Executive Order 13706, Establishing Sick Leave for Federal Contractors, is being implemented through a US Department of Labor (DoL) Notice of Proposed Rule Making (NPRM).  This NPRM creates new compliance obligations for contractors, and includes administrative and flow down requirements and responsibilities relating to subcontractor compliance.

The 2015 Establishing Sick Leave for Federal Contractors Executive Order requires that certain federal government contractors and subcontractors provide their employees with up to seven days a year of paid sick leave including paid leave allowing for family care.  The Executive Order follows the increasing state and local government paid sick leave mandates. 

The Executive Order asserts that it “seeks to increase efficiency and cost savings” in the performance of government contracts.  It states that providing paid sick leave will improve the health and performance of employees of federal contractors and that it will “bring benefit packages of federal contractors in line with model employers,” thus ensuring that  they “remain competitive employers.”  The Secretary of Labor is set to issue final regulations to implement the Order’s requirements by September 30, 2016.  Comments on this rulemaking must be received on or before April 12, 2016, extended from the previous close date of March 28, 2016.

This NPRM implementation of this Executive Order is another example of a requirement that prime contractors must flow down to their supply chain.  Other recent examples include the Fair Pay and Safe Workplaces Executive Order and the Minimum Wage Executive Order.  Unlike the rules implementing the Minimum Wage Executive Order, the Establishing Sick Leave for Federal Contractors implementing rules also apply to salaried-exempt employees.   

What is Required?

New contracts, contract-like instruments, and solicitations will include a clause, which the contractor and any subcontractors shall incorporate into lower-tier subcontracts, specifying that all employees, in the performance of the contract or any subcontract, shall earn not less than one hour of paid sick leave for every 30 hours worked.  The Executive Order prohibits a contractor from limiting the total accrual of paid sick leave per calendar year, or at any point, at less than 56 hours.  Contractors have the option to provide employees with at least 56 hours of paid sick leave at the beginning of each accrual year to avoid the burden of accrual.

Written notification to covered employees on available paid sick leave is required at least monthly, each time the employee requests to use paid sick leave, at separation of employment, upon reinstatement of paid sick leave (discussed below), and when the employee asks for this information (not more than once a week).  Online notifications may assist in satisfying this notification requirement.

In drafting this proposed rule, the DoL notes that it engaged stakeholders with an interest in the Executive Order in order to solicit their views regarding its implementation, including holding of “listening sessions” with worker advocates and business representatives.  The DoL estimates that 437,000 federal contractor employees who presently do not receive paid sick leave will begin to receive this benefit. 

The NPRM contains five parts: (1) general topics such as definitions, coverage, and exclusions; (2) federal government requirements; (3) requirements for contractors, including flowing down a contract clause, recordkeeping, and maintaining a list of accrued paid sick leave; (4) enforcement, including investigations, to be conducted by the Wage and Hour Division; and (5) administrative procedures including a dispute mechanism for contractor compliance, debarment proceedings, and hearings before an administrative law judge and the Administrative Review Board.  The proposed rule would add part 13 to Title 29 of the Code of Federal Regulations (C.F.R.).

Employees who work on covered contracts will earn sick leave even if they are exempt employees, which is different than other rules that only address nonexempt employees.  Further, an employee working at least 20% of the employee’s time in support of a covered contract is entitled to sick leave. 

What Contracts are Covered by the NPRM?

Subject to certain exclusions, the paid sick leave obligations will apply to federal government contracts if:

  1. the wages of employees “performing on or in connection with” the contract are governed by the Davis-Bacon Act of 1931 (DBA), the McNamara-O'Hara Service Contract Act (SCA), or the Fair Labor Standards Act (FLSA), including employees who qualify for an exemption from the FLSA’s minimum wage and overtime provisions, and
  2. the contract falls into one of the following four categories:
  • a procurement contract for construction covered by the DBA;
  • a contract for services covered by the SCA;
  • a contract for concessions, including any concessions contract excluded from coverage under the SCA by DoL regulations at 29 CFR 4.1333(b); or
  • a contract in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public.

However, the Paid Sick Leave Executive Order and implementing regulation will not apply to federal contracts covered by the Walsh-Healey Public Contracts Act.

