DOL Issues Final Rule Establishing Paid Sick Leave for Federal Contractors

By Alexa E. Miller

On September 29, 2016, the Department of Labor (“DOL”) issued a Final Rule implementing Executive Order 13706, which requires federal contractors and subcontractors performing work on or in connection with certain contracts to provide employees with up to 56 hours (7 days) of paid sick leave per year beginning on January 1, 2017. However, because this rule became final relatively recently, the Final Rule implementing EO 13706 could be rescinded by exercise of the Congressional Review Act (5 U.S.C. §§ 801-808), which is not subject to filibuster.

Applicability of the Final Rule

The Final Rule applies to certain new contracts and replacement contracts for expiring contracts with the federal government requiring performance in whole or in part within the United States that result from solicitations issued on or after January 1, 2017 (or that are awarded outside the solicitation process on or after January 1, 2017).

The Final Rule does not apply to all federal contractors; it only applies to the following types of contracts with federal government:

  1. Procurement contracts for services or construction covered by the Davis-Bacon Act (“DBA”): The DBA applies to contracts to which the federal government is a party, for the construction, alteration, or repair (including painting and decorating of public buildings and public works) of the federal government and that require or involve the employment of mechanics or laborers;
  2. Service contracts covered by the McNamara-O’Hara Service Contract Act (“SCA”): The SCA applies to any contract entered into by the United States that has as its principal purpose the furnishing of services in the United States through the use of service employees;
  3. Concession contracts: a contract under which the federal government grants a right to use federal property including land or facilities, for furnishing services; and
  4. Contracts in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public.

The Final Rule implementing paid sick leave for federal contractors does not apply to: construction contracts excluded from the DBA (and those valued at less than $2,000); service contracts exempted from SCA coverage by statute or regulation (and those valued at less than $2,500); grants; contracts or agreements with and grants to Indian Tribes; work performed outside of the United States; and contracts for manufacturing or furnishing of materials, supplies, articles or equipment to the federal government including those subject to the Walsh Healy Public Contracts Act.

Reasons For Sick Leave

The permissible reasons for using paid sick leave under the Final Rule are much broader than under the Family Medical Leave Act (“FMLA”) or many state mandated paid sick leave laws. Under the Final Rule, covered employees may use paid sick leave for themselves or their family members, including:

  1. For a physical or mental illness, injury, or medical condition;
  2. When obtaining diagnosis, care, or preventative care from a health care provider;
  3. When caring for a child, parent, spouse, domestic partner, or any other individual related by blood or affinity whose association with the employee is the “equivalent of a family relationship,” who has need for diagnosis, care, or preventative care, or is otherwise in need of care; or
  4. For domestic violence, sexual assault, or stalking situations.

Notably, the Final Rule allows employees to use paid sick leave to care for a person who is the “equivalent of a family relationship,” meaning no biological or legal relationship to the employee is necessary.

Accrual of Paid Sick Leave

Employees working on or in connection with a covered contract accrue one (1) hour of paid sick leave for every 30 hours worked, up to a maximum of 56 hours per year. Contractors must allow employees to carryover up to 56 hours of accrued but unused sick time from one accrual year to the next. Contractors may cap the amount of paid sick leave employees can accrue to 56 hours each year and can prohibit an employee from having more than 56 hours of paid sick leave available for use at any point in time under the accrual method. Therefore, accrual may be limited to less than 56 hours depending on how much unused sick leave was carried over from the previous accrual year and how much sick leave is used by the employee in the current year.

Alternatively, the Final Rule allows employers to frontload paid sick leave (grant the full allotment of leave) at the beginning of the benefit year. Significantly, any unused paid sick leave (including frontloaded leave) must be carried over from year to year, but the maximum amount that a worker can carryover is 56 hours. Because frontloading leave at the beginning of each benefit year does not eliminate a contractor’s obligation to allow employees to carryover unused sick time, an employee may have more than 56 hours of paid sick leave available for use at one time under the frontloading approach. However, an employee will not receive more than 56 additional hours in any one year (56 hours frontloaded plus 56 unused hours carried over from the prior benefit year, which equals a total of 112 hours).

