The potential payroll exposure for President Obama’s Executive Order – Establishing Paid Sick Leave for Federal Contractors (September 7, 2015) is taking shape, and it will be pricey.

On February 24, 2016, the U.S. Department of Labor (USDOL) issued a proposed rule, which will require private federal contractors to allow employees up to seven paid sick days each year.

According to the USDOL, the executive order will provide additional paid sick leave to an estimated 828,000 workers, including nearly 437,000 workers who currently receive no paid sick leave.

What does this mean in real dollars?

According to the Bureau of Labor Statistics (BLS), in 2015 the average total compensation for all private industry workers was $31.53/hour. This average total hourly rate per employee included wages and legally required benefits, plus paid leave, supplemental pay, insurance and retirement costs. The average straight wage rate for all workers in private industry was $21.98/hour 1, and the average employer legal benefit burden was $2.51/hour 2, for a base employer burden of $24.49 per hour, per employee. Using the BLS’s rough statistics, employees who are already receiving paid sick leave receive an average of 24 hours each year. Which means that 391,000 workers will soon receive an increase of 32 hours of paid sick leave each year, and 437,000 workers will soon receive 56 hours of paid sick leave each year.

(32 hours x $24.49) x 391,000 employees = $306,481,880

(56 hours x $24.49) x 437,000 employees = $599,319,290

Total Potential Paid Sick Leave Burden for 828,000 employees = $905,801,160.00

What does this mean for employers?

The implementation of this Executive Order presents two major issues.

First, how can employers effectively combat abuse of paid sick leave? The USDOL’s proposed rules allow an employer to use its existing paid time off policy; however, an existing policy must provide the same rights and benefits as the USDOL will require, and it appears that the “certification” requirement is ripe for abuse by employees. Employees would not be required to provide health care certification until they use three consecutive full days of paid leave, which could lead to an employee using paid sick leave to leave at noon on a Thursday and return to work on Tuesday morning without any challenge by the employer.

Next, how can a company effectively bid for work when it cannot estimate the use of paid sick leave? For contracts awarded after January 1, 2017, employees will be accumulating 1 hour of paid sick leave for every 30 hours worked. 3 This represents a potential 3.3% decrease in expected employee efficiency. Additionally, an employer may then need to assign that work to another employee at 1.5 times the regular rate. Employers will need to take into account these projected losses of time in order to meet their gross profit expectations on employee labor.

Paid sick leave is on its way and is expected to expand even further. We can review and modify your policies so that you maintain every advantage in operational efficiency; for example, it may be beneficial to convert existing paid leave into qualifying paid sick leave in advance of the rule implementation. We can also forecast the disruption to your operations based upon historical equivalents.