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Legal Challenge To Federal Contractor Minimum Wage Increase Rejected

January 9, 2023

Overview

In 2021, President Biden issued Executive Order 14026 to increase the minimum wage for federal government contractors to $15 per hour. On November 23, 2021, the Department of Labor (DOL) issued its final rule implementing Executive Order 14026. The rule requires any federal contractor to pay employees a minimum hourly wage of $15 and overtime wages for work beyond 40 hours per week. This wage is subject to yearly increases determined by DOL.

On September 29, 2022, DOL announced that the $15-an-hour minimum wage for federal contractors would increase to $16.20 because of inflation. The increase took place January 1, 2023, and applies to the following contracts for work within the United States and its territories:

  • Procurement contracts for construction covered by the Davis-Bacon Act;
  • Contracts for services covered by the Service Contract Act;
  • Contracts for concessions; and
  • Contracts entered with the federal government in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public and with wages governed by the Fair Labor Standards Act, Service Contract Act, or Davis-Bacon Act.

On February 9, 2022, the States of Indiana, Idaho, Arizona, Nebraska, and South Carolina (the States) filed an action in the federal district court for the District of Arizona, Arizona v. Walsh, No. 2:2022cv00213, challenging the President’s ability to increase the federal contractor minimum wage by Executive Order 14026 without some additional authorization from Congress. The plaintiffs argue that President Biden exceeded his authority under the Federal Property and Administrative Services Act of 1949 (the Procurement Act) (the stated basis for Executive Order 14026 and DOL’s final rule), asserting that the Procurement Act does not confer authority to implement minimum wage mandates and that Congress has already spoken regarding federal contractor minimum wages, through the Davis-Bacon Act and Service Contract Act. We previously discussed the arguments of the States challenging President Biden’s executive order and the government’s response.

On January 6, 2022, the district court dismissed the States’ challenges to President Biden’s increase in the federal contractor minimum wage. The district court identified four principal arguments made by the States:

  • Executive Order 14026 and DOL’s final rule exceeds the President’s authority under the Procurement Act;
  • Executive Order 14026 and DOL’s final rule are arbitrary and capricious in violation of the APA;
  • The Procurement Act violates the non-delegation doctrine; and
  • Executive Order 14026 and DOL’s final rule are barred by the Spending Clause of the U.S. Constitution.

The district court rejected each of the four arguments raised by the States.

Executive Order 14026 and DOL’s Final Rule Did Not Exceed the President’s Authority Under the Procurement Act

The district court held that the Procurement Act gave President Biden the authority to unilaterally increase the minimum wage of federal contractors and rejected the States’ argument that the President’s actions required a grant of explicit authority by Congress. Noting that “[c]ourts reviewing challenges to policies issued pursuant to the [Procurement Act] … require ‘a sufficiently close nexus’ to the statutory purposes of promoting ‘economy’ and ‘efficiency’ in federal contracting,” the district court concluded that:

there is a sufficiently close nexus between EO 14026 and the Final Rule and the [Procurement Act’s] goals of economy and efficiency in federal contracting. Here, the President has rationally determined that increasing the minimum wages of contractors’ employees will lead to improvements in their productivity and the quality of their work, and thereby benefit the government’s contracting operations. “Such a strategy of seeking the greatest advantage to the Government, both short- and long-term, is entirely consistent with the congressional policies behind the [Procurement Act].” [AFL-CIO v. Kahn, 618 F.2d 784, 793 (D.C. Cir. 1979)].

The district court also distinguished the cases that invalidated President Biden’s attempt to use the Procurement Act to impose a vaccine mandate on federal contractors. The district court explained that in the case of the federal contractor vaccine mandate, the “the asserted nexus to economy and efficiency in federal contracting ran through intermediate steps involving public health” and that “such a tenuous connection to the purposes of the [Procurement Act] would permit the government to regulate any number of public health concerns by asserting that, through improvements to public health, such measures indirectly decreased absenteeism and improved productivity.” The district court contrasted the “tenuous connection” vaccine mandates had to productivity with the fact that the increase in the federal contractor minimum wage “pertain[s] directly to the economic relationships between the government, its contractors and their employees, setting requirements for employees’ wages—i.e., the ‘price’ of their labor—which in turn affects their productivity—i.e., the ‘quality’ of their labor. Thus, the EO and Final Rule fit much more comfortably within the statutory goals of economy and efficiency as courts have broadly defined them.”

The district court additionally rejected application of the “major questions” doctrine, which the U.S. Supreme Court used to invalidate the Occupational Safety and Health Administration’s large employer COVID-19 vaccine mandate. The district court found that “[t]his is not a case in which an agency has relied on an ancillary statutory provision to exercise novel regulatory powers, as in the Supreme Court cases applying the major questions doctrine cited by Plaintiffs,” noting that “presidents of both political parties have issued orders like EO 14026 pertaining to the compensation of contractors’ employees, including orders specifically setting requirements for their minimum wages.” The district court also found that Executive Order 14026 and DOL’s final rule did not implicate federalism concerns, as, unlike the vaccine mandate, it did not “encroach upon states’ traditional police powers, which specifically include the power to require vaccination.” Instead, “the government here is setting minimum wages only for those workers connected to federal contracting.”

