While we are still in the first half of 2022, it has already been a busy year in terms of labor and employment developments for government contractors. For any companies doing work for the federal government, whether as prime contractors or as subcontractors, it can be challenging to keep up with the perpetually changing requirements, particularly when the changes occur this quickly.
These rapid-fire changes have introduced some onerous requirements with potentially very significant impacts. Just in the past few months, President Biden has issued Executive Orders (EOs) that:
- Directs an almost 50% increase in the minimum wage government contractors must pay their employees under a number of types of contracts.
- Mandates the use of union labor on large federal construction projects.
- Reinstitutes the requirement that federal contractors offer the right of first refusal to qualified service personnel who worked on predecessor contracts.
In addition, in February 2022 the Office of Federal Contractor Compliance Programs (OFCCP) at the Department of Labor (DOL) has rolled out its new on-line certification tool that contractors are now required to use to certify compliance with affirmative action requirements.
In Part 1 of this series, we will examine the increased minimum wage directive and the use of union labor on federal construction projects. Part 2 coming next month will cover the non-displacement of qualified workers and the new OFCCP “Contractor Portal.”
Increasing the Minimum Wage for Federal Contractors
President Biden’s Executive Order 14026 (EO 14026) increases the minimum hourly wage that federal contractors must pay their workers from $10.50 to $15. The DOL published a final rule implementing the EO 14026, which is aimed to promote the government’s procurement interests in economy and efficiency by contracting with sources that adequately compensate their workers. Of course, it will also result in taxpayers paying almost 50% more for certain types of services.
Contracts Covered by the EO 14026
Importantly, this new minimum wage only applies to new contracts entered into on or after January 30, 2022. A contract is still “new” if it is (1) an extension of an existing contract, (2) a renewal of an existing contract, or (3) an exercised option on an existing contract. The regulations call for additional wage increases starting January 1, 2023, and annually thereafter.
Covered contracts under the EO 14026 include the following types of agreements:
- Procurement contracts for construction covered by the Davis-Bacon Act (DBA).
- Service contracts under the Service Contract Act (SCA).
- Concession contracts with the federal government.
- Contracts related to federal land and offering of services to the general public, federal employees, and their dependents.
Exclusions from the EO 14026
The final rule also sets forth a number of categories of contracts and other instruments that are not subject to the minimum wage requirements. Specifically, the following are not subject to the $15 minimum wage requirement:
- Contracts that result from a solicitation issued prior to January 30, 2022, that are entered into on or between January 30, 2022 and March 30, 2022.
- Contracts with and grants to Indian Tribes.
- Contracts for construction and services (except for those expressly covered by EO 14026), that are excluded from DBA or SCA coverage.
- Contracts for the manufacturing or furnishing of materials, supplies, articles, or equipment to the federal government.
Workers Covered by the EO 14026
EO 14026 generally applies to the following categories of employees working on or in connection with a covered contract: (1) employees entitled to the Fair Labor Standards Act minimum wage (but not any employee who would be considered an exempt executive, administrative or professional employee); (2) service employees entitled to prevailing wages under the SCA; and (3) laborers and mechanics entitled to prevailing wages under the DBA.
Important Tips for Federal Contractors
Several lawsuits have already been filed directly challenging the implementation of EO14026. However, until these and any subsequent legal challenges are fully resolved, to avoid any potential penalties, contractors must comply with the minimum wage increase and review their contracts to determine whether the new minimum wage applies to their employees.
Union Labor Now Mandatory for Large Federal Construction Projects
On February 4, 2022, President Biden issued the Executive Order on Use of Project Labor Agreements for Federal Construction Projects (EO 14063). EO 14063 mandates that contractors and subcontractors working on federal construction projects valued at $35 million or more must enter into an agreement with a union to establish the rules applicable to labor relations on that project – a “project labor agreement” (PLA). EO 14063 mirrors an EO issued by President Obama, EO 13502, on February 6, 2009, including having the same title and much of the same language. The main difference between them is that President Obama’s EO encouraged rather than mandated that agencies require contractors enter into PLAs.
What Do Contractors Have to Do?
EO 14063 requires that contractors and subcontractors agree to enter into a PLA as part of the award of a federal contract in connection with a federal construction contract valued at $35 million or more. But it is not enough for the contractor and the union to negotiate their own terms. Instead, EO 14063 includes a number of very specific requirements.
First, the PLA must cover all contractors and subcontractors on the project. For large construction projects that require a number of trades, this could mean the PLA would cover dozens, if not more, companies. In addition, agreements cannot restrict contractors and subcontractors from competing for other contracts or subcontracts.
The PLA must also include three specific provisions:
- “Guarantees against strikes, lockouts, and similar job disruptions.”
