On February 25, 2016, the Department of Labor released proposed regulations to implement Executive Order (EO) 13706 (“Establishing Paid Sick Leave for Federal Contractors”).  The proposed regulations, if implemented, would require government contractors to provide paid sick leave to employees working on, or in connection with:

• contracts for services under the Service Contract Act (SCA);
• contracts for construction under the Davis-Bacon Act (DBA);
• contracts for concessions; and
• contracts in connection with Federal property or lands and related to offering services for federal employees, their dependents, or the general public.

The definition of a “contract” in the proposed regulation is broad.  It includes contracts, contract-like instruments, subcontracts at any tier, lease agreements, cooperative agreements, provider agreements, intergovernmental service agreements, service agreements, licenses, permits, or any other type of oral or written agreement.¹

The proposed regulation would apply to any “new contract,” which means a contract resulting from a solicitation issued on or after January 1, 2017 or a contract that is awarded outside of the solicitation process on or after January 1, 2017.

The final regulations are expected to be released later this year.  Comments to the proposed regulation are currently due on April 12, 2016.

Overview of the New Proposed Requirements

The proposed regulations contain a number of noteworthy new requirements for contractors that will translate into significant new financial, administrative, and recordkeeping burdens.

Provision of Sick Leave: the proposed regulations require contractors to provide one hour of sick leave for every thirty hours worked on or in connection with covered contracts.  Hours worked include paid time off, meaning that sick leave also accumulates during that time. See Proposed 29 CFR §13.5(a)(1).  The accrual basis of the sick leave under the proposed regulations is markedly different than how paid time off is accrued under other regulatory schemes such as the SCA.  The SCA awards buckets of vacation on an annual basis instead of allowing it to accrue on an hourly basis.  This difference will require contractors to set up a separate compliance scheme that will enable them to track this paid time off on this alternative basis.  Contractors are permitted to cap the accrual of sick leave at no less than 56 hours per year.  See Proposed 29 CFR §13.5(b)(1).

Employees Entitled to Sick Leave: all employees working on covered contracts are entitled to sick leave whether or not they are exempt.  This is a dramatic shift from previous regulations (such as Nondisplacement of Qualified Workers) which only impacted nonexempt employees.  See Proposed 29 CFR §13.2.  In addition, employees who devote at least 20% of their time supporting covered contracts are entitled to sick leave.  This requirement mirrors the recent regulations establishing a minimum wage for contractor employees (which is now $10.15 per hour).  See Proposed 29 CFR §13.4(e).

Carryover of Sick Leave: employees who are separated from their employment are not entitled to a payout of sick leave, but are entitled to have it restored if they return within 12 months.  Further, when a new contractor takes over work from another contractor, the employees who remain are entitled to have that sick leave carry over to the new contractor.  See Proposed 29 CFR §13.5(b)(4).

Taking Sick Leave: events that allow employees to take sick leave are quite broad and include caring for loved ones, court appearances or counseling connected with domestic abuse issues, and the employee’s efforts to obtain diagnosis and treatment for their own medical issues.  The definitions of those who the employee can care for under these regulations are also broad.  For instance, it can include a significant other’s child or someone who is related to the employee by “affinity.”  See Proposed 29 CFR §13.5(c)(1)(iii) and (iv).

New Recordkeeping Requirements: contractors are required to calculate an employee’s accrual of sick leave no less than weekly and disclose the amount of sick leave the employee has accumulated (to the employee): (i) on a monthly basis; (ii) any time an employee asks to use sick leave; (iii) upon an employee’s request; (iv) when the employee’s employment terminates; or (v) if sick leave is reinstated when an employee returns to the contractor within 12 months.  See Proposed 29 CFR §13.5(a)(1)(ii) and (2).  Contractors are required to keep an extensive array of records for three years that would be disclosed at the Department of Labor’s request.  See Proposed 29 CFR §13.25(a).

Provision of Certified Lists: a predecessor contractor must provide a certified list of the employees with the individuals’ entitlement to sick leave including for employees that have departed within the previous 12 months.  See Proposed 29 CFR §13.26.

Notice to Employees: contractors must provide notice to their impacted employees that they are entitled to sick leave under the EO.  SeeProposed 29 CFR §13.27.

Regulatory Pitfalls

The regulations, as proposed, contain a number of pitfalls that contractors should be monitoring.

Additional Burden: the sick leave required under these proposed regulations is an additional requirement separate and apart from the provision of benefits and paid time off under the SCA and DBA.  Contractors that previously used the provision of sick time to vitiate that burden must now find alternative benefits for those employees.  See Proposed 29 CFR §13.5(f)(2).  Further, if contractors have employees working on multiple contracts, those employees will have to have their time (and sick leave accrual) segregated if some of the contracts have the sick leave requirement in them and some do not.  Initially, this will be more common and will require a compliance system that can handle that additional complication.

Pricing and Staffing Issues: contractors bidding on contracts that will inherit the incumbent contractor’s employees (as required, in some instances, under the Nondisplacement of Qualified Workers), cannot effectively price and staff contracts during the proposal stage while unaware of the amount of sick leave each employee is entitled to receive.  Those contractors will only learn of the employees’ sick leave entitlement after they win the contract.

Tracking Exempt Employees: as noted above, employers must also accrue sick leave for exempt employees working on (or in connection with) covered contracts.  Because some employers do not track exempt employees on an hourly basis, the proposed regulation allows employers to assume that an exempt employee works 40 hours per week (or a lesser number that is consistent with the typical number of hours they work). See Proposed 29 CFR §13.5(a)(1)(iii).

Prime Contractor Liability: prime contractors are responsible for their subcontractors.  As stated in the proposed regulations, “[t]he 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.”  SeeProposed 29 CFR §13.21.

Retroactive Applicability: if the Department of Labor determines that an agency failed to include the regulations when they applied, the Department of Labor can require that that clause be included retroactively to the commencement of the contract and require payment to those employees impacted.  See Proposed 29 CFR §13.44(f).

Interplay with Other Statutes/Regulations: contractors can only count sick leave allowed under other sick leave regulations if such regulations check all of the requirements under these regulations.  See Proposed 29 CFR §13.5(f)(4).  Unless contractors want to provide sick leave under multiple regulations/statutes, sick leave policies should probably reflect the requirements under the more stringent requirements.

Significant Penalties for Noncompliance

If a contractor is found to have disregarded its obligations under the proposed rule, it shall be debarred for up to three years. SeeProposed 29 CFR §13.44(d).  The Department of Labor can also require withholding of funds that would be owed to the employees by virtue of contractor noncompliance.  The Department of Labor may also direct withholding for recordkeeping violations.  See Proposed 29 CFR §13.44(c).

Further, the Department of Labor may bring civil actions against contractors if the contract withholding is not sufficient to meet the underpayments due to the employees.  See Proposed 29 CFR §13.44(e).

A Look Ahead

The new proposed regulatory scheme places significant burdens on contractors.  This regulation will potentially require contractors to either set up new systems or modify existing systems to track sick leave on an accrual basis that segregates employees’ time depending on which contract they are working.  Further, contractors that fail to comply could be debarred for up to three years making strict compliance vital.

¹ See Proposed 29 CFR §13.2.  Specifically excluded from the proposed regulation, however, are grants, non-DBA contracts for construction, and non-SCA contracts for services (though the Department of Labor invited comment on whether all services contracts should be included).  See Proposed 29 CFR §13.4 and Federal Register, Vol. 81, No. 37, page 9608.

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Responsible Lawyer:

Eric S. Crusius