Overview. On September 30, 2016, the Department of Labor published the final rule implementing Executive Order 13706 requiring covered federal contractors to provide paid sick leave to covered employees.
The Final Rule is effective as of November 26, 2016, but shall apply to covered contracts where the solicitation for such contract has been issued, or the contract has been awarded outside the solicitation process, on or after January 1, 2017. Additional information can be found at: https://www.dol.gov/whd/govcontracts/eo13706/
Details.
Covered Contracts. The final rule generally applies to new covered contracts on or after January 1, 2017 and to existing covered contracts that will be renewed, extended, or amended on or after January 1, 2017. For certain procurement contracts subject to the Federal Acquisition Regulation (FAR) and this final rule, it will become effective after the FAR Council issues regulations to provide for the inclusion of the contract clause in covered contracts. The FAR Council is required to issue these regulations within 60 days of the Rule’s issuance (approximately at the end of November). The DOL will publish a document in the Federal Register to announce the applicability date for these contracts.
The final rule sets forth four broad categories of covered contracts:
- Procurement contracts for services or construction covered by the Davis Bacon Act (DBA);
- Contracts for services covered by the Service Contract Act (SCA);
- Contracts for concessions, including any concessions contracts excluded from coverage under the SCA by DOL regulations at 29 CFR 4.133(b); and
- Contracts in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public.
The rule broadly defines “contract,” stating that the term “includes all contracts and any subcontracts of any tier thereunder.”
Covered Employees. A covered employee means any person engaged in performing work on or in connection with a contract covered by the executive order, and whose wages under such contract are governed by the DBA, SCA, or the Fair Labor Standards Act (FLSA), including employees who qualify for an exemption from the FLSA’s minimum wage and overtime provisions, Paid sick leave requirements would apply, for example, to employees employed in a bona fide executive, administrative, or professional capacity. In addition, the paid sick time requirements would extend even to independent contractors who are covered by the SCA and the DBA.
Accrual of Sick Leave. The rule provides that a contractor shall permit an employee to accrue not less than 1 hour of paid sick leave for every 30 “hours worked” on or in connection with a covered contract. A contractor may not exclude time spent on non-covered work unless the contractor accurately records the employee’s covered and non-covered work hours. For employees performing work in connection with—rather than on—covered contracts, a contractor may estimate the portion of the employee’s hours worked in connection with covered contracts provided the estimate is reasonable and based on verifiable information. “Hours worked” under the final rule has the same meaning as it does under the FLSA: employees will accrue sick leave only when they are actually working.
Accrual and Calculation of Sick Leave. Under the rule, a contractor shall calculate an employee’s paid sick leave accrual no less frequently than at the conclusion of each pay period or each month, whichever interval is shorter.
A contractor does not need to allow accrual of paid sick leave in increments smaller than 1 hour. A fraction of hours worked, however, shall be added to hours worked for the same contractor in subsequent weeks, provided the next pay period occurs within the same accrual year.
Accrual and Tracking Hours Worked for Exempt Employees. If a contractor is not obligated by the SCA, DBA, or FLSA to keep track of an employee’s hours worked, including because the employee is exempt, the contractor may calculate paid sick leave accrual by tracking the employee’s actual hours worked or by assuming the employee works 40 hours on or in connection with a covered contract in each workweek. If such an employee regularly works fewer than 40 hours per week on or in connection with covered contracts, the contractor may allow the employee to accrue paid sick leave based on the employee’s typical number of hours worked on covered contracts per workweek, provided the contractor has evidence to support the number it uses.
Notification of Accrual. A contractor must provide an employee with written notification of the amount of unused accrued paid sick leave (i) once per pay period or per month (whichever is shorter), (ii) upon separation from employment, and (iii) upon reinstatement of paid sick leave for employees rehired within 12 months after a job separation. However, contractors who provide employees with electronic access to their leave balance and accrual do not need to provide employees with monthly written notices.
