The U.S. Court of Appeals for the Ninth Circuit ruled in Nebraska v. Su, No. 23-15179 (9th Cir. Nov. 5, 2024) that the president lacks authority under the Federal Property and Administrative Services Act of 1949 to set a federal contractor minimum wage.  Initially, 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 had dismissed the suit ruling that the President’s actions did not violate the law.

The history of this authority began in 2014 when President Obama invoked the Federal Property and Administrative Services Act of 1949 (FPASA) to issue Executive Order 13658 requiring federal contractors to pay employees $10.10 per hour minimum wage  In 2018, President Trump issued an executive order that excluded contracts related to seasonal recreational services from the minimum wage requirements of President Obama’s 2014 executive order. President Biden issued Executive Order 14026 which required federal contractors to pay employees a $15 minimum wage and rescinded President Trump’s 2018 exemption for seasonal recreational services.

The U.S. Department of Labor (DOL) filed regulations to implement the Executive Order.  It did acknowledge that government expenditures may rise if the increased cost to contractors is passed along to the government, but concluded that increased productivity, reduced turnover, and reduced absenteeism would offset some of those costs.  The DOL estimated that federal contractors would pay $1.7 billion annually in extra expenses because of the rule and yet did not quantify any cost savings resulting from increased productivity, reduced turnover, and reduced absenteeism. 

Five states challenged the wage mandate immediately after it took effect.  The states alleged that the wage mandate violated the FPASA, the Administrative Procedure Act (APA), the major questions doctrine, the non-delegation doctrine, and the Spending Clause.  The District Court did not agree that any of the laws were violated and dismissed the case.

On appeal to the 9^th Circuit, the court overturned the ruling of the district court.  Specifically, the court ruled that:

• 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 but additional $1.7 billion federal contractor costs which would be passed on to the government through price adjustments.
• The government's overbroad interpretation of the Procurement Act causes conflicts with other laws and a requirement of minimum wage rates strips contractors "of a key way to differentiate their services—labor cost."
• Further, 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.

Interestingly, the 9th Circuit's decision follows the reasoning employed by several federal courts enjoining EO 14042 which concerned the federal contractor vaccine mandate.  Being sent back to the District Court, an injunction will likely be issued, how broad a ruling is unknown at this time.

There is a split in the courts.  The 10^th Circuit ruled that the President had the authority to issue the Executive Order.  Currently there is a case in the 5^th Circuit concerning the same issues and likely to rule the same way as the 9^th.  With the new administration, the EO could be rescinded and all appeals dropped.  If the Supreme Court hears an appeal, it is our best guess at this time that it will rule like the 9^th Circuit. 

Interestingly enough, this case could also lead to the reasoning for the rescinding of Executive Order 11246, the affirmative action executive order.  Nowhere in the FPASA does it discuss affirmative action or authorize the president to initiate regulations which would require social programs with costs passed on to the government contracting.  The Supreme Court has not ruled specifically on this issue but could in the coming administration.

Source: Holland & Knight LLP 11/12/24