Eric Leonard is co-chair of Cozen O’Connor’s government contracts practice. Rachel Schwartz is an associate at the firm. The authors would like to thank Alexandra Baez for her contributions to this article.
Recent litigation has significantly reshaped federal contractor responsibilities. The flux and uncertainty created by those changes has made planning for compliance with these requirements by federal contractors and subcontractors incredibly complex and challenging.
Couple this with the litany of changes in related areas — such as project labor agreements, the non-displacement rule, pay equity and Executive Order 11246 — and it is clear that contractors will need to quickly re-evaluate their compensation, hiring and related structures for employees working on federal contracts and subcontracts in the coming months and years.
Federal and state minimum wage
As President Donald Trump’s second term begins, we would not be surprised to see new developments in the ever-evolving saga surrounding the federal contractor minimum wage. Contractors could see a shift toward a state-focused approach, because of the possibility of courts rolling back executive orders and rules targeted at the federal contractor minimum wage and other possible executive action targeted at reining in this annually increasing minimum wage.
We have already seen the 9th U.S. Circuit Court of Appeals rule that the federal contractor minimum wage EO exceeds the president’s power, and pending litigation elsewhere may further jeopardize the current federal contractor minimum wage requirements.
The administration also may: do away with or alter the yearly incremental increases put in place by EO 14026; decrease the federal contractor minimum wage back to align with the more generally applicable federal minimum wage; or reinstate the Obama-era federal contractor minimum wage, currently $13.30 per hour.
Practically speaking, any shifts may mean very little to those in states or localities with relatively high minimum wage requirements. However, a shift toward a landscape ruled by state-level wage requirements may increase administrative burdens, requiring contractors to implement significantly different wages for employees located in different states or municipalities.
Additionally, increased wages for federal contractors have set the industry standard for wage payment for years, and contractors may find it difficult to reduce wages while retaining employees in jobs throughout their businesses. While contractors may decide not to increase wages in 2026, it is unlikely that wages in the federal contracting sector will take a sizable pay cut any time soon.
To account for these varied state level considerations and the uncertainty of what the next few years will bring to federal contractor minimum wage requirements, contractors should factor these issues into pricing for bids for longer term contracts. By offering a sufficient buffer for required fluctuations (where permitted under law), contractors will hopefully be able to thread the needle of putting forth competitive proposals while also preserving future business interests.
Prevailing wages
The federal contractor minimum wage isn’t the only source of compensation obligations for federal contractors and subcontractors. Federal labor standards statutes setting federal contractor wages and fringe benefits like the Service Contract Act and Davis Bacon Act impose prevailing wage and fringe benefit payment obligations on federal contractors (and subcontractors) that perform services or construction work.
Over the past four years, President Joe Biden’s administration issued a number of EOs and rules that significantly impacted labor policy including in the area of prevailing wage practices. Most notably, the August 2023 changes to the U.S. Department of Labor’s DBA regulations significantly expanded the scope of coverage of the DBA and revised practices for developing Davis Bacon prevailing wage rates and incorporating Davis Bacon requirements into contracts.
A federal judge temporarily blocked portions of this rule. While we may not have an idea of whether this rule will ultimately move forward it is clear that the outcome of this and other pending judicial challenges will significantly impact federal construction contractors.
Only time will tell how the court will ultimately rule, particularly given the U.S. Supreme Court’s Loper Bright decision in mid-2024, which overturned a doctrine requiring federal courts to give deference to agencies’ reasonable interpretation of ambiguous statutes. Due to changing priorities, it’s also unclear whether the new administration will continue to defend the DBA rule.
While we hope some clarity will emerge soon, careful attention to developments in the ongoing litigation is warranted if you perform (or will perform) under DBA-covered contracts.
The overtime rule
Another area where over the years we have seen litigation upend rulemaking efforts is overtime — specifically, attempts to raise the monetary threshold for when employees can be considered exempt under the Fair Labor Standards Act.
The effect of raising the FLSA overtime threshold is that the higher the threshold, the fewer number of employees will qualify for the exemption thus increasing the number of employees eligible to receive overtime pay. In practice, employers also can increase employee pay to the FLSA threshold, but this could result in the employer bearing a significantly increased cost in compensation.
The most recent increase to the FLSA threshold by the Biden administration was enjoined after it took effect, a move that provided much anticipated clear guidance for contractors, assuring them that at least for now there will be no additional increase in the monetary threshold. While that decision was quickly appealed, the fate of that appeal is unclear given the change in administration; what, if any, additional action the new administration will take in this area is difficult to predict.
Even if the prior overtime rule is withdrawn or efforts to update the rule are abandoned, contractors still face challenges. For example, what, if anything, will employers do with employees who were already reclassified as non-exempt under former President Joe Biden’s rule based on the then-mandated nationwide increase? How will this impact employee compensation structures? What impacts would reclassifying these employees back to exempt status (thus removing the right to receive overtime pay) have on employee relations?
Bluntly, it may be very difficult for some employers, in the current economic conditions and economy, to make significant compensation and classification changes. Such a shift in compensation could create employee retention issues and dissatisfaction. Additionally, federal contractors need to consider the impact of the litigation on contract bids and proposals (new or already submitted). Ultimately, the evolving overtime rule leaves employers and policymakers navigating uncharted territory as we wait to see how the rule unfolds.
Recent related executive and court developments
Over the last four years, we saw the Biden Administration implement a host of EOs and rules related to pay and staffing practices. As referenced earlier, many of these rules are being quickly unraveled at the start of Trump’s second term. As this pendulum swings in the opposite direction (which it inevitably does during changes stemming from a new political administration), we should anticipate continued rapid and large-scale deregulation of businesses and labor and employment practices via the revocation and implementation of executive orders.
Trump already has rescinded several initiatives related to hiring and staffing, including:
- A proposed pay equity rule prohibiting contractors from considering previous pay information and requiring posting of pay range information.
- An EO requiring federal contractors and subcontractors on a covered successor contract to offer jobs to qualified employees under the predecessor contract.
- A longstanding EO creating federal contractor affirmative action obligations.
Although not included in the list of EOs rescinded by the new administration, a recent court decision also called into question the long-term viability of an order related to Project Labor Agreements. The order mandated that federal agencies require that contractors enter into PLAs for construction projects at or exceeding $35 million dollars. These PLAs significantly impact the hiring process (and in many cases cost) for these projects particularly for non-unionized contractors. Although the court proceedings are ongoing, we expect contracting agencies will cease including this provision in solicitations given the decision — a significant development for construction companies seeking to bid on federal construction projects at or exceeding $35 million.
Get comfortable with change
Overall, we see a couple of themes with the executive action taken to date with respect to government contracts labor and employment. One, this is yet another sign that for certain areas of pay and hiring practices (like pay equity), this administration will leave those issues to the states. Numerous states and localities already have pay equity requirements thus, arguably, rendering no need for federal regulation in this area. Two, this administration appears to favor a more “hands off” approach when it comes to issues such as contractor hiring and staffing practices.
So, what lessons should federal contractors take away from this overview of the numerous changes and challenges in the federal government contracting space? From litigation to regulation, government contractors should be prepared for robust changes to federal contracting requirements during the current administration.
While some of these changes may benefit contractors and others may inject stress into the generally stable federal contracting field, in the end, federal contractors must learn to get comfortable with closely monitoring these issues and quickly pivoting to align their business practices to meet current requirements or rescinding of requirements.
