Following up on President Obama’s Labor Day release of an executive order requiring government contractors to offer paid sick leave to employees, the Labor Department issued proposed implementing regulations and invited comments by April 12.  Contractors with service contracts should consider submitting comments, especially if they already offer paid sick leave and rely on that leave to meet their fringe benefit obligations under the Service Contract Act.

Under the SCA, contractors cannot take credit for offering benefits that they are legally required to provide.  By setting a minimum required level of paid sick leave, the proposed regulations convert seven days of those benefits into legal requirements, rendering them ineligible for bona fide fringe benefit status under the SCA.  Contractors would remain free to continue to account for the value of excesspaid sick leave in discharging their SCA obligations, but not the base requirements.  As a result, contractors may have to recalculate their fringe benefit packages by extracting the value of current paid sick leave benefits, and then offer some other offsetting bona fide fringe benefit or an equivalent cash payment.  In sum, the paid sick leave executive order could have the effect of penalizing contractors who were already offering the very same benefit that the government now requires. 

The coverage of these proposed rules is similar to that of the recent minimum wage rules, but paid sick leave also applies to “white collar” employees who qualify for an exemption under FLSA.  The Department has specifically invited comments whether the final regulations should expand beyond the current proposed coverage.  As written, the proposed regulations apply to SCA-covered contracts.  Certain service contracts, however, are excluded from the SCA if they involve services performed “exclusively by bona fide executive, professional, or administrative employees.”  The Department is considering whether to extend the paid sick leave requirements to those contracts.  (In the context of SCA regulations, the Department does not interpret the term “exclusively” literally.   As long as the vast majority of the workers — at least 80 or 90 percent — are executive, professional, or administrative employees, the Department will typically agree that the SCA does not apply, even if non-exempt employees are also included in the labor mix.)

The proposed regulations include enforcement sanctions for “interference” with an employee’s accrual or use of paid sick leave, and for “discrimination”  in carrying out the requirements.  Contractors should be aware of two nuances in this section of the regulations.

• First, “interference” sweeps broadly. It includes “discouraging” use of paid sick leave, transferring an employee to a non-covered contract in order to frustrate accrual of leave, requiring an employee to find a replacement before approving sick leave, and even miscalculating accrual rates.

• Second, the Labor Department takes the position that non-discrimination rules apply to job applicants and former employees, and protects them “from retaliation by a prospective or former employer that is a covered contractor.” The Department concedes that this interpretation contradicts case law in the Fourth Circuit with respect to applicants, and accordingly “would not enforce its interpretation on this issue in that circuit.”  The Fourth Circuit’s jurisdiction covers a wide range of government contractors in the Hampton Roads and Northern Virginia regions, inviting patchwork enforcement and forum shopping.

Contractors have little time to respond to these regulations, but thoughtful comments now could help minimize the impact of difficult compliance burdens in the coming years.