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Practical Impact of Increased Minimum Wage for Federal Contractors

May 13, 2021

Last month, President Biden issued an Executive Order which raised the minimum wage for federal contractors to $15.00 per hour. It was a smaller victory than what he had hoped after his desired new federal minimum wage of $15.00 per hour was stripped out of last month’s COVID-19 relief bill, but it was a win nonetheless.

The significance of this change in rate will have far-reaching consequences on the national labor market and local economies, the total impact of which is not yet known. Possible outcomes include wage compression between skilled and unskilled workers, upward pressure on wages for employees who are already above the new minimum, a possible unintended negative impact on lower wage-earning communities, as well as the intended, but unspoken, result that private sector employers will have to raise their rates or lose workers.

Impact on Low-Wage Local Economies

Biden’s Executive Order requires federal agencies to implement a $15.00 per hour minimum wage for all service and construction contracts beginning January 30, 2022.   This is an increase of over $4.00 per hour (current hourly minimum is $10.95).

The impact of this change will be felt differently across the country based on local economies.  Geographic areas with predominantly lower wage earners could feel the pain more than higher wage-earning areas. This unintended consequence could be devastating to federal contractors operating in poorer regions of the country, which may find they can no longer compete as a result of increased wages. Meanwhile, federal contractors operating in high wage locals will barely feel the impact of this new requirement as most already pay at or above this rate to compete for talent in their local markets.

By way of example, imagine you own a factory in a low wage-earning community which makes widgets for the federal government and you pay your workers $10.95 per hour. Now, imagine your competitor who operates in a high-wage community already pays his employees $15.00 per hour.  Your competitor will not need to raise his wages to comply with the new federal contractor minimum, but you will need to increase wages by $4.05 per hour to be in compliance. As a result, your company may no longer win this federal work unless you are able to offset the additional labor costs somehow. This will in turn have a negative impact on the local job market where your demand for local labor may be slashed.  

Wage Compression Versus Upward Pressure to Increase Wages

Two other possible results will be wage compression and added pressure on non-federal employers to increase wages for skilled workers to keep the status quo in rate differential between skilled and unskilled workers. If employers allow wage compression to occur, this will lead to employee dissatisfaction as skilled workers may come to resent and question why unskilled workers are being paid similarly to themselves. Alternatively, if employers correct the wage compression issue, they will hurt profitability as now both lower and higher waged workers will be receiving higher wages.

Impact on Private Sector Employers

The impact on private sector employers may be the biggest unspoken win for President Biden.  It is believed that by increasing this minimum wage, private sector employers will be forced to raise wages in order to compete for talent.  This will have an indirect but significant impact in achieving Biden’s ultimate goal of raising wages more broadly.          

The new federal contractor minimum of $15.00 per hour will be an interesting test case before a potential federal increase to $15.00 per hour for all workers.  How do local economies respond to increased wages, what is the impact resulting from wage compression and is there a general upward pressure on wages?  Private sector employers can learn a lot by watching closely to see how the new federal contractor minimum wage plays out.

Brody and Associates regularly advises management on complying with the latest state and federal employment laws.  If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.454.0560.