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How to Prepare for $15 Federal Contractor Minimum Wage Implementation

The federal contractor minimum wage is slated to increase to $15 per hour in early 2022. President Biden issued an Executive Order on April 27, 2021, to raise the federal contractor minimum wage from the current $10.95 per hour to $15 per hour beginning January 30, 2022.

Here are additional highlights from the Executive Order:

  • All agencies must incorporate a $15 minimum wage in new contract solicitations by January 30, 2022. By March 30, 2022, all agencies must implement the minimum wage into new contracts, as well as existing contracts, when the parties exercise their option to extend such contracts annually.
  • Ensure minimum wage rises with inflation every year after 2022 to automatically adjust to changes in the cost of living. Every January, the secretary of labor will increase the federal contractor minimum wage by increments of five cents, based on the annual increase in the consumer price index.
  • Under both the Service Contract Act and the Davis-Bacon Act, Wage determinations will likely rise each year, starting with the new $15 per hour wage floor.
  • By 2024, eliminate the tipped minimum wage for federal contractors. The federal statute allows employers to pay a sub-minimum wage to tipped workers as long as their tips bring their wage up to the minimum wage level. This executive order ensures tipped employees working on federal contracts will earn the same minimum wage as other federally contracted employees.
  • Ensure a $15 minimum wage for federal contract workers with disabilities, extending the required $15 minimum wage to federal contract workers with disabilities to ensure equity.
  • Revokes President Trump’s Executive Order 13838, restoring minimum wage protections to outfitters and guides operating on federal lands.

This order builds on the Obama-Biden Executive Order 13658, issued in February 2014. The minimum wage for workers performing work on covered federal contracts is currently $10.95 per hour, and tipped minimum wage is $7.65 per hour.

What Contractors Should Expect

As the federal contractor minimum wage increases, lower-wage job classifications on each wage determination may see an “automatic” rise in wages each year. This is particularly true if the previous prevailing wage was below or close to the new rising minimum wage floor.

Contractors must review the wages paid to employees working on federal contracts annually. This will ensure the minimum wage is appropriately paid to federal contractors. Simply relying on the applicable wage determination will not suffice to ensure federal compliance. A more thorough analysis is needed of the federal contractor minimum wage as adjusted each year.

In anticipation of January 30, 2022, changes, contractors, and subcontractors should:

  • As of 2022, plan to price all-new federal contract work using the new $15 per hour minimum wage;
  • Prepare to make Requests for Equitable Adjustment and to seek other appropriate contract price adjustments on contract extensions and renewals once the new federal minimum wage is applied; and
  • Develop an internal review process and methodology to ensure you appropriately adjust lower-wage workers’ wages each year to reflect the new year’s federal contractor minimum wage.

Skilled Labor Likely to Follow Suit

Rising costs should be mostly, if not entirely, absorbed into contractor pricing models and fully compensated by the federal government. That means the biggest concerns of the minimum wage increase are with retaining skilled labor and employee relations.

Unskilled labor will see a rise in wage rates due to the new $15 minimum wage. Over time, the wage differential between unskilled and skilled labor will shrink. As a result, minimum wage may approach the hourly rates for certain semi-skilled and skilled labor categories, which could cause discontent among skilled trade workers. The potential result is a push for increased rates for skilled workers by unions and skilled journeymen.

Addressing wage compression risk will be key. Potential solutions will vary by industry and be based on the nature of each contractor’s workforce.

This wage compression issue can become more acute depending on to what extent Congress rolls out the Biden infrastructure plan. Congress may seek to apply the Davis-Bacon Act to direct federal construction projects and federally financed or federally insured construction activities. 

If Congress were to expand the Davis-Bacon Act’s coverage, as the administration is signaling, a larger proportion of construction work would be covered by the Davis-Bacon Act and the federal contractor minimum wage requirements.

As the federal contractor minimum wage requirements cover more workers, higher-skilled trade employees are more likely to push for comparable annual wage increases to keep pace with the Department of Labor instituted annual raises.

Bowers & Company CPAs aims to offer helpful information to our clients and friends. Learn more about how we can help should your small business need financial services.

Disclaimer: To ensure compliance with requirements imposed by the Department of Treasury, we inform you any U.S. federal tax advice contained in this document or video is not intended for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

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Bowers & Company CPAs - Accounting Services Firm in Syracuse and Watertown NY
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