Guidance eases cost of new paid sick leave rule but creates new administrative burdens.

  • Department of Labor’s Annual Memorandum raises the Service Contract Act (SCA) Health and Welfare Fringe Benefit rate to $4.41 per hour.
  • Contracts containing Federal Acquisition Regulation (FAR) 52.222-62 Paid Sick Leave under Executive Order 13706 clause will have a new effective rate of $4.13 per hour, partially offsetting the cost of the Paid Leave requirement.
  • Contractors in Hawaii making contributions to the Hawaii Prepaid Health Care Act will continue to have lower hourly fringe requirements, but there will be similarly be two rates for covered and uncovered contracts of $1.63 and $1.91, respectively.

The U.S. Department of Labor (DOL) has announced its annual adjustment for the SCA Health and Welfare (H&W) Fringe Benefits rate for all wage determinations issued on or after August 1, 2017. While DOL typically adjusts this rate annually, this year DOL issued two SCA H&W Fringe Benefit rates to address Executive Order (EO) 13706, which is being implemented in contracts through FAR 52.222-62, Paid Sick Leave Under Executive Order 13706. DOL’s hourly H&W rate for uncovered contracts is $4.41 and its rate for covered contracts is $4.13. DOL’s use of two rates will create administrative complications for contractors whose workforce is working on both covered and non-covered contracts.

The lower SCA H&W rate will partially offset the cost of a contractor’s compliance with EO 13706. The EO and FAR clause require covered contractors to provide employees up to 56 hours of paid leave sick leave annually. (For details on the EO, see our prior Client Alert, “Department of Labor Issues Final Rule Requiring Federal Contractors to Provide Paid Sick Leave,” dated October 6, 2016.) The clause provides workers a benefit under covered contracts of the accrual of one hour of paid sick leave per 30 hours worked, not to exceed 56 hours per year.

However, this FAR clause is only incorporated into solicitations issued after January 1, 2017 or contracts awarded outside the solicitation process after January 1, 2017. Given that many service contracts, with priced options, are effectively five-year contracts, this clause will be incorporated into the Government’s inventory of service contracts over a five-year period as new contracts are awarded. During this five-year transition period, contractors will be required to provide paid sick leave for covered employees who are working under the covered contracts, but will not have a similar requirement for uncovered contracts.

A contractor may accept the administrative complexities and potential employee morale problems of providing paid sick leave to only their employees who are working under covered contracts. Alternatively, a contractor can avoid some of the administrative complexities and the morale issues by providing paid sick leave to all of its employees. These employers may then opt to reduce or eliminate the cost of some of these employees’ other fringe benefits to offset this increased cost.

The new DOL lower SCA H&W Fringe Benefit rate is meant to offset a contractor’s increased cost of the seven days of paid sick leave by reducing the covered H&W rate. However, this revised rate is not automatically applicable to existing contracts—it only becomes effective once the government agency modifies the contract to include an updated wage determination. Also, while the lower, covered H&W rate offsets some of the cost of the paid sick leave benefit, it does not offset all of the paid sick leave cost. Instead, based upon the $0.28 benefit cost differential, the reduced rate only reimburses a contractor for the equivalent of 56 hours of pay at an hourly amount of $10.40. Given that the hourly wage rates for most service employees substantially exceeds $10.40, the reduced H&W rate is only a partial offset for these increased costs.

Immediate action items for contractors

  • Identify all covered contracts and solicitations containing FAR 52.222-62.
  • Check all solicitations, modifications and revised wage determinations to ascertain whether the new H&W rates are included in your new contracts or are being incorporated into your existing contracts.
  • Ensure you have an appropriate system for tracking accruals of paid sick leave, especially when you have employees working on both covered and uncovered contracts.
  • Ensure you are reporting the proper amount of accrued paid sick leave to covered employees for each pay period.