Frontloading of Sick Leave. As an alternative to having employees accrue sick time based on hours worked, a contractor may provide an employee with a lump sum of at least 56 hours of paid sick leave at the beginning of each accrual year. If the contractor hires an employee or newly assigns the employee to work on or in connection with a covered contract after the beginning of the accrual year, the contractor may provide a prorated amount of paid sick leave.
Carryover and Caps. All paid sick leave carries over from one accrual year to the next. If the contractor uses the accrual method, the contractor may limit the amount of paid sick leave an employee is permitted to accrue to 56 hours in each accrual year, but paid sick leave carried over from the previous accrual year shall not count toward the contractor’s annual accrual cap. A contractor may also limit the amount of paid sick leave an employee is permitted to have available for use at any point to 56 hours. Thus, a contractor may put in place two caps: an annual accrual cap of 56 hours and a maximum sick leave bank of 56 hours. In doing so, a contractor can effectively limit an employee’s carryover by setting a sick leave bank limit, as permitted by the rule.
Example: An employee accrues 56 hours in the first year but does not use any of that time. All 56 hours carry over to the second year. In the second year, the employee will not start accruing any more time until the employee uses some of the 56 hours. If the employee uses all 56 hours in the second year, the employee may accrue up to another 56 hours by the end of the second year. The employee never carries over more than 56 hours in a year.
If a contractor “frontloads” paid sick leave at the beginning of each accrual year, an employer may limit the carryover from year to year to 56 hours, but it must still front load the full 56 hours. Thus, the maximum bank may exceed 56 hours when using the frontloading method.
Example: An employee receives 56 hours at the beginning of the first year and uses zero hours over the course of that year. The employee would then carry over all 56 hours to the second year and will receive another 56 hours at the beginning of the second year for a total of 112 hours in the paid sick leave bank and available for use.
Amount of Annual Use. Under the rule, a contractor may not limit the amount of paid sick leave an employee may use per year or at once. Thus, an employee could use more than 56 hours in a year if the employee carries over hours from the previous year.
Accrual Year. A contractor may define an accrual year, which is a 12-month period as selected by the contractor, so long as it is a consistent option for all or similarly-situated employees and is not selected or changed to avoid paid sick leave requirements.
Termination and Reinstatement. Under the rule, accrued, unused sick leave does not have to be paid out upon termination of the employment relationship. That said, paid sick leave must be reinstated for employees rehired by a covered contractor within 12 months after a job separation. Employers may avoid the reinstatement requirement by paying out unused sick leave at the time of termination.
Timing of Pay. A contractor must compensate an employee for time during which the employee used paid sick leave no later than one pay period following the end of the regular pay period in which the paid sick leave was used.
Interaction with Other Laws. A contractor’s compliance with state or local paid sick leave laws must also comply with the executive order; the most protective aspect of each law must be applied.
Interaction with More Generous Leave Policies. Under the final rule, contractors with generous paid time off policies may allow employees to use all of paid time off for sick time and other uses permitted by the rule. Alternatively, for each accrual year, the contractor may allow employees to use only up to 56 hours of the paid time off for reasons permitted by the rule as long as the contractor tracks, and makes and maintains records reflecting, the amount of paid time off an employee uses pursuant to the executive order and rule.
Contractors must comply with the rule’s carryover requirements, which means that employees must begin the subsequent year with as much leave as they would have been entitled to under the final rule, but need not be permitted to carryover more than 56 hours.. Similarly, only up to 56 hours of paid time off must be reinstated to an employee rehired within 12 months of a job separation, even if the employee had greater amounts of leave upon separation. In its discussion of the rule, the DOL also clarifies that if employees use their entire paid time off balance for vacation, they are not entitled to any additional paid time off, as long as the paid time off policy does not create any significant barriers to their using the time for purposes described in the rule.
More information, including full text of the Final Rule, Overview, Fact Sheet and Frequently asked questions can be found here, on the DOL’s website.
Call to Action. Clients should determine now the applicable effective date based on the type of contract at issue, and should also determine if they are a covered contractor. You should also determine whether you will treat all hours worked as “covered” work, or just those hours that technically qualify as covered.
As always, if you have any questions regarding the content of this Alert, please reach out to your Relationship Manager, or Service Team.