248-409-1900 dburke@mi-worklaw.com

By:  Bill Pilchak and Dan Cohen – 3/25/14 

In 2015, an army of employees will be interested in whether

 their employer is a federal subcontractor

On February 12, 2014, President Obama signed an Executive Order raising the minimum wage for federal contractors and subcontractors to $10.10 (a $2.85 increase), effective January 15, 2015.  Executive agencies, likely the Department of Labor or OFCCP, are required to issue regulations by October, 2014, in order to enforce the minimum wage requirement sixty days later.

Next, on March 12, President Obama reported that he will be directing the Department of Labor to issue regulations increasing the minimum required salary amount for an individual to qualify for exempt status to $984.00 per week ($51,168 per year).  “Minimum required salary” means that unless a person is paid salary at that level, they must receive overtime pay at 1 ½ the hourly rate for hours over 40 in a week.  The minimum required salary had been $455.   The new threshold will more than double the former minimum when the regulations take effect.

Authority For These Measures

 In case you have been tuned into the current political/Constitutional controversy of the President acting unilaterally to impose law, neither move likely requires Congressional approval.  Federal contractors have had numerous obligations, including Affirmative Action Plan obligations, under Executive Orders for decades.  And, the minimum required salary has always been set by regulations, not Congress.

 That said, every time the President acts unilaterally, Court-watchers wonder if the Supreme Court won’t reign in the “imperial Presidency.” The President’s power is supposed to stem from an Act of Congress or the Constitution itself.  Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579 (1952), struck down an executive order of the President for that reason, a case most recently cited to limit President Bush’s power in international affairs in Medellin v. Texas, 552 U.S. 491 (2008).  Congress has spoken on pay for government contractors and subcontractors at least four times in the Davis-Bacon Act, the Walsh-Healey Act, the Service Contract Act and the Fair Labor Standards Act.

 Federal Contractor Minimum Wage

 Many may yawn at the news about the minimum wage for federal contractors and subcontractors, thinking the developments have no effect for them.  However, there are greater implications than most understand.  Many businesses operate without appreciating that they are federal subcontractors.  (Others recognize that they are, but ignore their obligations until the OFCCP comes knocking.)  Federal contractors are supposed to include “flow-down” clauses in their federal contracts alerting their suppliers of their obligations.  However, many do not and the OFCCP does not consider the lack of a flow-down clause to be an excuse for not complying.

“A ‘Federal subcontract’ is an agreement or arrangement with a Federal contractor either (1) for the furnishing of supplies or services or for the use of real or personal property, which is necessary to the performance of any one or more Federal contracts; or (2) under which any portion of the Federal contractor’s obligation under any contracts is performed, undertaken, or assumed. Thus, some but not all contracts with a Federal contractor will trigger coverage under the laws administered by OFCCP.”

 Many (possibly most) large corporations are suppliers to the federal government.  Employers may think that their goods/services are not necessary to the performance of a federal contract, but the OFCCP takes an expansive view of that.  For example, a company supplying workers’ compensation coverage to a federal contractor is “necessary” to the performance of a federal contract.  Moreover, once any aspect of a business has federal subcontractor status, federal subcontractor obligations spread to all facilities and departments of the business.

As noted, many businesses “lay low” until the OFCCP sends a notice, and then rush to comply.  However, effective January, 2015, there will be an army of employees making less than $10.10 interested in ferreting out whether their employer is a federal subcontractor.

Employers have the remainder of 2014 to adopt a strategy, but many will assure that their lower-tier employees are paid $10.10 per hour in 2015, to avoid an OFCCP complaint and scrutiny.

Minimum Required Salary

Admittedly, $455 per week ($23,660) probably was too low, because someone with salaried responsibility (supervising employees, making decisions of consequence to the company) probably should be paid more.  But, $984 ($51,168) is too high for some industries, including fast food and retail.  Glassdoor.com reports that a McDonald’s store manager averages $42,128 per year, with assistant managers averaging just under $30,000.  To avoid giving assistant managers a $20,000 raise, McDonalds and similar companies may reconfigure the compensation for their managers to an hourly rate that –with overtime- equates to their present income.

The Obama Administration’s Continuing Transference of Wealth 

A future BLawg article may someday count up all the ways that the Obama administration has drained revenue from businesses-owners.  Today, let’s limit our focus to the effect of Obama’s announcements on one McDonald’s restaurant.  If McDonald’s did not reconfigure the earnings of their managers, and the three Assistant Managers got raises from $30,000 to $51,168, and the Store Manager got a raise to – say $57,000 (because she can’t be paid the same as her subordinates), the March 12 announcement takes more than $78,000 out of the profits of one store.  Since most McDonalds are operated by franchisees, that amount comes out of the pocket of a local business owner.  If the McDonalds was on a military base and required to pay $10.10 per hour for each of the 50 employees (equaling 25 full time employees) instead of the $7.79 average today, that takes $120,000 per year out of the profits of one store.  (10.10 – 7.79 x 40 x 25 x 52).

Thus, the impact of both announcements in this hypothetical is nearly $200,000.  It’s not hard to see how the Administration’s Marxist mindset squelches the start-up of new businesses.  Not only does it take money out of the pockets of people who might start another enterprise, but it reduces the reward for risking one’s life savings in order to do so.

 Sure, the crew and managers will get a bigger paycheck.  If you think your out-of-work brother-in-law will be getting a job from someone making $51,168 a year, that might be a good thing.  Personally, we have never seen that happen.  Just as we have gotten used to self-check-out kiosks at Home Depot and most grocery stores, it looks like we will soon be punching in and paying for our orders at fast food kiosks where one employee does the work of three or four. McDonalds has already installed 7000 of these kiosks in its European market.