- “Effective, prompt, and mutually binding procures” for labor dispute resolution.
- Mechanisms for labor-management issues such as, but not limited to, “productivity, quality of work, safety, and health.”
Finally, although it probably could have been left unsaid, these new mandatory agreements must comply with all applicable laws.
Claimed Benefits of EO 14063?
One of the areas in which President Biden’s EO 14063 borrows heavily from President Obama’s is the asserted benefits of this requirement that contractors, large and small, contract with labor organizations irrespective of company policy of financial impact of that decision. Like all EO’s, the claimed benefits are asserted as fact when many entities have, since EO 14063 has been issued, been heavily critical of the EO because of the potential negative impact it could have.
President Biden, adopting President Obama’s reasons, claims that PLAs, which are “routinely” used by companies in the public and private sectors to “reduce uncertainties,” will provide structure and stability, avoid labor disruptions by establishing dispute-resolution mechanisms and prohibiting work stoppages, and ensure that all of the “stakeholders” commit to proceeding efficiently without stoppages. EO 14063 also claims that it will “[a]dvance the interest of project owners, contractors, and subcontractors, including small businesses,” although the EO does not explain how.
There Are Exceptions to EO 14063
Like all government requirements, there are exceptions. Although it seems unlikely it will occur much under this administration, agencies have the authority to decide that a PLA is not appropriate on three grounds.
First, if an agency determines that a PLA for a particular project will not achieve the government’s interests in achieving economy and efficiency, it may opt out. Below are the five factors an agency must consider that weigh in favor finding a PLA is not required:
- Short duration and lack of operational complexity.
- The project only includes one craft or trade.
- The project involves specialized construction work available from a limited number of companies.
- The need for the project “is of such unusual and compelling urgency that the [PLA] would be impracticable.”
- Other similar factors “deemed appropriate” in the implementing regulations and guidance.
Second, if an agency’s market analysis shows that mandating a PLA “would substantially reduce the number of potential bidders so as to frustrate full and open competition” it may decline to include this mandate in requests for proposals for the project. This may be the case if, for example, there are a limited number of construction projects in a remote location.
Third, agencies need not require a PLA where mandating a PLA would be inconsistent with law. Given that EO 14063 creates the obligation that contractors enter into PLAs on large federal construction projects, it is unclear when doing so might be inconsistent with law.
Large Impact, Questionable Authority
It is not apparent that there was any consideration of the potential negative economic impact of mandating that construction contractors use union labor for federal construction projects, many of which are over the “large” threshold of $35 million.
By some estimates, it will have a very significant impact, affecting up to 200,000 workers and $262 billion in federal construction projects. Further, the Associated Builders & Contractors has argued that EO 14063 will exacerbate the serious skilled labor shortage in the construction industry, which was approximately 430,000 workers in 2021 and may be as high as 650,000 in 2022.
In addition, these changes will likely increase construction costs by an estimated 12% to 20%. EO14063 will almost certainly exacerbate the United States’ massive infrastructure deficit given that much of that urgently needed construction will be federally funded. To give you an idea of the size of the problem, the American Society of Civil Engineers, which gives the current state of American infrastructure an overall grade of C-, estimates that a $5.937 trillion infrastructure investment is needed in the U.S. by 2029, of which $2.588 trillion is underfunded.
Also, it is possible that this measure will face legal challenges. The claimed authorization for EO 14063 is the Federal Property and Administrative Services Act, 40 U.S.C. 101 et seq. (FPASA). Some may recognize that this is the same statute that the White House cited to authorize the president to issue the federal contractor vaccine mandate. Federal courts have been very skeptical of the broad claim of authority under FPASA. The main reason for the skepticism is that the statute authorizes the president to ensure the U.S. has an economic and efficient procurement system, not to make contractors or construction projects more efficient.
Implementation of EO 14063
EO 14063 requires that the Federal Acquisition Regulatory (FAR) Council propose implementing federal procurement provisions by June 4, 2022. In addition, the Office of Management & Budget must issue guidance to implement exception and reporting requirements. By tracking and reporting the use of exceptions, it would not be surprising if agencies will be reluctant to use the discretion that EO 14063 appears to grant. Finally, the Departments of Defense and Labor must develop a training strategy for the contracting workforce to ensure personnel understand how to implement the new requirement correctly.
Richard Arnholt is a member at Bass, Berry & Sims in Washington, D.C. He advises companies on the complex rules applicable to contracting with federal and state governments. He focuses on risk mitigation through implementation and upgrades to ethics and compliance programs as well as response to government allegations of procurement fraud or misconduct. He can be reached at email@example.com.
This article was originally published in HR Professionals Magazine (April 2022). For more information related to these topics, access the recording of our recent webinar, What Was Old is New Again – Government Contractor Labor & Employment Updates.