Ninth Circuit Says Federal Contractor Minimum Wage Is Unlawful

The U.S. Court of Appeals for the Ninth Circuit held on Nov. 5, 2024, ruled that the president lacks authority to require federal contractors to pay a minimum wage. Nebraska v. Su, No. 23-15179, 2024 WL 4675411 (9th Cir. Nov. 5, 2024). The 2-1 decision follows a string of federal court opinions in 2022 enjoining the government contractor vaccine mandate, and sets up a circuit split on the president's authority to issue a contractor minimum wage under the Federal Property and Administrative Services Act of 1949 (the Procurement Act).¹

• The ruling does not halt the application of the federal contractor minimum wage nationwide because the injunction will apply only in favor of the plaintiffs in that case.
• For the moment, most federal contractors remain subject to the presidentially imposed minimum wage. However, even if this rule is eventually discarded, federal contractors remain subject to any applicable state minimum wage, as well as federal wage statutes such as the Service Contract Act and the Davis-Bacon Act.

History of the Federal Contractor Minimum Wage

On Feb. 12, 2014, President Barack Obama signed Executive Order (EO) 13658, "Establishing a Minimum Wage for Contractors."² Its minimum wage was set at $10.10 per hour. This was the first time that a president had ever established a minimum wage for federal contractors. Congress had previously directed minimum wages on certain types of federal contracts through laws such as the McNamara-O'Hara Service Contract Act of 1965, which requires a "prevailing wage" on contracts with service employees, and the Davis-Bacon Act, which requires the same on federal contracts for construction, alteration and repair.³

President Obama issued EO 13658 under the authority of the Procurement Act, echoing its purpose by stating that a minimum wage on federal contracts "promote[d] economy and efficiency in procurement by contracting with sources who adequately compensate their workers."⁴

The U.S. Department of Labor's (DOL) final rule implementing EO 13658 noted several comments "expressing strong opposition to the EO and questioning its legality and stated purpose."⁵ The DOL did not respond to those concerns because "comments questioning the legal authority and rationale underlying the EO are not within the purview of this rulemaking action."⁶

The contractor minimum wage largely stayed in place after President Obama left office. On May 25, 2018, President Donald Trump issued EO 13838, "Exemption from EO 13658 for Recreational Services on Federal Lands," declaring that EO 13658 "shall not apply to [federal] contracts or contract-like instruments" entered into "in connection with seasonal recreational services or seasonal recreational equipment rental."⁷ President Trump kept the contractor minimum wage in place as it applied to all other federal contractors.

On April 27, 2021, President Joe Biden signed EO 14026, titled "Increasing the Minimum Wage for Federal Contractors."⁸ EO 14026 rescinded President Trump's exemption for seasonal recreational services and raised the hourly minimum wage paid by contractors to workers on or in connection with covered federal contracts to $15 per hour for federal contracts beginning on or after Jan. 30, 2022. This amount is adjusted annually; the rate announced for 2025 is $17.75 per hour.⁹ EO 14026 and its higher minimum wage applies to the same types of contracts with the federal government that were covered by President Obama's EO 13658. However, the more recent EO 14026 only applies to contracts with the federal government that were entered into on or after Jan. 30, 2022, or that were renewed or extended on or after Jan. 30, 2022.¹⁰ Contracts before that period remain subject to the lower minimum wage previously instituted by President Obama in EO 13658 (now at $12.90 per hour). Like President Obama, President Biden cited the Procurement Act as authority for the contractor minimum wage, using the same introductory language as Obama's order.

On Nov. 16, 2021, the DOL published its final rule implementing EO 14026, raising the minimum wage to $15 per hour.¹¹ As with the final rule during the Obama Administration, the DOL did not address commenters' concerns over the EO 14026's legality: "Comments questioning the legal authority and rationale underlying the President's issuance of the Executive order are not within the scope of this rulemaking action."¹²

The Ninth Circuit's Decision in Nebraska v. Su

The states of Arizona, Nebraska, Idaho, Indiana and South Carolina brought suit in the U.S. District Court for the District of Arizona, challenging enforcement of the contractor minimum wage. The district court dismissed the suit. Arizona v. Walsh, No. CV-22-00213, 2023 WL 120966, at *13 (D. Ariz. Jan. 6, 2023). The district court concluded that the wage mandate did not violate the Procurement Act and the major questions doctrine did not apply because the economic impact was too small. Id. at *4-8. The district court also reasoned that the rule was not subject to arbitrary-or-capricious review because the DOL was required to adopt the policy pursuant to EO 14026.