What Can Sick Leave Be Used For?

Paid sick leave earned may be used for an absence resulting from:

  1. physical or mental illness, injury, or medical condition;
  2. obtaining diagnosis, care, or preventive care from a health care provider;
  3. caring for a child, a parent, a spouse, a 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 any of the conditions or needs for diagnosis, care, or preventive care described in (i) or (ii) or is otherwise in need of care; or
  4. domestic violence, sexual assault, or stalking, if the time absent from work is for the purposes described in (i) or (ii), to obtain additional counseling, to seek relocation, to seek assistance from a victim services organization, or take related legal action, including preparation for or participation in any related civil or criminal legal proceeding, or to assist an individual related to the employee as described in (iii) in engaging in any of these activities.

Paid sick leave will be carried over from one year to the next and shall be reinstated for employees rehired by a covered contractor within 12 months after a job separation.  The use of paid sick leave cannot be made contingent on the requesting employee finding a replacement to cover any work time to be missed.

Successor Contractor Issues

Although employees who end their employment on a covered contract are not entitled to receive a sick leave pay out, the employee will be able to have sick leave restored if the employee returns within 12 months.  This brings up the issue of successor contractors, a topic frequently encountered in the type of services contracts that will be affected by this NPRM.

Successor issues arise when work is taken over from an incumbent contractor following a recompetition where rebadging of the former incumbent employees is common.  Those employees will be entitled to have their sick leave transfer to the new contractor.  One such issue raised by the proposed rule in this regard is the potential liability of a successor contractor for accrued sick leave.  SCA-covered successor contractors face the requirements of a separate Nondisplacement Executive Order that address the provision of a “right of first refusal of employment” to employees on the predecessor contract who work in positions for which they are qualified.  This is the common “rebadging” scenario and it is notable that the DoL has indicated that the Executive Order’s requirement to carry over previously accrued paid sick leave for employees ‘‘rehired by a covered contractor’’ should be interpreted to include successor contractors and the DoL has invited comments on rebadging issues.

The DoL also has invited comments on the extent to which its interpretation of this reinstatement requirement may affect pricing and cost accounting for covered contractors and contracting agencies, including the potential for paying twice for the same benefit: first to a predecessor contractor charging the contracting agency for predicted use of paid sick leave during its contract term, and then second to a successor contractor who would be obligated to pay for unused sick leave later used by its employees during the successor’s contract.

Contractors will have difficulty ascertaining and addressing the sick pay requirement’s impact in the preparation of proposals because the impact of “carry over” sick leave will not be known.  This is an issue that needs to be addressed to allow all offerors to compete on a fair and equal basis.

Prime Contractors Must Police Their Subcontractors

This NPRM continues the placement of responsibility on a prime contractor for policing subcontractors in their supply chain.  The NPRM provides that the prime contractor and higher-tier contractors “shall be responsible for the compliance by any subcontractor or lower-tier subcontractor with the requirements of Executive Order 13706 and this part, whether or not the contract clause was included in the subcontract.”

These responsibilities should be noted because the administrative burden of compliance is considerable and could be difficult for smaller companies.

Penalties

Federal contractors are advised to consider how to implement and comply with this new proposed rule.  The NPRM states that failure to comply will result in a three-year debarment for the offending company and the DoL can withhold funds that represent sick leave owed to the employees.  In addition, the DoL can withhold because the contractor had violated the recordkeeping requirements or institute legal action if the withhold is insufficient.

Contractors should note that Section 4(a) of the Executive Order grants authority to the Secretary to investigate potential violations of and obtain compliance with the Order. Section 4(b) further explains that the Executive Order creates no rights under the Contract Disputes Act, and disputes regarding whether a contractor has provided employees with paid sick leave shall be addressed as provided in the NPRM at Subpart E “Administrative Proceedings.”

Finally, the NPRM also provides that if there is a failure to comply with the proposed implementing clause, “the contracting agency may...take action to cause suspension of any further payment...[and contractor failure to comply] may constitute grounds for termination of the right to proceed with the contract work and, in such event...[the contracting agency may charge] the contractor in default with any additional cost.”