Fair Labor Standards Act (FLSA) in Contracting

The Fair Labor Standards Act of 1938 (29 USC 201 et seq.) is the foundational federal labor law governing minimum wage, overtime pay eligibility, and child labor protections for workers in the United States. For federal contractors, FLSA compliance is not optional or secondary: it is a mandatory baseline that applies to all employees performing work on covered contracts, regardless of the contractor's size or the contract's dollar value. The Department of Labor's Wage and Hour Division enforces the FLSA and has broad authority to investigate, assess back wages, and assess civil money penalties.

What does the FLSA require in contracting?

The FLSA requires that covered employees be paid at least the federal minimum wage for all hours worked. As of 2024, the federal minimum wage is $7.25 per hour, though many states and localities have higher minimums that a contractor must also meet. Executive Order 14026, issued in 2021, further requires that employees working on or in connection with new or renewed federal contracts be paid a minimum wage of $17.75 per hour (as adjusted for 2024), a rate that FAR 52.222-55 implements as a contract clause on covered solicitations.

The FLSA also requires that non-exempt employees receive overtime pay at a rate of at least one and one-half times their regular rate for all hours worked beyond 40 in a workweek. The determination of which employees are exempt from overtime is one of the most litigated questions under the Act. The primary exemptions are for executive, administrative, and professional employees paid on a salary basis above a threshold, and for outside sales employees. Misclassifying hourly workers as exempt to avoid overtime obligations is a major source of FLSA violations in GovCon.

The FLSA is distinct from the Service Contract Act (SCA, 41 USC 6701), which applies to service contracts over $2,500 and requires payment of prevailing wages and fringe benefits as determined by the Department of Labor. Where both apply, contractors must satisfy the higher of the two standards.

Why it matters for contractors

FLSA violations on government contracts expose contractors to back wage liability, liquidated damages equal to the back wages owed, civil money penalties, and potential debarment. The Wage and Hour Division conducts investigations both in response to employee complaints and through directed compliance audits in industries with high violation rates, including hospitality, facilities management, and security services.

Contractors with complex timekeeping practices, blended workforces of hourly and salaried employees, or employees who work variable schedules must maintain accurate records of hours worked for all non-exempt employees. The FLSA requires record retention of payroll records for at least three years.

Misclassification of employees as independent contractors is also a growing enforcement priority. Workers who are economically dependent on a single contractor and perform core contract work are likely employees under the FLSA's economic reality test, not independent contractors.

Example

A facilities management contractor employs 60 hourly maintenance workers on a multi-year GSA building services contract. During a Wage and Hour Division audit triggered by a worker complaint, investigators discover that the contractor has not been paying overtime to employees who worked more than 40 hours per week during periods of peak demand, classifying those hours incorrectly as "on-call" time not subject to overtime. The Division assesses back wages covering a two-year lookback period for all affected workers, plus an equal amount in liquidated damages. The contractor also pays a civil money penalty for the willful violations and updates its timekeeping practices under a compliance agreement.