Raising the Contractor Minimum Wage: It’s Not as Simple as it Looks

One of President Biden’s first actions following his inauguration was to issue an executive order requiring that the minimum wage paid by government contractors be at least $15 per hour. While it will affect only a very small percentage of workers (the vast majority of contractor employees are already making more), it is an important step. But while the order itself is straightforward, its implementation will be complicated. As such, it is essential that the implementing rules fully account for a range of impacts. What’s more, they should be informed by lessons learned the last time the contractor minimum wage was increased (as the result of a 2014 executive order). 

Biden’s directive will be reflected in new wage determinations covering the federal prevailing wage laws (the Davis-Bacon Act for construction and Service Contract Act for services) issued by the Labor Department’s Wage and Hour Division. Initial implementation guidance is expected soon. These laws were created to ensure that companies did not use wage arbitrage, especially involving those at the lower end of the wage scale, as a key tool in competition for government contracts. “Prevailing wages” established under the laws are to be fair, reasonable, and consistent with local market realities. Put another way, contrary to what some like to allege, for the most part it is the government, not companies, that determine the wages employees are paid under government services contracts. And although implementation of the laws can be remarkably (and unnecessarily) complex, the role and rationale of the SCA in particular are supported across industry. After all, they level the playing field for wages and, at least theoretically, enable companies to compete on the basis of other, more substantive factors. 

At the same time, because they apply up and down the spectrum of hourly wages, the prevailing wage laws also complicate implementation of the executive order. For example, if Employee A is making $12/hour and Employee B, who has slightly more experience and responsibility is making $14/hour, do they both now get $15? Do they get proportional wage increases? And what about the vast majority of those already making over $15/hour? If those making less are getting pay raises, doesn’t that change the calculus of what those employees should be paid? Otherwise, real wage compression can occur. And that would run directly counter to the administration’s goal of accelerating upwardly mobile wages. 

Then there are the budget implications. Agencies depend on service contractors to execute their missions. Substantial increases in wages will drive up operational costs. How much time will agencies have to adjust their budgets before implementation is mandated? What impact will the new fiscal requirements have on agency operations? 

These are not new challenges. The contractor minimum wage was increased almost 50% six years ago and is today well above the national minimum wage. This experience should inform the implementation of the new executive order to avoid shocks to the system. This is essential because Biden’s executive order is likely to have greater impact than the 2014 executive order, since the number of workers affected (those who currently earn between the current contractor minimum wage and the new contractor minimum wage) is almost certainly much larger than seven years ago.

There are other issues to consider as well, including longstanding questions about the prevailing wage laws that speak directly to the spirit and intent of Biden’s executive order and the administration’s goals. As such, the new order presents a unique opportunity to finally deal with them.

While intended to provide a floor beneath which wages cannot drop, the SCA also creates a ceiling. After all, no company that submits a bid including wages above the SCA’s prescribed level can expect to be competitive or compensated. Nonetheless, because the Labor Department has not, and likely cannot, entirely keep up with local or regional market shifts, wages are often dated and artificially low.  This is particularly true in cases where government operations are a dominant force in the local labor market. In those situations, the government effectively sets the market for wages in the relevant job categories. Whatever the government’s current wage rate might be, it is the de facto prevailing rate since there are no external market forces to contend with—even though it may be well below what the company or its employees might think is fair and reasonable.  

Further, the Bureau of Labor Statistics surveys on which the SCA wages are based are regional in nature. As such, the underlying data are drawn from both higher and lower cost areas to create a regional mean. That may make sense for analytical purposes, but when the work involved is being performed in the higher cost area, the “prevailing” wage is actually lower than what is being paid to other workers in the same area doing similar jobs for non-government employers. Moreover, contractors can only be reimbursed for wages that are consistent with the wage determination, which may or may not be adjusted in any given year and is not subject to any kind of automatic cost of living increase. In any event, the current circumstances can create a bizarre combination of a wage safety net and wage suppression, and some additional flexibility is clearly warranted.

The administration has appropriately made wage security and equity a foundational element of its agenda. We know from studies by Treasury Secretary Janet Yellen and others that improving wages drives productivity and work quality. This is no less true in government contracts. Biden’s executive order sets the stage for a new minimum wage for employees working in support of government missions. For it to work as intended, and for the administration’s broader goals to be achievable, we need to take advantage of this moment to tackle the EO’s inherent complexities, as well as the broader gaps that have long existed. That’s where real progress will be made.