On September 29, 2016, the U.S. Department of Labor (“DOL”) issued Final Rule entitled “Establishing Paid Sick Leave for Federal Contractors,”  which implements President Obama’s Executive Order 13706. The Rule is similar to many of the recently enacted state and local laws requiring the provision of paid sick leave, but has its own peculiarities. It requires federal government contractors and subcontractors to provide employees working under covered contracts with up to 56 hours of paid sick leave annually, accrued at a rate of at least one hour of paid sick leave for every 30 hours worked. As discussed in greater detail below, the Rule permits employees to use paid sick leave for a broad array of reasons, limits employers’ right to deny use of paid sick leave, and imposes recordkeeping requirements on employers. The new Rule will begin to impact contractors and subcontractors in 2017: specifically, it will apply to both new covered contracts and replacements for expiring contracts (and subcontracts entered into thereunder) where the solicitation has been issued, or the contract has been awarded outside the solicitation process, on or after January 1, 2017.

Below is a summary of the key provisions and practical steps contractors can take now to comply with the Rule.

Which Contracts are Covered?

The Rule will apply to both new covered contracts and replacements for expiring contracts (and subcontracts entered into thereunder) where the solicitation has been issued, or the contract has been awarded outside the solicitation process, on or after January 1, 2017. The four categories of contracts covered by the Rule are (1) procurement contracts for construction covered by the Davis-Bacon Act (“DBA”); (2) service contracts covered by the McNamara-O’Hara Service Contract Act (“SCA”); (3) concessions contracts; and (4) contracts in connection with Federal property or lands and related to offering services to federal employees, their dependents, or the general public. The Rule excludes certain contracts; for example, it does not apply to federal grants and cooperative agreements and contracts for manufacturing or furnishing of materials to the government under the Walsh Healey Public Contracts Act, procurement contracts for construction that are excluded from coverage of the DBA, or contracts for services that are exempted from coverage under the SCA.

Which Employees are Covered?

The Rule covers employees who are engaged in performing work “on” or “in connection with” a covered contract and whose wages under such contract are governed by the DBA, the SCA, or the Fair Labor Standards Act (“FLSA”), including employees who are exempt from overtime. Employees are considered to be performing “on” a covered contract when they directly perform specific services required by the contract. Employees are considered to be performing “in connection with” a covered contract when they perform work necessary to perform the contract but do not directly perform services required by the contract. For example, DOL states that an accounting clerk who processes invoices and work orders on a covered contract for janitorial services would be performing services “in connection with” the contract but not “on” the contract. The Rule provides a narrow exemption from coverage for employees who (1) do not work “on” a covered contract; and (2) spend less than 20% of their work hours in a particular workweek performing work “in connection with” a covered contract.

The Rule also provides a temporary and limited exception from all of the Rule’s requirements for employees covered by a collective bargaining agreement (“CBA”) ratified before September 30, 2016.  This exemption lasts until January 1, 2020 or when the CBA ends, whichever date is earlier, provided that the CBA provides covered employees with at least 56 hours per year of paid leave that may be used for health care and sickness reasons. Additionally, if a CBA provides less than 56 hours per year of paid leave, an employer can take advantage of this temporary exemption by providing covered employees with the difference between 56 hours and the amount provided under the CBA. Employers who attempt to take advantage of this latter option should ensure that they satisfy applicable union bargaining obligations under labor law.

It is important to note that, technically, the Rule not only applies to employees but also to independent contractors who are covered by the SCA or DBA and otherwise meet the requirements above.

How Will Sick Leave Accrue?

The Rule establishes that employees will earn a minimum of one hour of paid sick leave for every 30 hours worked on or in connection with a covered contract. “Hours worked” does not include hours when the employee is on paid sick leave or other paid time off. Although employers may cap the total amount of leave that may be accrued per year, this cap cannot be fewer than 56 hours per year (regardless of how many hours per week the employee works). Likewise, an employer may cap the total amount of leave that may be held by an employee at any one time to 56 hours, such that an employee may not accrue additional leave until the employee’s leave balance drops below 56 hours. An employee may carry over accrued, unused paid sick leave from year to year, but an employer may cap the carryover to no less than 56 hours. If a contractor is not required by the SCA, DBA, or FLSA to keep records of an employee’s hours worked (e.g., because the employee is exempt from overtime payment), the contractor has the option of either tracking actual hours worked, using an assumption that the employee works 40 hours on or in connection with a covered contract in each workweek, or allowing an employee to accrue paid sick leave based on the employee’s “typical number of hours worked on or in connection with covered contracts per workweek,” so long as the employer has appropriate evidence to support its estimate.

Contractors will have the option to provide employees with at least 56 hours of paid sick leave at the beginning of each accrual year, also known as “frontloading,” rather than based on hours worked. If a contractor elects to frontload paid sick leave, the contractor can still cap the total amount of leave that may be carried over from year to year to 56 hours, however, the contractor may not cap the total amount of sick leave that an employee may hold at any given time.

