Paid Sick Leave Now Required for Federal Contractors

By: Sara Crabtree, Senior Manager

Effective November 29, 2016, the Department of Labor has issued regulations to implement Executive Order 13706, Establishing Paid Sick Leave for Federal Contractors, signed by President 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.

Executive Order 13706 was signed by the President with the intention of increasing efficiency and cost savings in the work performed by contractors for the Federal government. The theory is that providing access to paid sick leave will improve the health and performance of the contractors and bring benefit packages in line with other employers, so that they remain competitive in their search for talented and dedicated employees.

The use of paid sick leave cannot be made contingent on the requesting employee finding a replacement to cover any work time to be missed, nor can an employer require employees to use their leave in a minimum increment greater than one full hour. Furthermore, certification or documentation regarding the use of the leave may only be required of an employee for absences of three or more consecutive workdays.

Paid sick leave earned by an employee may be used for a variety of reasons, including physical or mental illness, injury or medical condition; obtaining diagnosis, care or preventative care from a healthcare provider; caring for a child, parent, spouse, domestic partner or any other individual related by blood or who is the equivalent of a family relationship with the employee and has any of the conditions or needs listed above. In addition, the leave can be used for support or care related to domestic violence or sexual assault.

Contractors will be prohibited from limiting the total amount an employee can accrue per calendar at no less than 56 hours. In addition, accrued sick leave shall carry over between years and shall be reinstated for employees rehired by a covered contractor within 12 months of separation; however, there is no requirement for a contractor to make a financial payment to an employee upon separation for unused accrued sick leave.

Employers will have an option on how to credit employees for the sick leave hours. Sick leave policies can be written to accrue one hour of leave for every 30 hours worked, or employees can be credited with 56 hours of leave in a lump sum at the beginning of each accrual year. The 12-month accrual year can start on any fixed date that the contractor chooses, as long as it is used in a consistent option for all employees. Employers that choose the accrual approach must calculate the accrual at least once at the end of each work week, but is only required to accrue the leave on full hours, not fractionally based on increments of less than 30 hours paid time. For example, an employee would accrue one (1) hour of leave in a 40 hour work week, not 1.3 hours.

The new sick leave requirement applies to new contracts and replacements for expiring contracts with the Federal government that result from solicitations issued on or after January 1, 2017. The requirement will be required to flow down to subcontractors and lower-tier subcontracts. Employees who on average spend less than 20 percent of their working hours in a work week on a contract subject to the sick leave rule will not be required to follow the Executive Order.

Contracts covered by this requirement include the following:

• services or construction;
• services covered by the Service Contract Act;
• contracts for concessions;
• contracts entered into 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; and
• the wages of employees under such contract or contract-like instrument governed by the Davis-Bacon Act, or the Fair Labor Standards Act (“FLSA”), including employees who qualify for an exemption from the FLSA’s minimum wage and overtime provisions.

Contracts for concessions mean a contract under which the Federal government grants a right to use Federal property, including land or facilities, for furnishing services. This is regardless of whether the services are of direct benefit to the government, its personnel, or the general public. Contracts in connection with Federal property or lands generally includes leases of Federal property, including space and facilities, and licenses to use such property.

Contractual agreements not covered by the Executive Order and subject to the sick leave rule includes grants, contracts and agreements with Indian tribes, any procurement contract for construction that is not subject to Davis-Bacon, any contracts for services that are exempted from coverage under the Service Contract Act, contracts for manufacturing or furnishing of materials, supplies, articles or equipment to the Federal government.

The paid sick leave requirement will be in addition to a contractor’s obligations under the Service Contract Act or Davis-Bacon Act, and since contractors cannot receive credit towards the fringe requirement for any fringe benefits which are required by federal law, contractors will not be able to receive credit for the 56 hours of paid sick leave provided to employees in satisfaction of this Order. If a contractor were to offer more than 56 hours of paid sick leave to an employee, the difference above the minimum 56 hours could be used to offset the fringe requirement under the Service Contract Act or Davis-Bacon Act.

Opponents of the new rule argued that requiring companies to provide paid sick leave will be a hardship for many, especially smaller businesses. The government countered that the benefit of allowing employees who are sick to stay home and recuperate instead of risking infecting their co-workers is a greater advantage.

There is a Paid Time Off (“PTO”) policy substitute instead of paid sick leave, but it is not an easy substitution to implement given some of the compliance requirements. A PTO policy can satisfy the requirements if it is made available to all employees who are entitled to paid sick leave, it can be used for all of the same purposes as the sick leave. The accrual manner, carryover, reinstatement and payment for unused leave are also the same. The PTO is protected by the prohibitions against interference, discrimination and record-keeping violations.

Additional compliance burdens exist under the new sick leave rules, as well. Contractors are required to provide a certified list to the contracting officer, showing paid sick leave balances at the completion of the contract. It is not clear a contractor would do that with a PTO policy that does not separate sick and vacation leave. Under the rule, contractors are required to reinstate prior accrued sick leave if an employee is reemployed within 12 months. If a contractor has a policy of paying out PTO upon departure, it might risk paying out amounts it may have to later reinstate.

Contractors will have to decide what works best for them and their employees. Whether a contractor chooses to amend an existing policy or create a new one, it needs to be ready for that first covered contract awarded on or after January 1, 2017.