The regulatory onslaught for federal contractors just won’t stop.  The “contractor blacklisting” regulations implementing Executive Order 13673, Fair Pay and Safe Workplaces are set to take effect by the end of this month. On September 29, 2016, the U.S. Department of Labor (DOL) issued a final rule to implement Executive Order 13706, Establishing Paid Sick Leave for Federal Contractors, which means that contractors’ human resources and legal teams will have another set of regulations to parse and implement by the end of the year. As contractors tackle the final rule, they will need to consider four issues:

  1. how to identify whether they are subject to the final rule and the pockets of employee populations entitled to paid sick leave under it;
  2. how to shoehorn the new sick leave requirements into existing leave programs that may not recognize the concept of sick leave per se or may not “accrue” discrete amounts of leave;
  3. how to harmonize the final rule’s requirements with state and local sick leave mandates that differ from—and in some cases may be at odds with—the final rule; and
  4. how to manage internal inequities that may result between covered and non-covered employees who may work alongside one another.

As the final rule includes flow-down obligations to lower tiers of subcontracts under covered contractors, subcontractors face the same kind of challenges as prime contractors.

Which Contracts Are Covered?

The final rule applies only to “new contracts” with the federal government (and only to portions of such contracts performed within the United States) that fall into one of four categories:

  1. procurement contracts for construction covered by the Davis-Bacon Act (DBA);
  2. contracts for services covered by the Service Contract Act (SCA);
  3. contracts for concessions, including any concessions contract excluded from coverage under the SCA by Department of Labor regulations codified at 29 C.F.R. 4.133(b); or
  4. contracts in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public.

A contract is “new” if it “results from a solicitation issued on or after January 1, 2017,” or is awarded outside the solicitation process on or after January 1, 2017. New contracts include “both new contracts and replacements for expiring contracts,” but not contracts extended via the government’s unilateral exercise of a pre-negotiated option to renew an existing contract. A contract entered into before January 1, 2017, will be considered a “new contract” if, by bilateral negotiation, the contract is, on or after January 1, 2017, (1) renewed; (2) extended (except for short-term extensions made pursuant to an existing clause); or (3) amended pursuant to a modification that is outside the scope of the contract.

In contrast, the following contracts and arrangements do not trigger the obligation to provide PSL:

  • contracts with state or local governments (even if wages are governed by the DBA);
  • contracts for the manufacturing or furnishing of materials, supplies, articles, or equipment to the federal government;
  • grants
  • contracts with Indian Tribes;
  • procurement contracts for construction that are excluded from coverage of the DBA;
  • contracts for services that are exempted from coverage under the SCA

Prime contractors on covered contracts are required to “flow down” the PSL requirements to subcontractors on those contracts.

Which Employees Are Covered?

To be eligible for PSL in connection with one of the four categories of covered contracts, an employee’s wages for work on or in connection with the contract must be governed by the SCA, the DBA, or the Fair Labor Standards Act (FLSA) or be exempt under one of the FLSA’s exemptions (e.g., individuals employed in an executive, administrative, or professional capacity).

Direct Employees. Subject to a special exception for employees covered by a collective bargaining agreement, all employees who work on a covered contract are entitled to PSL. An employee is said to work “on” a covered contract if he or she is directly engaged in performing the specific work called for by the contract.

Indirect/Overhead Employees. Subject to the exception for collective bargaining agreements, employees who work in connection with a covered contract are entitled to PSL if they spend 20 percent or more of their hours worked in a workweek performing work duties “necessary to the performance of” one or more covered contracts. An employee who does not work on a covered contract and who spends less than 20 percent of his or her workweek working in connection with one or more covered contracts is not entitled to PSL.

Employees Covered by a Collective Bargaining Agreement. The final rule contains a quasi-exception for employees employed under a collective bargaining agreement that was ratified before September 30, 2016, provided that the CBA provides at least 56 hours (or 7 days) of paid time off that can be used for reasons related to sickness or health care each year. For employees covered under a CBA meeting this requirement, the PSL requirements of the final rule do not apply until the earlier of January 1, 2020, or the date on which the CBA terminates. If a CBA provides the employees at issue with paid time off that may be used for reasons related to sickness or health care, but the amount is less than 56 hours (or 7 days) per year, the contractor must provide employees with the additional amount needed to reach 56 hours.

