Biden Increases Minimum Wage and Phases Out Tip Credit for Federal Contractors

On April 27, 2021, President Joseph R. Biden issued an executive order increasing the minimum wage for workers working on or in connection with a federal government contract. Under the order, federal contractors will be required to pay workers a minimum wage of $15 per hour, beginning January 30, 2022.  The order further instructs that the minimum wage be indexed to the Consumer Price Index and adjusted upward annually.

The order also increases the minimum wage for tipped workers (such as those who may work under a contract with the federal government to provide meals in federal facilities).  Under the order, tipped workers must be paid a minimum cash wage of $10.50 per hour, beginning January 30, 2022. 

Beginning January 1, 2023, the minimum wage for tipped employees will increase to 85% of the minimum wage then in effect for hourly workers of federal contractors.  By January 1, 2024, federal contractors will be required to pay tipped employees the same—100% of the minimum wage in effect for federal contractors—as all other hourly workers. Additionally, and consistent with the FLSA, the order specifies that when a worker paid the tipped minimum wages does not receive sufficient tips to equal the standard minimum wage, the employer must make up the difference.

For the next 2.5 years during which a federal contractor may continue to claim a tip credit toward a tipped employee’s minimum wage (before the tip credit is phased out in 2024), the FLSA’s rules regarding tip pools will continue to apply.  For example, federal contractors that claim a tip credit must ensure that any mandatory “traditional” tip pool includes only workers who customarily and regularly receive tips—back-of-the-house employees, such as cooks or dishwashers, remain excluded from tip pools. However, starting in 2024, when federal contractors can no longer claim a tip credit and must pay tipped employees the full minimum wage in direct wages, federal contractors will have the ability to implement mandatory, “nontraditional” tip pools, which may include all non-managerial employees such as cooks and dishwashers.  Once the tip credit is phased out for federal contractors, this shift would allow the overall compensation of non-service, back-of-the-house workers to be subsidized by the tips received by front of the house workers. 

The secretary of labor is directed to issue regulations to implement the order by November 24, 2021, and the Federal Acquisition Regulatory Council is required to amend its regulations to include these requirements in new federal contracts, and the extension of existing federal contracts, on or after the effective date.

The order was not wholly unexpected, particularly insofar as congressional efforts to increase the minimum wage to $15 per hour have thus far been unsuccessful.  Employers that are government contractors or subcontractors are advised to consult with counsel to ensure they are prepared to come into compliance with these requirements. 

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.