Integration with Existing PTO Policies and Collective Bargaining Agreements

A contractor’s existing Paid Time Off (“PTO”) policy can fulfill the paid sick leave obligations under EO 13706 as long as it provides employees with at least the same rights and benefits as the Final Rule. The DOL’s guidance explains that if a contractor provides employees with at least 56 hours (7 days) of paid time off that can be used for any purpose and meets the requirements of the Final Rule, then the contractor does not have to provide separate paid sick leave, even if an employee uses all of the time for vacation.

There is also a temporary delay in application of the Final Rule for employees whose covered work is governed by a collective bargaining agreement (“CBA”) that was ratified before September 30, 2016, and that provides at least 56 hours of paid sick leave (or paid time off that may be used for sickness/health care reasons) per year.  In such circumstances, the requirements of the Final Rule will not apply until the date the agreement terminates or January 1, 2020, whichever occurs earlier. If the CBA provides less than 56 hours of paid time off that may be used for sickness/health care reasons, then the contractor must provide employees with the difference between 56 hours and the amount of sick time/PTO provided under the existing CBA that is consistent with either the Final Rule or the terms and conditions of the governing CBA.

Penalties for Non-Compliance

All covered contracts and subcontracts entered into on or after January 1, 2017, must contain a mandatory contract clause, which directs, as a condition of payment, that contractors shall provide paid sick leave to all employees performing work on or in connection with a covered contract. The DOL’s Wage and Hour Division is charged with investigating potential violations of and obtaining compliance with the Final Rule. Failure to comply with the paid sick leave obligations can lead to significant penalties including, but not limited to, the contracting agency withholding payments due on the contract as necessary to pay workers lost pay and/or benefits for any violation of the requirements of the Final Rule.

Takeaways to Consider

Here are some key points for federal government contractors and subcontractors to consider:

  1. The Final Rule takes effect on January 1, 2017, regardless of the change in administration, but the incoming Congress may set it aside after it takes effect;
  2. Determine the expiration date of existing contracts with the federal government and identify covered contracts that may be renewed or awarded on or after January 1, 2017;
  3. Keep in mind administrative considerations, such as segregating covered work from non-covered work, tracking hours worked on or in connection with a covered contract, using an accrual method or frontload method (carryover requirements apply under both methods), tracking usage of leave, maintaining records of written denials, providing notice of available sick leave, etc.;
  4. Review and update existing PTO policies to ensure compliance with the Final Rule;
  5. Coordinate with Human Resources and/or union representatives if unionized employees have collective bargaining agreements before implementing any benefit or policy changes;
  6. When considering leave requests, keep in mind the expansive permissible uses of paid sick leave including care for an employee’s own illness, care for a family member or “the equivalent of a family relationship,” and domestic violence, stalking or sexual assault;
  7. Review attendance policies to ensure that employees are not disciplined for using paid sick leave;
  8. Post notice of Workers Rights Under Executive Order 13706 provided by the Department of Labor in a prominent and accessible place in the workplace;
  9. Maintain records of requests for leave, approvals and written denials, and sick leave usage, and provide notice of available paid sick leave on pay stubs or itemized wage statements; and
  10. Ensure that the mandatory contract clause in Appendix A to the Final Rule, which is a condition of payment, is contained in all new covered contracts and subcontracts with the federal government.

Federal Court Orders Stop to DOL’s Persuader Rule

By Stephanie Dodge Gournis, Gerald Hathaway, and Mark Foley

On June 27, 2016, a Texas federal court granted a preliminary injunction preventing the Department of Labor (DOL) from moving forward on a nationwide basis with the July 1st enforcement of its Final Rule Interpretation of the “Advice” Exemption to Section 203(c) of the Labor Management Reporting and Disclosure Act (LMRDA) (also known as the DOL’s “Persuader Rule”). The court order was based on findings that plaintiffs in the case of National Federation of Independent Business, et al. v. Perez, 5:16-cv-00066-C, were likely to succeed on the merits of their claims in establishing that the DOL’s Persuader Rule is inconsistent with federal law and exceeds the DOL’s statutory authority.