The plaintiffs¹³ appealed to the Ninth Circuit, which reversed and remanded with instructions to the district court to issue a preliminary injunction. The Ninth Circuit held that the minimum wage rule was unlawful for several reasons:

• The contractor minimum wage exceeds the president's authority under the Procurement Act. The "economy and efficiency" clause is a precatory provision, not actually an operative law, and no operative provision of the Procurement Act authorizes the president to establish a minimum wage.
• The DOL's rule did not promote economy and efficiency. In fact, the DOL had estimated that that the rule would initially cost federal contractors $1.7 billion (which would be passed on to the government through price adjustments), and did not necessarily outweigh the cost benefits according to the DOL's own analysis.
• The government's overbroad interpretation of the Procurement Act is shown by its discordance with other laws. Minimum wage rates impair competition in the market for federal contracting and strips contractors "of a key way to differentiate their services—labor cost." Likewise, a presidentially set minimum wage contrasts with the McNamara-O'Hara Service Contract Act, the Davis-Bacon Act and the Walsh-Healey Public Contracts Act, all of which were enacted by Congress and all of which account for local variations in wages.
• The DOL's implementing rule was subject to arbitrary-or-capricious review under the Administrative Procedure Act (APA), and the DOL acted arbitrarily or capriciously when it failed to consider alternatives to issuing regulations implementing the minimum wage mandate.¹⁴

Nebraska v. Su, No. 23-15179, 2024 WL 4675411 (9th Cir. Nov. 5, 2024).

Continued Limitation on Presidential Authority Under the Procurement Act After the Government Contractor Vaccine Mandate

The Ninth Circuit's decision follows the reasoning employed by several federal courts enjoining EO 14042, better known as the government contractor vaccine mandate. See Kentucky v. Biden, 23 F.4th 585 (6th Cir. 2022); Louisiana v. Biden, 55 F.4th 1017 (5th Cir. 2022); and Georgia v. President of the United States, F.4th 1283 (11th Cir. 2022). These, courts found that the mandate exceeded President Biden's authority under the Procurement Act.¹⁵ Although the Ninth Circuit found the government contractor vaccine mandate to be lawful, this decision was later vacated as moot and the Court in Su specifically rejected the reasoning of that case.¹⁶

Other Litigation Over the Contractor Minimum Wage

The Fifth Circuit is currently considering the government's appeal of a Texas district court's summary-judgment ruling¹⁷ that enjoined the minimum wage from being enforced against state agencies in Texas, Louisiana and Mississippi, which had challenged the rule in a separate lawsuit. On Aug. 6, 2024, the Fifth Circuit heard oral arguments. Texas v. Biden, 5th U.S. Circuit Court of Appeals, No. 23-40671; Texas v. Biden, 694 F. Supp. 3d 851, 874 (S.D. Tex. 2023). In August 2024, the Tenth Circuit held that the president did have authority under the Procurement Act to order a minimum wage mandate, even as applied to recreational seasonal workers. Bradford v. U.S. DOL, 101 F.4th 707 (10th Cir. 2024), petition for cert. filed, No. 24-232 (U.S. Aug. 28, 2024).

Future of the Government Contractor Minimum Wage

The Ninth Circuit held that "the district court abused its discretion in denying [the] Appellants [states] a preliminary injunction," reversed the district court's dismissal, vacated the denial of the injunction and remanded for further proceedings "consistent with this opinion."¹⁸ Thus, although it is anticipated that the district court will issue an injunction immediately, it is unclear if this injunction will apply only to the plaintiff-states in their capacity as federal contractors (e.g., Idaho State University and the Idaho Department of Fish and Game both contract with the federal government to provide various services), or if the federal government will be enjoined from enforcing the contractor minimum wage on all federal contracts performed within these jurisdictions. Either way, the injunction is unlikely to apply nationwide.