What Are the Requirements for Providing or Accruing PSL?

Contractors can choose one of two options to provide employees with the required PSL: the accrual method or the front-load method.

Accrual Method. Under the accrual method, employees must be credited with 1 hour of PSL for every 30 hours of work on or in connection with covered contracts. The accruals must be calculated at least once every pay period. Employers are not required to let employees accrue PSL in fractions of hours for any increment of work less than 30 hours. Technically, employers are required to base accruals on only those hours that are worked on or in connection with covered contracts. If an employer wants to exclude time not worked on covered contracts, the employer has an obligation to maintain accurate records identifying the employee’s covered and non-covered work. Where the covered and non-covered work involves only hours worked in connection with covered contracts, the contractor can rely on an estimated breakdown of hours, provided the estimate is reasonable and verifiable. For exempt employees for whom a contractor is not required to maintain records of hours worked, the contractor has the option to calculate accruals using an assumption of 40 hours per workweek. If the exempt employee works a part-time schedule, accruals can be calculated based upon that employee’s typical weekly schedule.

Front-Load Method. Under the front-load method, an employer credits an employee with at least 56 hours of PSL at the beginning of each accrual year rather than allowing him or her to accrue PSL based on hours worked. Where an employee does not commence work on covered contracts until after the accrual year has begun, the employer can prorate the 56 hours based on the number of pay periods remaining in the accrual year.

Rules and Limits on Accrual, Carryover, and Availability

Accrual Method. Employees must be able to carry over their accrued PSL from one accrual year to the next, and the amount of PSL in one year cannot be used to offset the amount accrued in the following year. However, where an employer utilizes the accrual method, these accruals can be limited in three different ways: First, the employer can use an annual accrual cap to limit an employee’s accrual to 56 hours in any one accrual year. Second, the employer can use a carryover cap to limit to 56 hours the amount of PSL that an employee can carry over from one accrual year to the next. Third, an employer can use an availability cap to limit to 56 hours the amount of PSL an employee has available for use at any one time.

Front-Load Method. Under the front-load method, employees must be able to carry over their accrued PSL from one accrual year to the next, and the amount of PSL received in one year cannot be used to offset the amount accrued in the following year. However, the employer can restrict to 56 hours the amount of PSL that can be carried over from one accrual year to the next. Unlike the accrual method, an employer that uses the front-load method cannot limit the amount of PSL that an employee has available for use at any one time. This final point is a major distinction between the accrual method and the front-load method.

Use of PSL

Under the final rule, an employee with accrued PSL must be allowed to use it for any of the following reasons:

  1. for a physical or mental illness, injury, or medical condition of the employee himself or herself;
  2. to obtain diagnosis, care, or preventive care from a health care provider;
  3. to care for a child, parent, spouse, domestic partner, or any other individual related by blood or affinity whose close association with the employee is the equivalent of a family relationship, who has any of the conditions or needs for diagnosis, care, or preventive care described above or is otherwise in need of care; or
  4. for absences related to domestic violence, sexual assault, or stalking, if the absence is for the purposes of reasons (1) or (2) or to obtain additional counseling, seek relocation, seek assistance from a victim services organization, or to take related legal action (including preparation for or participation in any related civil or criminal legal proceeding) as a consequence of domestic violence, sexual assault, or stalking; or to provide assistance to a person in a covered relationship who undertakes any of these actions as a result of domestic violence, sexual assault, or stalking.