The LMRDA requires employers and labor relations consultants (including attorneys) to report certain agreements and arrangements (and payments made pursuant to such agreements/arrangements) under which a consultant performs activities that have “an object … directly or indirectly to persuade employees concerning their rights to organize and bargain collectively.” The statute expressly exempts from its reporting requirements consultant activity that involves a consultant’s mere giving of “advice” to the employer. The DOL historically has interpreted this LMRDA “Advice Exemption” as not requiring employers or consultants to report “indirect” consultant persuader activity – meaning activity in which the consultant works behind-the-scenes, but never directly communicates with employees. With the publishing of its new Persuader Rule on March 24, 2016, the DOL announced its rejection of the prior Advice Exemption  interpretation and directed employers and consultants to begin reporting indirect persuader activities, including activities in which a consultant drafts or revises employer policies and communications, assists management in developing coordinated responses to organizing and collective bargaining, and/or conducts seminars or management training which assists the employer in developing anti-union strategies or action plans. Under the LMRDA reporting requirements, officers of employer and consultant companies are required to maintain necessary records to support DOL filings for at least 5 years, and are subject to criminal penalties and prosecution for false or incomplete reporting, or failure to file a required report as required under the DOL’s rules.

The DOL’s new Persuader Rule technically went into effect on April 24, 2016, but was scheduled to apply only to consultant agreements and arrangements made after July 1, 2016. This meant that starting July 1, 2016 employers and consultants faced increased reporting obligations requiring them to report all consultant agreements/arrangements, and activities and payments made pursuant to such agreements/arrangements. Consultants (including law firms) also were required to report on an annual basis all receipts and disbursements arising in connection with any labor relations advice or services rendered to employers without limitation to the consultant’s “persuader clients.” In other words, consultants (and law firms) that engaged in persuader activity for a single client would be required to report labor relations advice and services for all clients (even when no persuader activity was involved for those other clients).

The National Federation of Independent Business case is just one of three federal lawsuits pending in various jurisdictions seeking to prevent the DOL’s Persuader Rule from taking effect. In this case interested business groups and ten states joined together to pursue an injunction against the DOL in the United States District Court in Northern Texas. The outcome of the case was influenced by expert testimony of labor attorneys, bar association representatives and business associations regarding the anticipated economic business costs of implementing the new reporting requirements, as well as concerns regarding restrictions on employer free speech rights and opportunities to obtain adequate legal representation for labor relations matters.

Based on the evidence presented, Senior District Judge Sam R. Cummings concluded that the DOL failed adequately to explain its reasoning for abandoning the prior, longstanding interpretation of the LMRDA Advice Exemption, and thus the DOL should not be afforded the usual deference in its agency interpretations. The Court found the DOL’s Persuader Rule arbitrary, capricious, and an abuse of the DOL’s discretion on the basis that the rule unreasonably conflicts with state rules regarding the practice of law, including attorney duties to protect client confidentiality, exercise independent professional judgment and render candid advice. The Court found the DOL’s Persuader Rule imposes content-based burdens on employer First Amendment rights to express opinions regarding union organizing, and to consult and hire attorneys to speak on an employer’s behalf. The Court found substantial likelihood that the plaintiffs would succeed on claims that the Persuader Rule is “void-for-vagueness” under the Due Process Clause of the Fifth Amendment. In the words of the Court, “[h]ere DOL replaced a long-standing and easily understandable bright-line rule with one that is vague and impossible to apply.” The Court found there to be “a substantial risk that associations, employers and consultants, including attorneys, will not be able to determine with reasonable certainty whether their actions require reporting.” Finally, the Court found substantial likelihood that the Persuader Rule violates the Regulatory Flexibility Act (RFA), on the basis that in promulgating the new rule the DOL “artificially excluded important costs of its implementation from consideration,” including significant costs incurred by consultants in having to file annual reports detailing expenditures of their individual clients. The Court granted the plaintiffs’ petition for temporary injunction, finding that the plaintiffs would suffer irreparable harm in absence of injunctive relief.  With this decision the DOL is enjoined on a national basis from implementing “any and all aspects” of its Persuader Rule pending full resolution of the case merits or until further Court Order. The decision calls into serious question whether the DOL’s Persuader Rule can be legally enforced. At a minimum, and assuming the injunction is not lifted by an emergency appeal, it will be many months (if not years) before the DOL can move forward with its new-found interpretation of the law.