The district court then rejected the States’ argument that Executive Order 14026 and DOL’s final rule are “invalid to the extent they set minimum wages for the employees of subcontractors, licensees, and permittees who are not directly involved in the government’s acquisition of goods or services.” The district court accepted the federal government’s argument that:

EO 14026 and the Final Rule apply only to the work of an employee “in connection with” a covered contract or subcontract if the employee spends at least 20% of his or her workweek performing such work and, even then, the employee is only entitled to receive the applicable minimum wage for the work spent in connection with such contract or subcontract. 29 C.F.R. §§ 23.40(f), 23.220(a). Further, Defendants persuasively argue that extending the minimum wage requirements to subcontractors is necessary to prevent government contractors from simply subcontracting out the bargained-for services to avoid paying the minimum wage.

The Administrative Procedures Act Does Not Apply to Executive Orders or Agency Rules Implementing Executive Orders

The States also argued that Executive Order 14026 and DOL’s final rule should be vacated using the Administrative Procedures Act’s arbitrary and capricious standard. The district court concluded that executive orders from the President are not reviewable under the APA because the President is not an “agency.” The fact that Executive Order 14026 is being implemented as a rule issued by the DOL did not change that conclusion because DOL’s final rule was merely “implement[ing] decisions made by the President pursuant to his delegated authority.”

The Procurement Act Did Not Violate the Non-Delegation Doctrine

The States argued that the Procurement Act violated the non-delegation doctrine, meaning that the President could not rely on that statute as authority for increasing the federal contractor minimum wage. The non-delegation doctrine is a principle that Congress cannot delegate its legislative powers to other entities without setting out an “intelligible principle” that the body to whom power is delegated is to follow. The district court concluded that “[t]he [Procurement Act] sets out an ‘intelligible principle’ to guide the President’s exercise of authority” because it authorizes the President to “prescribe policies and directives that the President considers necessary” to provide the government with “an economical and efficient system” for, among other things, “procuring and supplying property and non-personal services.”

Executive Order 14026 and DOL's Final Rule Were Not Barred by the Spending Clause of the U.S. Constitution

The final claim made by the States was that Executive Order 14026 and DOL’s final rule violated the Spending Clause of the Constitution. The Spending Clause authorizes Congress to “lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common [Defense] and general Welfare of the United States.” The Supreme Court has construed the Spending Clause to permit the federal government to impose conditions on federal grants to States only if Congress explicitly authorizes the grant conditions. The States argued that “to the extent the [Procurement Act] authorizes the President to condition the acceptance of federal contracting funds on the requirement that States pay their employees a minimum wage of his choosing, it does so without providing clear statutory notice of these terms of acceptance.”

The district court found that the Spending Clause’s “clear notice requirement” did not apply to federal contracts, or invalidate Executive Order 14026 and DOL’s final rule, agreeing with the federal government that:

States receive notice of the terms of acceptance of federal contracting funds through the process of contracting. (MTD/MSJ at 34–35.) If they did not, there could be no mutual assent necessary for contract formation. See 1 Williston on Contracts § 3:6 (4th ed. 2022) (noting that for a contract to be enforceable, there must be agreement on essential terms). Defendants further contend that Plaintiffs cannot credibly claim they are “unaware of the conditions or [are] unable to ascertain what is expected of them,” Pennhurst, 451 U.S. [1,] 17 (1981), given that they “have been entering into contracts with the federal government for years subject to the minimum-wage standards of EO 13,658, which was issued by President Obama in 2014.” (Id. at 35.) EO 14026 increases the minimum wage in new contracts and contract-like instruments, but “it does not include surprising [contracting] States with post-acceptance or ‘retroactive’ conditions.” Nat’l Fed. of Indep. Bus. v. Sebelius, 567 U.S. 519, 584 (2012) (quoting Pennhurst, 451 U.S. at 584).

Conclusion

All of the foregoing raise the following question: was this the final word on the argument that was made to the district court, and —if it is not—what may happen next? The district court’s rejection of the States’ challenge to Executive Order 14026 and DOL’s final rule may be appealed by the States. Thus, it is not necessarily the last word on this topic.  In the meantime, however, the increase in the federal contractor minimum wage will likely be implemented in 2023. Accordingly, federal contractors may want to consider a variety of issues, including how and when to comply with the requirements of the DOL rule and, if compliance imposes additional costs on them, how and when to seek an equitable adjustment of pricing on their existing contracts to address that increased cost.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact a Schwabe lawyer.

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