$10.10 in 2015

Ten-ten an hour will be the new minimum wage rate at federal contractors in 2015, the way things look now.

The first official step has been taken to make $10.10/hr a new rule for U.S. federal contractors.  The required preliminary notice was published recently in the Federal Register, per Executive Order 13658, Establishing a Minimum Wage for Contractors, which was signed by President Barack Obama on February 12, 2014.  The new 54-page notice promises to release proposed regulations 10/1/2014 which are scheduled to go into effect 1/1/2015.

Only federal contractors should be directly affected.  The notice of proposed rulemaking contains detailed links to FAQs and summaries. 

Right up front, it states that it “seeks to increase efficiency and cost savings in work performed by parties that contract with the federal government by increasing the minimum hourly wage paid by those contractors to workers performing on covered federal contracts to $10.10 an hour beginning January 1, 2015…,” with increases thereafter to be determined by the Secretary of Labor.  It is somewhat unclear how raising wage rates is expected to enhance efficiency and save money, but I would expect the argument to be that higher pay attracts better workers who will produce output results of superior quality.  CEOs accused of excessive compensation should make a note of that interesting defense:  lower pay endorses lower quality, while higher pay assures higher quality. 

Contractors to the US government must make plans now for new approaches next year.  Pay compression and internal equity pressures will have a ratchet effect on their lowest-paid jobs, even those not engaged in a covered federal contract.  Employers in high-paying locations where prevailing competitive rates already greatly exceed that new federal floor amount will have the fewest problems.  As long as the current lowest hourly pay rate is $10.10, no immediate adjustments will be necessary.  It will be different for federal contractors who have been hiring at the lower minimum wage levels permitted in other parts of the United States. 

There are many places where plenty of competent (if unskilled) candidates are willing, available and actively and earnestly seeking work for amounts below $10.10 an hour.  While this new rule only applies to federal contractors, it will still have some affect on others.  Minimally qualified workers can be expected to welcome the higher entry rate and to cite it to justify higher “market” pay at all employers, whether federal contractors or not. 

When faced with an 1/1/2015 requirement for a new mimium rate that exceeds its current minimum pay practices, a federal contractor will have to raise the floor for all below the $10.10 level.  Then they will need to address the inevitable pay compression issues created by a 39.31% increase in the current U.S. federal minimum wage rate.  Lifting the bottom by $2.85 an hour creates a ripple effect that cascades into job rates that will no longer retain the same lead distance above the prior minimum entry amount.  All who had progressed in the past from the 2014 minimum entry rate of $7.25 to a current $10.09 an hour will be leapfrogged, if they work on projects not covered by the new contractor rule.  Although the $10.10 minimum rate only applies to work on federal projects bid in 2015, historical internal equity patterns will be disrupted.  There will be pressure to “make employees whole” even if they have lost nothing except their lead over less valuable junior co-workers.  The increase from $7.25 to $10.10 costs $5,780 per person working a 2,080-hour year.  Simply increasing the wages of 900 employees earning under $12/hr by that same flat $2.85 to minimize compression by maintaining the same absolute hourly difference between all workers at those levels would cost $5,335,200.00 a year. 

Why is no one talking about this cost?  Is it because it all eventually comes out of our tax dollars?  In the end, after the federal contractor passes the costs on to the government in their new higher bid, the taxpayers will be subsidizing this generous move.

What do you think?

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. After over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), serves on the Advisory Board of the Compensation and Benefits Review and will express his opinion on almost anything.

Creative Commons image "Calculator and Dollar Bill" by Images_of_Money

Comments

[Trevor Norcross]

Hi Jim,

I’m also surprised we have not heard more questions about the pay compression issues and suggestions on how to deal with them. It does not stop by just moving the employee making $8.00 to $10.10, what do you do with the employee making $10.50, $17.00 or $25.00? At what rate do you stop mitigating for compression? If your starting rate is $8.00 and you raise these employees to $10.10 what do you do with the employee making $9.00 and $10.00?

What if government contracts are only a small part of your business and you have to raise the wages of all impacted employees. Can you raise your fees on those contracts to cover all costs or will it also impact margins on non-government contracts?

How many of these impacted companies will take the opportunity to correct individual pay for performance issues in the process? Are they looking at this as a bigger opportunity?

There is no “one size fits all” answer.

[Mark]

Increases of this magnitude far outweigh anything one would typically find in the market place; especially since duties and responsibilities are not required to be enhanced. So the first thing you have is increased cost with the "anticipation" these new, higher rates of pay will infuse the workers with greater efficiency and higher quality.

Also brought to mind is the question for the government contractor employers. "If the contractor employs other companies in contract to them for on-site services, does the new lower rate apply to them as well? I am thinking cleaning and dining services that may typically contracted to companies that specifically perform those functions.

How far will the compression issues reach? 39% reaches a long distance over salary grid structures in both the same level of responsibility as well as positions of greater responsibility.

[Jacque Vilet]

It would be interesting to know how the issue of compression was handled the last couple of times minimum wages increased. Yes, I know it's not exactly the same issue: the minimum wage didn't just apply to federal contractors and there was not a 39% jump ---- but I'm sure they caused compression. So how were they dealt with then?

[E. James (Jim) Brennan]

All good comments and questions. If you are affected, everyone working on a covered federal contract must make at least $10.10. New minimum wage pay compression adjustments involve the same options that have always been followed, usually chosen according to how your lowest paid hourly earners cluster statistically. Mitigation cutoff points can be problematic. http://www.compensationcafe.com/2011/12/2012-state-overtime-changes.html refers to the seminal August 1988 article in The Personnel Journal on Increasing Minimum Wages Without Maximum Costs. Lots of ways to handle it.

[Tony Bergmann-Porter]

I for one welcome our new roboproles:

http://singularityhub.com/2013/01/22/robot-serves-up-340-hamburgers-per-hour/

[E. James (Jim) Brennan]

Don't suspect many burger-flippers are federal contractors, so they might not be directly affected. Hope you realize that particular occupation was reclassified by the government from the service sector to the manufacturing sector some time ago. It is one reason "manufacturing jobs" didn't drop so dramatically as factories disappeared in past years. A whole bunch of positions were switched from the service category to the manufacturing category.

[Jim Johnson]

I can't help but wonder if the impact of this change is really going to be as great as what we might "initially" anticipate. Has anyone seen any studies based on hard data (e.g., BLS) that provide a preliminary impact assessment? What percentage of our federal contractors actually have current starting rates below $10.10 per hour?

[Trevor Norcross]

Hi Jim,
It is not just the employees making less than $10.10. It is also the expectations and pay compression issues for employees making over this rate that impacted companies need to think about.

[E. James (Jim) Brennan]

JJ: The most granular broad BLS sampling that I can recall is the OES survey. That doesn't ask for the actual pay rate but instead merely requests a headcount by income bracket for wide occupations, like a "receptionist" entry would carry a count of 8 in the box for the appropriate wage range like below
---------------------|-----------------------
Range A | Under $9.25 | Under $19,240
Range B | $9.25 to $11.49 | $19,240 to $23,919.

So BLS can not identify how many earn under $10.10 because they don't collect actual integer wage rates for the sample used for their estimates.

TN: Bingo! Imagine the ripple effect from all the folks who spent years climbing from $7.25 (or lower in earlier times) only to see the grade school dropout on his/her first job starting today at their hard-earned veteran pay level. The cry of "unfair" will ring loud throughout the land. Those unaffected will shout, "where's MINE?" Supervisors will weep. Unions will rejoice. Things will get interesting.