President Obama Issues Controversial Executive Order Increasing Minimum Wage by 40 Percent on New Federal Contracts

On February 12, 2014, President Barack Obama issued his controversial and long anticipated Executive Order requiring contractors on new federal contracts to pay a minimum wage of $10.10 per hour by January 1, 2015. The order applies to US contractors, such as National Park Service concessions workers, nursing assistants caring for veterans, and military food-service employees, according to a White House fact sheet. The 39 percent increase from $7.25 per hour takes effect for new contracts starting January 1, 2015 and will annually be indexed to CPI increases starting on January 1, 2016. The increase will only kick in when new contracts are signed, and it will not cover existing employees until their contracts are renewed, according to a White House statement.

For contractors covered by the Service Contract Act or the Davis-Bacon Act, the Order applies only to contracts or contract-like instruments at the thresholds specified in those statutes. For procurement contracts where workers' wages are governed by the Fair Labor Standards Act, the Order applies only to contracts or contract-like instruments that exceed the micro-purchase threshold, as defined in 41 U.S.C. § 1902(a), unless expressly made subject to the Order pursuant to regulations or actions taken under the Order.

The Order does not apply to grants; contracts and agreements with and grants to Indian Tribes under the Indian Self-Determination and Education Assistance Act; or any contracts or contract-like instruments expressly excluded by the regulations issued pursuant to the Order. Although the Order applies only to executive agencies, independent agencies are “strongly encouraged” to comply with the Order.

Tipped workers employed by businesses with federal contracts will also benefit. Currently workers who receive tips may be paid a minimum base of $2.13 per hour, because the employer can take a credit for tips received by the workers. The Order raises that base to $4.90 per hour and increases it by 95 cents a year until it reaches 70 percent of the regular minimum wage. If a worker’s tips on top of that don't add up to $10.10 an hour, the federal contractor will be required to make up the difference.

According to the President, the Order “seeks to increase efficiency and cost savings in the work performed by parties who contract with the Federal Government.” He reasoned that raising the pay of low-wage workers “increases their morale and the productivity and quality of their work, lowers turnover and its accompanying costs, and reduces supervisory costs. These savings and quality improvements will lead to improved economy and efficiency in Government procurement.”

Labor Secretary Thomas Perez told reporters the Order would benefit “hundreds of thousands” of federal workers, but admitted that could take as many as five years. He added the administration needed to finalize how the Order would be implemented to have a “better handle” on exactly how many workers would benefit from the Order. The Order requires that Secretary Perez institute regulations for the Order by October 1, 2014. The Secretary will have the authority to investigate potential violations of, and obtaining compliance with, the Order.

The Order comes amidst discussion at both the state and federal level about increases in the minimum wage. There is currently a pending bill in the Senate that if passed would phase in the minimum wage hike from the current $7.25 an hour to $8.20 in the first year, then $9.15 the year after and to $10.10 in the third year. The bill also calls for changes for tipped workers similar to Obama’s Order. Many states have also increased their minimum wages, as we previously discussed here.

For more information about the Order or other minimum wage issues, please contact the authors or any other members of the Arent Fox Labor & Employment group.