On September 29, 2016, the Department of Labor (“DOL”) issued a Final Rule implementing Executive Order 13706, which requires federal contractors and subcontractors performing work on or in connection with certain contracts to provide employees with up to 56 hours (7 days) of paid sick leave per year beginning on January 1, 2017. However, because this rule became final relatively recently, the Final Rule implementing EO 13706 could be rescinded by exercise of the Congressional Review Act (5 U.S.C. §§ 801-808), which is not subject to filibuster.

Applicability of the Final Rule

The Final Rule applies to certain new contracts and replacement contracts for expiring contracts with the federal government requiring performance in whole or in part within the United States that result from solicitations issued on or after January 1, 2017 (or that are awarded outside the solicitation process on or after January 1, 2017).

The Final Rule does not apply to all federal contractors; it only applies to the following types of contracts with federal government:

1. Procurement contracts for services or construction covered by the Davis-Bacon Act (“DBA”): The DBA applies to contracts to which the federal government is a party, for the construction, alteration, or repair (including painting and decorating of public buildings and public works) of the federal government and that require or involve the employment of mechanics or laborers;

2. Service contracts covered by the McNamara-O’Hara Service Contract Act (“SCA”): The SCA applies to any contract entered into by the United States that has as its principal purpose the furnishing of services in the United States through the use of service employees;

3. Concession contracts: a contract under which the federal government grants a right to use federal property including land or facilities, for furnishing services; and

4. Contracts in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public.

The Final Rule implementing paid sick leave for federal contractors does not apply to: construction contracts excluded from the DBA (and those valued at less than $2,000); service contracts exempted from SCA coverage by statute or regulation (and those valued at less than $2,500); grants; contracts or agreements with and grants to Indian Tribes; work performed outside of the United States; and contracts for manufacturing or furnishing of materials, supplies, articles or equipment to the federal government including those subject to the Walsh Healy Public Contracts Act.

Reasons For Sick Leave

The permissible reasons for using paid sick leave under the Final Rule are much broader than under the Family Medical Leave Act (“FMLA”) or many state mandated paid sick leave laws. Under the Final Rule, covered employees may use paid sick leave for themselves or their family members, including:

1. For a physical or mental illness, injury, or medical condition;

2. When obtaining diagnosis, care, or preventative care from a health care provider;

3. When caring for a child, parent, spouse, domestic partner, or any other individual related by blood or affinity whose association with the employee is the “equivalent of a family relationship,” who has need for diagnosis, care, or preventative care, or is otherwise in need of care; or

4. For domestic violence, sexual assault, or stalking situations.

Notably, the Final Rule allows employees to use paid sick leave to care for a person who is the “equivalent of a family relationship,” meaning no biological or legal relationship to the employee is necessary.

Accrual of Paid Sick Leave

Employees working on or in connection with a covered contract accrue one (1) hour of paid sick leave for every 30 hours worked, up to a maximum of 56 hours per year. Contractors must allow employees to carryover up to 56 hours of accrued but unused sick time from one accrual year to the next. Contractors may cap the amount of paid sick leave employees can accrue to 56 hours each year and can prohibit an employee from having more than 56 hours of paid sick leave available for use at any point in time under the accrual method. Therefore, accrual may be limited to less than 56 hours depending on how much unused sick leave was carried over from the previous accrual year and how much sick leave is used by the employee in the current year.

Alternatively, the Final Rule allows employers to frontload paid sick leave (grant the full allotment of leave) at the beginning of the benefit year. Significantly, any unused paid sick leave (including frontloaded leave) must be carried over from year to year, but the maximum amount that a worker can carryover is 56 hours. Because frontloading leave at the beginning of each benefit year does not eliminate a contractor’s obligation to allow employees to carryover unused sick time, an employee may have more than 56 hours of paid sick leave available for use at one time under the frontloading approach. However, an employee will not receive more than 56 additional hours in any one year (56 hours frontloaded plus 56 unused hours carried over from the prior benefit year, which equals a total of 112 hours).

Integration with Existing PTO Policies and Collective Bargaining Agreements

A contractor’s existing Paid Time Off (“PTO”) policy can fulfill the paid sick leave obligations under EO 13706 as long as it provides employees with at least the same rights and benefits as the Final Rule. The DOL’s guidance explains that if a contractor provides employees with at least 56 hours (7 days) of paid time off that can be used for any purpose and meets the requirements of the Final Rule, then the contractor does not have to provide separate paid sick leave, even if an employee uses all of the time for vacation.

There is also a temporary delay in application of the Final Rule for employees whose covered work is governed by a collective bargaining agreement (“CBA”) that was ratified before September 30, 2016, and that provides at least 56 hours of paid sick leave (or paid time off that may be used for sickness/health care reasons) per year.  In such circumstances, the requirements of the Final Rule will not apply until the date the agreement terminates or January 1, 2020, whichever occurs earlier. If the CBA provides less than 56 hours of paid time off that may be used for sickness/health care reasons, then the contractor must provide employees with the difference between 56 hours and the amount of sick time/PTO provided under the existing CBA that is consistent with either the Final Rule or the terms and conditions of the governing CBA.

Penalties for Non-Compliance

All covered contracts and subcontracts entered into on or after January 1, 2017, must contain a mandatory contract clause, which directs, as a condition of payment, that contractors shall provide paid sick leave to all employees performing work on or in connection with a covered contract. The DOL’s Wage and Hour Division is charged with investigating potential violations of and obtaining compliance with the Final Rule. Failure to comply with the paid sick leave obligations can lead to significant penalties including, but not limited to, the contracting agency withholding payments due on the contract as necessary to pay workers lost pay and/or benefits for any violation of the requirements of the Final Rule.

Takeaways to Consider

Here are some key points for federal government contractors and subcontractors to consider:

1. The Final Rule takes effect on January 1, 2017, regardless of the change in administration, but the incoming Congress may set it aside after it takes effect;

2. Determine the expiration date of existing contracts with the federal government and identify covered contracts that may be renewed or awarded on or after January 1, 2017;

3. Keep in mind administrative considerations, such as segregating covered work from non-covered work, tracking hours worked on or in connection with a covered contract, using an accrual method or frontload method (carryover requirements apply under both methods), tracking usage of leave, maintaining records of written denials, providing notice of available sick leave, etc.;

4. Review and update existing PTO policies to ensure compliance with the Final Rule;

5. Coordinate with Human Resources and/or union representatives if unionized employees have collective bargaining agreements before implementing any benefit or policy changes;

6. When considering leave requests, keep in mind the expansive permissible uses of paid sick leave including care for an employee’s own illness, care for a family member or “the equivalent of a family relationship,” and domestic violence, stalking or sexual assault;

7. Review attendance policies to ensure that employees are not disciplined for using paid sick leave;

8. Post notice of Workers Rights Under Executive Order 13706 provided by the Department of Labor in a prominent and accessible place in the workplace;

9. Maintain records of requests for leave, approvals and written denials, and sick leave usage, and provide notice of available paid sick leave on pay stubs or itemized wage statements; and

10. Ensure that the mandatory contract clause in Appendix A to the Final Rule, which is a condition of payment, is contained in all new covered contracts and subcontracts with the federal government.