Effective January 1, 2021, federal government contractors are required to pay their employees performing work on or in connection with covered government contracts at least $10.95 per hour – an increase of $0.15/hour from the 2020 federal minimum wage. 85 FR 53850 (Aug. 31, 2020). As we previously reported, the federal minimum wage for workers on covered government contracts has increased every year since 2015 pursuant to Executive Order 13658 (“Executive Order”) and its implementing regulation, FAR 52.222-55, Minimum Wage Under Executive Order 13658.

As a reminder, contractors with current covered contracts that will continue into 2021 should review their payroll records to see if there are any covered employees earning less than $10.95/hour. If any covered employees are earning less than this new federal minimum wage, the employer must increase those employees’ rate of pay beginning January 1, 2021. Contractors may not discharge their obligation to pay at least the new minimum wage by furnishing fringe benefits.

Additionally, contractors are responsible for their subcontractors’ compliance with the Executive Order and may be held financially liable for underpayments. As a result, contractors should remind their subcontractors of the obligation to pay their covered employees the 2021 federal minimum wage. They also should consider reviewing subcontractor certified payrolls and other payroll data for potential violations.

Requesting a Price Adjustment

Although government contractors may be required to increase wages, they may be able to recover this increase from the Government if they can warrant that the contract price does not include allowance for any contingency to cover these increased costs. FAR 52.222-55 provides that a contractor may request an adjustment to the contract price if its labor costs (including subcontractor labor costs) and any associated labor costs increase as a result of the annual increase to the federal minimum wage. Associated labor costs are the increases or decreases from changes in social security and unemployment taxes and workers’ compensation insurance and excludes any amount for general and administrative costs, overhead, or profit. Subcontractors similarly can request a price adjustment through the prime contractor.

It is important to note that the minimum wage requirements under the Executive Order are separate and distinct from the prevailing wage requirements under the Davis-Bacon Act (“DBA”) and Service Contract Act (“SCA”). Accordingly, contractors are not entitled to duplicate price adjustments with any price adjustment sought under the DBA or SCA. Therefore, contractors must pay the higher of: (1) the new federal minimum wage rate; (2) applicable SCA wage determination rate; or (3) applicable DBA wage determination to its covered employees.

Finally, contractors may not seek a price adjustment as a result of any wage increases under any other federal or state prevailing wage law or applicable law establishing a minimum wage higher than the federal minimum wage.

Beginning now, contractors should promptly determine whether they need to increase rates of payment. They also will need to determine whether they and/or their subcontractors will need to submit a request for a price adjustment to the Contracting Officer on any current covered contract.