The final rule contains a description of the individuals who would qualify as individuals “related by blood or affinity whose close association with the employee is the equivalent of a family relationship.” The final rule contains several other principles that govern an employee’s use of PSL and a contractor’s right to impose restrictions on PSL use. They include the following:

  • An employee must be allowed to use some or all of his or her PSL balance upon oral or written request that includes enough information to inform the contractor that the employee’s need for absence falls into one of the four categories above and, to the extent feasible, of the duration of the absence.
  • Where the need for PSL is foreseeable, an employee must request leave at least seven calendar days in advance; where the need is not foreseeable, an employee must make the request for leave as soon as is practicable.
  • An employee is entitled to use PSL only for absences that coincide with time when he or she would have been performing work on or in connection with one or more covered contracts.
  • Where the need for PSL is foreseeable, a contractor may ask an employee to make a reasonable effort to schedule an absence to avoid disrupting operations, but a contractor may not make an employee’s use of PSL contingent on production or on finding a replacement worker to cover his or her work.
  • An employer is not permitted to limit the amount of PSL an employee may use in any one year or at any one time on any basis other than the amount of PSL an employee has available.
  • An employer is not permitted to require an employee to use PSL in increments greater than one hour, except in circumstances where it would be impossible for the employee to commence or end work midway through a shift, such as in the case of a flight attendant who has to miss a scheduled flight, or a laboratory technician who is unable to enter or leave a clean room.
  • An employer is not permitted to deduct from an employee’s PSL balance more than the number of hours of work that the employee otherwise would have been required to work.
  • A contractor’s denial of an employee’s request to use PSL must be made in writing.
  • When a contractor’s denial of PSL is based on the fact that an absence does not coincide with time when an employee would be working on or in connection with covered contracts, the denial must be supported by records segregating the employee’s time on covered and non-covered contracts. 

Requirements for Documentation and Certification from Employees

Under the final rule, an employer may not require an employee to produce “extensive or detailed” information about the need for the absence or the familial relationship with an individual to be cared for. However, where PSL is used for an absence of three or more consecutive workdays, and the employer has provided the employee with notice either before or during leave, the employer can require the employee to produce certification from a health care provider or, in the case of an absence related to domestic violence, stalking, or sexual assault, documentation from a person involved assisting the employee. The employer also can require documentation to establish the necessary relationship with a person cared for, provided that the documentation can consist of something as simple as a written statement from the employee. However, the employer may not require an employee to submit any certification or documentation earlier than 30 days after the first day of the absence triggering the need for certification or documentation.

While an employer is waiting for certification or documentation to verify the use of PSL, the employer is required to treat the PSL request as valid and provide pay and benefits during the absence. However, if the employee fails to produce any certification or documentation within 30 days, the employer has a 10-day window within which to deny the PSL retroactively. When an employee produces insufficient certification or documentation, the employer must notify the employee and give him or her at least five days to provide supplemental certification or documentation. If the supplemental information continues to be insufficient, the contractor has 10 days to deny the PSL retroactively. The final rule states that when PSL is retroactively denied, the contractor is free to take lawful steps to recover the value of the PSL pay and benefits provided during the underlying absence.

Requirements for Payout, Reinstatement, and Successor Contractors

The final rule permits, but does not require, an employer to pay out an employee’s balance of PSL upon termination of employment. Where an employee terminates employment (either voluntarily or involuntarily), and then returns to employment with the same contractor within 12 months of the termination, the contractor must reinstate the employee’s prior PSL balance, unless the contractor paid out the PSL balance to the employee. The right to reinstated PSL applies only when the employee returns to work with the same contractor. That right does not extend to reinstatement with a successor contractor, a requirement that the DOL had included in the proposed rule it published in February.

Information About PSL Balances 

The final rule requires an employer to notify an employee of his or her accrued and unused PSL at least once each pay period (or once a month, whichever is shorter), as well as upon separation from employment. Notice of the amount also must be provided to an employee if he or she is reinstated and is entitled to reinstatement of a PSL balance at that time.