The Ninth Circuit's opinion creates a split with the Tenth Circuit on the issue of the president's authority to promulgate a contractor minimum wage under the Procurement Act. More broadly, the Ninth Circuit rejected "economy and efficiency," standing alone, as an operative command for regulation under the Procurement Act. So have the Fifth, Sixth and Eleventh Circuits. This contrasts with the broader reading of the Procurement Act given by the Fourth, Tenth and District of Columbia Circuits. The resolution of the Procurement Act's breadth has foundational implications for not only the minimum wage EOs but other EOs as well, including those requiring contractor sick leave (EO 13706) and, most prominently, regulating antidiscrimination and affirmative action (EO 11246).

The future of the contractor minimum wage is uncertain. Although the circuit split could make it a tempting target for resolution by the Supreme Court, the Ninth Circuit's opinion directs only a preliminary injunction, with a merits decision yet to be had. Further, the changeover from the Biden Administration to the second Trump Administration could result in modifications or repeal of the contractor minimum wage altogether – as well as another round of litigation from that action.

Next Steps for Contractors

Contractors with the minimum wage requirements in their contracts (FAR 52.222-55) should continue to follow the mandates set out in their contracts. If a company is located in a state impacted by an injunction, it should inquire about next steps from the contracting officer to ensure any minimum wage increases will be recoverable under FAR 52.222-55(b)(3).

For contractors unaffected by an injunction, they should continue to operate normally and ensure they receive price adjustments for every minimum wage increase by documenting their increased costs and submitting requests to the contracting officer (and document and pass along any subcontractor increases).

In the medium term and long term, contractors may find it helpful to consider how their proposed labor mix and pricing for future federal contract opportunities could change if the contractor minimum wage was eliminated. While this rule is still very much in effect for the vast majority of contractors, companies should be prepared for the possibility that it may eventually be eliminated.

It is important to note that even if the DOL eventually rescinds or modifies the contractor minimum wage, federal contractors remain subject to their state's minimum wage, as well as to federal statutes such as the Service Contract Act and the Davis-Bacon Act.

Holland & Knight will continue to monitor developments regarding the contractor minimum wage and provide updates. Please contact the authors if you have specific questions for your business.

Notes

¹ 40 U.S.C. 101 et seq.

² 79 FR 9851, 9852 (Feb. 20, 2014); cf. 40 U.S.C. § 101.

³ 41 U.S.C. § 6701 et seq.; 40 U.S.C. § 3141 et seq. Other Congressional directed minimum wage laws include the Walsh-Healey Public Contracts Act. 41 U.S.C. § 6501 et seq.

⁴ 79 FR 9851, 9852.

⁵ 79 FR 60634, 60636.

⁶ 79 FR 60634, 60636.

⁷ 83 FR 25341.

⁸ 86 FR 22835.

⁹ 89 FR 79644.

¹⁰ 88 FR 66903, 66905.

¹¹ 86 FR 67126.

¹² 86 FR 67126, 67129, 67131.

¹³ Arizona did not join the four other states in the appeal after Democratic Attorney General Kris Mayes was elected in 2022 in place of Republican Mark Brnovich, who had originally joined the suit.

¹⁴ The Court found that the major questions doctrine does not apply because the Executive's reliance on the Procurement Act for the minimum wage mandate is not a "transformative" expansion of its authority.

¹⁵ Following these decisions, the Biden Administration withdrew its vaccine requirements, including this mandate on federal contractors, effective May 1, 2023.

¹⁶ Nebraska v. Su, No. 23-15179, 2024 WL 4675411, at *14, citing Mayes v. Biden, 67 F.4th 921 (9th Cir. 2023), vacated as moot, 89 F.4th 1186 (9th Cir. 2023).

¹⁷ State of Texas et al v. Biden et al, No. 6:2022cv00004.

¹⁸ Nebraska v. Su, No. 23-15179, 2024 WL 4675411, at *1-2, 7 (9th Cir. Nov. 5, 2024).

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