As expected, the Department of Labor (DoL) published on Friday, September 30, 2016, its “Establishing Paid Sick Leave for Federal Contractors” final rule. When fully implemented, this rule will provide paid sick leave to over one million contractor employees; more than half of that number currently lack paid sick leave.

Contractors subject to the final rule will need to address the formidable task of revising policies and procedures and implementing a program to ensure compliance with this final rule’s requirements. In addition, contractors may need to coordinate the overlapping requirements of paid sick leave laws that exist at the federal, state, and local levels.

This final rule implements Executive Order 13706, signed by President Barack Obama on September 7, 2015. The Executive Order requires certain parties that contract with the federal government to provide their employees with up to seven days (56 hours) of paid sick leave annually, including paid leave allowing for family care.

This final rule represents an ambitious undertaking. It defines terms used in the regulation, describes the categories of contracts and employees that are covered by the Executive Order, sets forth requirements and restrictions governing the accrual and use of paid sick leave, and prohibits interference with or discrimination for the exercise of rights under the Executive Order. Further, the final rule describes the obligations of contracting agencies, the DoL, and contractors under the Executive Order, and establishes the standards and procedures for complaints, investigations, remedies, and administrative enforcement proceedings related to alleged violations. It incorporates existing definitions, procedures, remedies, and enforcement processes under the Fair Labor Standards Act, the Service Contract Act, the Davis-Bacon Act, the Family and Medical Leave Act, the Violence Against Women Act, and Executive Order 13658, Establishing a Minimum Wage for Contractors. The final rule becomes effective November 29, 2016.

Additional Explanatory Material Available Through the DoL

This final rule requires 127 pages in the Federal Register format to respond to the Executive Order’s mandate. A major part of the Federal Register publication is a comprehensive review of the over 35,000 comments received in response to the earlier Notice of Proposed Rulemaking (NPRM). That review provides a good deal of information, including the arguments that support the intent of the Executive Order and concerns with the NPRM. The review of comments also indicates thoughtful examination of the issues raised in the comments.

Clearly, careful study is required to understand this complex final rule and its compliance requirements, but the DoL has made the effort somewhat easier by providing a Wage and Hour Division webpage that contains a number of resources. Two of the more useful resources include a helpful fact sheet that summarizes the implementing rule, and a comprehensive set of “Questions and Answers.” Contractors and those advising contractors on paid sick leave compliance may benefit from reviewing these resources.

Earlier Notice of Proposed Rulemaking and Comments

On February 25, 2016, the DoL published its NPRM in the Federal Register and invited public comments. Steptoe’s advisory on the NRPM, entitled “Federal Government Contractors Face New Paid Sick Leave Compliance and Flow Down Obligations,” is available here. The final rule includes only minor changes from the NPRM.

What Contracts are Covered?

The requirements of the Executive Order and final rule apply only to certain, specifically identified categories of contracts with the federal government, and only to contracts that are “new” on or after January 1, 2017 (generally those awarded pursuant to solicitations issued on or after that date). The categories of covered contracts are identical to those covered by the final rule implementing Executive Order 13658, Establishing a Minimum Wage for Contractors, except that the final rule implementing the paid sick leave Executive Order also applies to certain contracts with the US Postal Service.

The Executive Order and the DoL’s implementing final rule apply to a new contract that is:

  1. a procurement contract for construction covered by the Davis-Bacon Act (DBA);
  2. a contract for services covered by the Service Contract Act (SCA);
  3. a contract for concessions, including any concessions contract excluded from coverage under the SCA by the DoL regulations at 29 CFR 4.133(b); or
  4. a contract in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public.

Also, the final rule only applies to contracts, or portions of contracts, with the federal government performed within the United States (defined as the 50 States and the District of Columbia).

What Contracts are Excluded?

The final rule does not apply to grants as that term is used in the Federal Grant and Cooperative Agreement Act. It does not apply to contracts and agreements with grants to Indian Tribes under the Indian Self-Determination and Education Assistance Act (Public Law 93–638), as amended. In addition, the final rule does not apply to contracts that are subject only to the Davis-Bacon and Related Acts.

