Paid sick leave laws have been a growing trend in city, county and state legislatures across the country over the last few years. Now, the federal government has joined the trend. Beginning January 1, 2017, and depending on the federal procurements involved, federal contractors and subcontractors may have to start providing up to 56 hours of paid sick leave per year to their employees working on federal contracts throughout the United States.

On September 30, 2016, the U.S. Department of Labor published a Final Rule (81 Fed. Reg. 67598) implementing Executive Order 13706, Establishing Paid Sick Leave for Federal Contractors. The 127-page Final Rule, which becomes effective on November 29, 2016, creates new entitlements regarding the accrual and use of paid sick leave, as well as detailed recordkeeping and enforcement mechanisms for the new employee entitlements and rights. Only some of the new requirements are outlined below. Therefore, thorough review of the Final Rule by each employer, in light of each contractor’s or subcontractor’s workforce and federal contracts, may be warranted.

Coverage

The Final Rule applies to contracts that result from new solicitations issued after January 1, 2017, as well as contract renewals, most contract extensions and contract modifications that are outside the scope of the contract and occur after January 1, 2017. 29 C.F.R. § 13.3. In other words, the Final Rule does not apply to federal contracts entered into before January 1, 2017, unless there is some change or extension to the contract post-January 1.

Not all new, renewed, extended or modified federal contracts are covered. Instead, the only covered contracts (29 C.F.R. § 13.3(a)) are:

  • A procurement contract for construction covered by the Davis-Bacon Act (“DBA”);
  • A contract for services covered by the Service Contract Act (“SCA”);
  • A contract for concessions; or
  • A contract in connection with federal property or lands and related to offering services for federal employees, their dependents or the general public.

The Final Rule does not apply to: (a) “contracts for the manufacturing or furnishing of materials, supplies, articles, or equipment to the Federal Government” (29 C.F.R. § 13.3(d)); (b) grants (29 C.F.R. § 13.4(a)); (c) contracts and agreements with and grants to Indian Tribes (29 C.F.R. § 13.4(b)); (d) construction contracts excluded from DBA coverage (29 C.F.R. § 13.4(c)); (e) service contracts exempted from SCA coverage (29 C.F.R. § 13.4(d)); or (f) work performed outside of the United States (29 C.F.R. § 13.3(c)).

Accrual of Paid Sick Leave

Covered contractors and subcontractors are required to “permit an employee to accrue not less than 1 hour of paid sick leave for every 30 hours worked on or in connection with a covered contract” (29 C.F.R. § 13.5(a)) up to at least 56 hours per “accrual year” (as defined in the Final Rule). All hours worked by an employee on a covered contract are presumed to be counted for accrual purposes unless the contractor has time records detailing “the employee’s covered and non-covered hours worked.” 29 C.F.R. § 13.5(a)(1)(i). Contractors must calculate an employee’s accrual of paid sick leave each pay period or each month, whichever frequency is greater. 29 C.F.R. § 13.5(a)(1)(ii). For Fair Labor Standards Act exempt employees, the contractor may “calculate paid sick leave accrual by tracking the employee’s actual hours worked or by using the assumption that the employee works 40 hours on or in connection with a covered contract in each workweek.” 29 C.F.R. § 13.5(a)(1)(iii). Instead of hourly accrual, contractors are also given the option “to provide an employee with at least 56 hours of paid sick leave at the beginning of each accrual year.” 29 C.F.R. § 13.5(a)(3).

Contractors must notify each employee, in writing, “of the amount of paid sick leave that the employee has accrued but not used no less than once each pay period or each month, whichever interval is shorter, as well as upon a separation from employment and upon reinstatement of paid sick leave.” 29 C.F.R. § 13.5(a)(2).

Treatment of Accrued Paid Sick Leave

As mentioned above, employees shall be permitted to accrue not less than 56 hours of paid sick leave each accrual year. An accrual year is defined as “a 12-month period beginning on the date an employee’s work on or in connection with a covered contract began or any other fixed date chosen by the contractor, such as the date a covered contract began, the date the contractor’s fiscal year begins, a date relevant under State law, or the date a contractor uses for determining employees’ leave entitlements under the FMLA.” 29 C.F.R. § 13.5(b)(1).

Paid sick leave must carry over from one accrual year to the next, but contractors may limit the amount of paid sick leave available for use to not less than 56 hours and employees may cease accruing paid sick leave once they accrue a minimum of 56 hours. In other words, accrual of new paid sick leave up to the 56-hour level may resume when an employee uses accrued paid sick leave and the employee’s available paid sick leave balance dips below 56 hours. 29 C.F.R. § 13.5(b)(2) and (3).

