Final Rule on Paid Sick Leave Requirement for Federal Contractors

On September 29, 2016, the U.S. Department of Labor (DOL) issued its Final Rule requiring certain federal contractors and subcontractors to provide paid sick leave to covered employees. The Final Rule was long awaited following President Obama’s September 7, 2015, Executive Order mandating paid sick leave. Although more than 35,000 parties submitted comments to the Proposed Rule implementing the Executive Order, the Final Rule fails to address many of the concerns raised by employers regarding its substantial obligations.

For certain federal contracts awarded on or after January 1, 2017, contractors and subcontractors will be required to provide covered employees one hour of paid sick leave per 30 hours worked, up to 56 hours per year. Employers may impose a cap limiting employees’ overall accrual to 56 hours per year, but employees must be allowed to carry over up to 56 hours of accrued but unused paid sick leave to the next year. Importantly, contractors may coordinate the requirements of the Final Rule with their existing paid time off policies, provided such policies meet all the requirements of the Final Rule.

Applicability to Federal Contractors and Subcontractors

The Final Rule applies only to the following new or replacement federal contracts entered into after January 1, 2017:  

• Contracts covered by the Davis-Bacon Act or the Service Contract Act 
• Concession contracts with the federal government
• Service contracts in connection with federal property or lands  

Contractors are also required to “flow-down” the sick leave standards and contractual language to subcontractors performing services on the federal projects, provided the subcontract also fits into one of the above categories.   

Covered Employees

The Final Rule applies broadly to covered employees (full- or part-time) who perform “work on or in connection with” a covered contract. Employees who spend less than 20 percent of their hours in any given work week performing services in connection with such covered contract are not covered by the Final Rule.

A short-term exemption exists for employees who are covered by a collective bargaining agreement (CBA) ratified before September 30, 2016, which provides such employees with at least 56 hours of paid sick leave (or its equivalent) annually. These employees are exempt from coverage under the Final Rule until the earlier of the CBA termination date or January 1, 2020. If an applicable CBA provides less than 56 hours paid sick leave per year, however, the contractor must provide the difference between the CBA annual accrual rate and 56 hours in accordance with the Final Rule.

Hours Worked

Covered employees accrue paid sick leave only for hours actually worked on the federal contract, provided that the time worked in connection with the contract is adequately recorded. Paid sick leave must be accrued each pay period or each month, whichever interval is shorter.   

• “Hours worked” does not include paid time off, such as the use of paid time off or vacation.  
• For exempt employees, federal contractors may estimate a full-time employees’ work week at 40 hours per week or, if the exempt employee works part time or less than 40 hours on the contract, the contractor may estimate the hours of work each week, provided the estimate of hours for such work week is reasonable and can be verified through required documentation.

Lump Sum Alternative

As an alternative to the accrual method, contractors may “front load” paid sick leave by providing employees a lump sum of 56 hours of paid sick leave at the beginning of each year. Notably, employees must still be permitted to carry over up to 56 hours of unused paid sick leave at the end of each year under this lump sum method.

Permissible Uses

Employees must be allowed to use the paid sick leave to care (including preventative care) for themselves, family members, domestic partners or other individuals with whom the employee has a close relationship, and to address the effects of certain crimes, such as domestic violence.

Contractors may not limit the amount of paid sick leave employees can use in any given year or for any single occurrence. Additionally, contractors may not require employees to use paid sick leave in increments of greater than one hour.

Contractors may request employees provide documentation from a health care provider for any use of sick time of three or more consecutive days. 

Employee Notice   

Contractors are required to provide employees written notice of the amount of sick leave they have available each pay period or monthly, whichever interval is shorter, and on such events as separation from employment and reinstatement of employment. Contractors may satisfy this requirement by providing employees access to an online system that allows employees to check their sick leave balance at any time.

Although employees may request the use of sick leave orally or in writing, a contractor must provide written notice of any denial of sick leave time specifying the reason for the denial.

Termination of Employment

Contractors are not required to pay out accrued sick leave upon termination of employment. However, if an employee does not receive payment upon termination of employment, the employee is entitled to reinstatement of their paid sick leave balance if they become re-employed within 12 months.  

The DOL’s Final Rule on paid sick leave is what is hoped to be the end of significant new requirements implemented during President Obama’s administration, which has imposed burdensome obligations on federal contractors and subcontractors, including the following recent changes:

• A raise in the minimum wage for employees working under federal contracts 
• Expansion of the protected classes under which federal contractors may not discriminate to include sexual orientation and gender identity
• Implementation of the “Fair Play and Safe Workplaces” executive order, which requires federal contractors bidding on new contracts to disclose past labor law violations, provide detailed wage statements to employees and not require workers to enter into certain mandatory pre-dispute arbitration agreements
• Updates in sex discrimination guidelines
• Implementation of the “Pay Transparency Rule” which prohibits contractors from discharging or discriminating against applicants or employees who discuss compensation

Although the paid sick leave requirement does not take effect until new contracts are implemented after January 1, we recommend that federal contractors review any existing paid time off policies to determine the implications of complying with the Final Rule on any future contracts or renewals.