In addition, the final rule does not appear to reach many procurement contracts beyond those identified above. For example, according to the comments accompanying the final rule, the Executive Order does not apply to:

(i) prime contracts for the “manufacturing or furnishing of materials, supplies, articles, or equipment,” and similar subcontracts, including subcontracts for materials, supplies, articles, or equipment for use on a covered contract, 87 FR at 67616; and

(ii) a significant portion of commercial items contracts, including “commercial supply contracts subject to the Walsh-Healey Public Contracts Act.” Id. at 67690.

What is the Dollar Threshold?

Contracts covered by the SCA or the DBA apply the final rule to prime contracts only at the thresholds specified in those statutes ($2,500 and $2,000, respectively), and for procurement contracts where employees’ wages are governed by the Fair Labor Standards Act (i.e., procurement contracts not covered by the SCA or DBA), the rule applies when the prime contract exceeds the micro-purchase threshold ($3,500).

There is no value threshold for application of the rule to subcontracts awarded under covered prime contracts or for concessions contracts not covered by the SCA and contracts with the federal government in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public not covered by the SCA.

What About Other Paid Sick Leave Rules Under State or Local Law?

Interest in the provision of paid sick leave is not an issue unique to the federal government. In the United States, at least five states, twenty-nine cities, one county, and Washington, DC currently have paid sick leave laws on the books that contractors may have to follow. Contractors are not exempt from the requirements of those state or local laws requiring paid sick leave. The final rule notes that nothing in Executive Order 13706 or in the final rule “shall excuse noncompliance with or supersede any applicable Federal or State law, any applicable law or municipal ordinance, or a collective bargaining agreement requiring greater paid sick leave or leave rights than those established under the Executive Order and this [rule].”

The final rule does say that a contractor may satisfy its obligations by providing paid sick time that fulfills the requirements of a state or local law provided that the paid sick time is accrued and may be used in a manner that meets or exceeds all of the requirements of the final rule. Where the requirements of an applicable state or local law and the order and this final rule differ, the final rule notes that “satisfying both will require a contractor to comply with the requirement that is more generous to employees.”

Must Prime Contractors Police Their Subcontractors?

The answer is an emphatic yes!

As we noted in our earlier advisory on the NPRM, federal government prime contractors and higher tier subcontractors have seen an increase in the responsibility placed upon them to effectively police the lower tier subcontractors in their supply chain. The comments submitted in response to the NPRM raised several concerns in that regard and some commenters requested that the final rule detail what “upper-tier contractors” (the phrase used in the final rule), are expected to do in order to ensure compliance by subcontractors. The cost of ensuring lower-tier compliance oversight was mentioned as well.

There was a suggestion in a comment that an upper-tier contractor’s sole responsibility should be to incorporate the contract clause in its subcontract. However, the DoL noted that, after careful consideration of the comments received, it decided to adopt § 13.21(b) as proposed:

The prime contractor and any upper-tier contractor 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.

However, according to the DoL, that upper-tier contractors can “indemnify themselves against violations committed by lower-tier contractors” and that elimination of this requirement “could diminish the level of care contractors exercise in selecting subcontractors on covered contracts and reduce contractors’ monitoring of the performance of subcontractors—two ‘vital functions’’ served by the flowdown responsibility.”

Does This Final Rule Describe Enforcement Procedures?

Yes; The DoL is responsible for enforcement, procedures for handling complaints, and other steps in the enforcement process set out in the final rule. However, these procedures are essentially identical to those adopted in the final rule implementing the Minimum Wage Executive Order.

The DoL can investigate potential violations and ensure compliance with the final rule. Subpart E—Administrative Proceedings at § 13.51 “Disputes Concerning Contractor Compliance” sets forth the procedures for resolution of disputes of fact or law concerning a contractor’s compliance. Neither Executive Order 13706 nor the final rule creates or changes any rights under the Contract Disputes Act or creates any private right of action. However, nothing in the Executive Order or 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. The order and the final rule do not preclude judicial review of final decisions by the Secretary of Labor in accordance with the Administrative Procedure Act.