Contractors are not required to pay employees for unused leave when employment is terminated. The Rule provides that employees that are rehired by the same company within 12 months after separation must have their unused paid sick leave benefits reinstated, unless the employer has elected to pay out the employee’s leave at the end of employment.  

How Can Sick Leave be Used?

The Rule allows paid sick leave to be used for absences resulting from:

  • An employee’s physical or mental illness, injury, or medical condition
  • An employee’s need to obtain diagnosis, care, or preventive care from a health care provider
  • An employee’s need to deal with issues related to domestic violence, sexual assault, or stalking of the employee
  • An employee’s need to care for his or her child, parent, spouse, domestic partner, or “any other individual related by blood or affinity whose close association with the employee is the equivalent of a family relationship” who has a medical condition or need for diagnosis, care, or preventive care, or who needs assistance in dealing with issues relating to domestic violence, sexual assault, or stalking.

Paid sick leave under this Rule is generally only required to be provided to employees to excuse absences during the time that the employee would otherwise be working on or in connection with a covered contract.

During paid sick leave, employers are required to provide a covered employee with the same pay and benefits that the employee would receive if not using paid sick leave. For example, contractors must continue to make contributions to fringe benefit plans for the time employees are on paid sick leave and must provide the same hourly pay as if the employee had been present at work.

When Can Sick Leave be Used?

Employees must be permitted to use paid sick leave as it accrues; in contrast to a number of state and local sick leave laws, initial employment restriction periods (e.g., prohibiting the use of sick leave during the first 90 days of employment) are not allowed.

Employees may request to use their accrued leave by phone, by email, or by other oral or written note.  Employees must provide notice at least 7 days in advance when the need for leave is foreseeable, and as soon as practicable when unforeseeable.  Except under unique circumstances in which it is impossible for an employee to start late or end early during a shift, employers cannot require employees to take more leave than is needed and must allow employees to use leave in increments of no more than one hour.  

Employers may request documentation of the medical or other covered reason for an employee’s need for sick leave, however, this is permitted only after the employee is absent for three or more consecutive full workdays. An employer must maintain the confidentiality of any medical or other personal information received from an employee.

An employer’s grounds for denying a request are limited to: (1) an insufficient amount of accrued sick leave to cover the request; (2) insufficient information about the need for paid sick leave, in which case the employer must allow the employee to submit a new, corrected request; (3) a need for paid sick leave that is not covered by the Rule; (4) insufficient notice when advance notice was practicable; or (5) a request to use paid sick leave during time the employee is scheduled to be performing non-covered work.  Employers cannot make the use of leave contingent on employees finding a replacement to cover their work.  Denials must be in writing and include an explanation, and employers must generally provide an opportunity for an employee to correct the request.

Are There are Other Significant Requirements?

Contractors are required to maintain and preserve for three years a number of records relating to paid sick leave use and accrual, copies of employees’ requests to use paid sick leave, dates and times of paid sick leave used, written responses to requests to use paid sick leave, and other records showing tracking of or calculations relating to employees’ use and/or accrual of paid sick leave.

Contractors must also post this notice in the workplace or electronically (where a contractor customarily posts notices to employees electronically).

DOL is charged with monitoring compliance with the Rule and may investigate alleged violations, such as failure to comply with the Rule’s accrual rate or allowed use, or a claim of retaliation for or interference with an employee’s attempt to exercise sick leave rights.  Moreover, the Rule permits a contracting officer upon its own action or upon request from DOL to withhold payments or advances under a contract which is necessary to pay employees the full amount owed to compensate for any violation of the Rule, including any pay and/or benefits denied or lost by reason of the Rule’s violation. Contractors may also be debarred for failure to comply.

Can Existing Sick Leave or PTO Policies be Used to Comply?

Employers may comply with the Rule using existing paid sick leave or paid time off (“PTO”) policies, so long as the paid sick or PTO leave may be used for at least the same purposes described in the Rule, the policy allows for accrual at a rate that is at least equal to the minimums of the Rule, and the policy meets all other Rule requirements. Employers who desire to use existing paid sick or PTO policies to comply should pay close attention to their policies regarding accrual rates, maximum carryovers, probationary periods, uses for leave, and required certifications.

How Should Employers Prepare to Comply?

Contractors should begin drafting or updating paid sick leave or PTO policies to comply with the Rule. Significantly, the Rule does not supersede any local, state, or federal law or collective bargaining agreement that provides greater leave benefits. This can create substantial complexity for contractors. Many states and localities have enacted paid sick leave laws, which contain varying (and sometimes conflicting) requirements for employers, such as different accrual rates, permissible uses for leave, recordkeeping requirements, rules for front-loading, and caps on carryover and maximum leave balances. Given these varying, jurisdictional-specific requirements, contractors should consider whether they want to establish one universal policy for all employees or multiple jurisdiction-specific policies. Contractors must also ensure that they are prepared to administer a sick leave policy, including properly tracking and maintaining records of accrual and use of sick leave, as well as sick leave requests.