Use of General PTO Policies to Satisfy the Final Rule

Contractors can use existing PTO policies to fulfill their obligation to provide PSL required by the final rule, at least to the extent that the PTO is not provided to satisfy SCA or DBA obligations. Because many PTO policies allow employees to use them for any kind of absence, this option offers a ready solution for covering the array of absences covered by the final rule. A contractor choosing this option must ensure that at least 56 hours of PTO accrue each accrual year; that the policy affords employees all the rights required by the final rule; and that the policy does not subject the use of PTO to conditions or restrictions greater than those permitted by the final rule (e.g., use, notice, carryover, availability, reinstatement, documentation, certification, etc.).

A contractor that opts to comply by using a general PTO policy can do so in one of two ways. First, it can ensure that all PTO leave available under the policy accrues and satisfies all the requirements of the final rule. Second, where the policy provides more than 56 hours of PTO per accrual year, the PTO policy would have to provide only 56 hours of PTO each accrual year that could be used for PSL purposes. In the latter case, the contractor would have to track, and make and maintain records reflecting, the amount of PTO that employees use for the purposes permitted by the final rule.

Overlapping Mandates—State and Local Requirements

As states and localities have enacted paid sick leave laws of their own over the past few years, the final rule is just one of many paid sick leave schemes that may apply to the same populations of employees.  While these laws are similar in some respects, they differ in others. Providing PSL as required by the final rule does not necessarily satisfy the requirements of these mandates, and compliance with state and local laws does not necessarily satisfy the final rule.

For most contractors with employees subject to incongruent sick leave mandates, the straightest path to compliance will likely be to create a single paid-leave policy that satisfies the minimum requirements of all of the paid leave mandates that apply to an employee population. While this approach likely will result in over-compliance, many may find it preferable to separately maintaining, tracking, and complying with dozens of conflicting leave schemes.

Special Challenges for SCA and DBA Contracts

For contractors with employees working on SCA or DBA contracts with the federal government, the final rule contains a costly wrinkle. While general PTO policies can be used to offset PSL obligations, SCA and DBA contractors cannot count paid vacation or PTO required by wage determinations toward their 56 hours of PSL obligations. They are therefore faced with the additional cost of up to 56 hours of PSL per year for each employee. The DOL’s Wage and Hour Division (WHD) has recognized this hurdle and has posted the following guidance in a Frequently Asked Questions resource on its website:

Q. How do the EO’s requirements interact with the SCA and DBA?

A. Paid sick leave required by the EO and the Final Rule is in addition to a contractor’s obligations under the SCA and DBA. A contractor may not receive credit toward its prevailing wage or fringe benefit obligations under those Acts for any paid sick leave provided in satisfaction of the requirements of the EO.

If a contractor chooses to provide more paid sick time than is required by the EO, that additional paid sick time could count toward SCA or DBA obligations if it complies with the requirements under those statutes.

Q. Will the Service Contract Act (SCA) health and welfare benefit rate be adjusted now that contractors must provide paid sick leave in addition to fulfilling their SCA obligations?

A. Yes. The WHD will announce an SCA health and welfare benefit rate specifically for Federal contractors whose employees receive up to 56 hours of paid sick leave pursuant to the Executive Order and Final Rule. In recognition of the fact that these employers will be providing employees with paid sick leave in addition to health and welfare benefits under the SCA, this rate is expected to be lower than it would be without consideration of the provision of paid sick leave pursuant to the Executive Order and Final Rule. This rate will be announced to contracting agencies in an All Agency Memorandum (AAM) as a part of the regular, annual updating of the SCA health and welfare benefit rate, which will be issued consistent with the timing of previous years’ AAMs.

The trouble with the DOL’s approach is that the final rule takes effect on January 1, 2017, and the next AAM updating the health and welfare benefit rate is not expected until June of 2017. Contractors submitting bids before June 2017 for contracts to be performed after June of 2017 will have to frame their bids without knowing whether and by how much the PSL requirements will be offset by a reduction in the health and welfare benefit rate.  Contractors will want to structure their bids to include the full cost of both the current health and welfare benefit rate and the cost of PSL accruals at least through the middle of 2017.  Without question, these circumstances call for an interim AAM or at least for the WHD to provide accelerated guidance for SCA and DBA contractors.


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