Accrued paid sick leave need not be paid out in cash upon termination of employment. 29 C.F.R. § 13.5(b)(5). However, accrued paid sick leave balances must remain available and be reinstated for employees rehired by the same contractor within 12 months after a job separation. 29 C.F.R. § 13.5(b)(4).

Use of Paid Sick Leave

Similar to the Family and Medical Leave Act (“FMLA”), federal contractor and subcontractor employees may take paid sick leave for physical or mental illness, injury or medical condition of the employee or the employee’s 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.” 29 C.F.R. § 13.5(c)(1). In addition to these traditional FMLA uses, employees may also take paid sick leave in connection with domestic violence, sexual assault or stalking and to obtain “counseling, seek relocation, seek assistance from a victim services organization, take related legal action … or assist an individual related to the employee … in engaging in any of these activities.” Contractors shall account for an employee’s use of paid sick leave in increments of no greater than one hour and may not deduct accrued paid sick leave in an amount greater than the time the employee was actually absent from work. 29 C.F.R. § 13.5(c)(2).

Employees are required to request, and contractors are required to grant or deny, the use of paid sick leave in a manner similar to FMLA leave requests. 29 C.F.R. § 13.5(c)(3). Contractors and subcontractors may require employees to produce certification or documentation for any leave of three or more consecutive workdays—but only if the employer notifies the employee of this certification requirement before the employee returns to work. 29 C.F.R. § 13.5(e).

Additional Technical Wrinkles

In addition to the foregoing, there are potential traps for the unwary:

  • There are special rules for employees covered by collective bargaining agreements and the Final Rule’s impact on such collective bargaining agreements. 29 C.F.R. § 13.4(f).
  • The Final Rule not only applies to those employees working directly on federal contracts and subcontracts, but also to those employees “performing in connection with such contracts.” 29 C.F.R. § 13.4(e). According to the definitions, an “employee performs ‘in connection with’ a contract if the employee’s work activities are necessary to the performance of a contract but are not the specific services called for by the contract.” 29 C.F.R. § 13.2. In other words, administrative, executive and other “overhead” employees are subject to the Final Rule provided they spend 20 percent or more of their hours in a given workweek working on a covered contract.
  • The new paid sick leave requirements may not be counted toward health and welfare or “fringe” requirements set by any SCA or DBA wage determination, except to the extent employer-provided paid sick leave benefits exceed those required by the Final Rule. 29 C.F.R. § 13.5(f)(2).
  • The Final Rule does not supersede or replace any contractor or subcontractor requirements to comply with the FMLA or any state or local paid sick leave laws or ordinances. 29 C.F.R. § 13.5(f)(3). To the extent there is any conflict or difference between the new federal and any state or local requirements, “satisfying both will require a contractor to comply with the requirement that is more generous to employees.” 29 C.F.R. § 13.5(f)(4).
  • While contractors and subcontractors may continue to use paid time off (“PTO”) policies that combine vacation and sick leave, the Final Rule imposes many conditions and restrictions on the use of such PTO policies that are beyond the scope of this Alert. 29 C.F.R. § 13.5(f)(5).

Federal Contracting Issues

Finally, a number of federal contracting considerations are raised by the Final Rule.

  • The Final Rule and its related contract clauses may be retroactively included in federal contracts should a federal agency fail to include them in new contracts, extensions, renewals or modifications. 29 C.F.R. § 13.44(f).
  • Contractors and subcontractors of all tiers are required to “flow down” the Final Rule contract clauses on all covered subcontracts. 29 C.F.R. § 13.21(b).
  • Detailed recordkeeping requirements are imposed regarding the kinds of information that must be maintained for three years. 29 C.F.R. § 13.25.
  • There is a new notice requirement obligating contractors and subcontractors to display a poster advising employees of their rights under the Final Rule. 29 C.F.R. § 13.26.
  • Compliance with the Final Rule is an express “condition of payment” by the federal government and higher-tier contractors. In other words, noncompliance constitutes grounds for the government to withhold payment. 29 C.F.R. § 13.21(a) and (b).
  • Contracting officers may also terminate federal contracts for failure to comply with the Final Rule. 29 C.F.R. § 13.11(c). Contractors and subcontractors found to have disregarded their obligations under the Final Rule shall be subject to debarment proceedings. 29 C.F.R. § 13.44(d); § 13.52. Furthermore, nothing in the Final Rule “is intended to limit or preclude a civil action under the False Claims Act, 31 U.S.C. 3730, or criminal prosecution under 18 U.S.C. 1001.” 29 C.F.R. § 13.1(c).
  • The Final Rule covers only those federal contracts not covered by the Federal Acquisition Regulation (“FAR”). We are still waiting on the FAR Council to promulgate new FAR clauses analogous to those set out in the Final Rule and called for in Executive Order 13706 to be incorporated into FAR-covered contracts.