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The Department of Labor’s (DOL’s) final rule establishing paid sick leave for federal contractors (the Rule) in furtherance of Executive Order 13706 took effect on January 1, 2017.

The Rule imposes new compliance requirements on federal contractors and subcontractors, and, until the Rule is rescinded, contractors must act to ensure that they comply, or that they are excused from compliance with, the Rule.

Seven Days of Mandatory Paid Sick Leave

Covered contractors must provide no fewer than seven days of paid sick leave annually. But not all employees are covered by the Rule — only those employees who work on “or in connection with” a contract that is covered by the Rule fall under the sick leave provision.

Covered Contracts

The Rule applies to certain types (see below) of newly awarded contracts under solicitations issued on or after January 1, 2017, unless the contracts are otherwise exempt under one of several exceptions, or are awarded outside of the solicitation process on or after January 1, 2017. A covered contract type that was entered into prior to January 1, 2017 will constitute a new (covered) contract if, through bilateral negotiation, on or after January 1, 2017:

• the contract is renewed;
• the contract is extended, unless the extension is made pursuant to a term that was in the contract as of December 31, 2016 and provided for a short-term limited extension; or
• the contract is amended pursuant to a modification that is outside the scope of the contract.

The definition of “new contract” does not include the unilateral exercise of a pre-negotiated option to renew an existing contract by the federal government. For construction contractors in particular, contracts solicited after January 1, 2017 will be subject to the Rule. The Rule also applies to non-construction contractors, and all contractors should consider carefully whether coverage under the Rule is excepted before committing the resources necessary to achieve compliance.

Covered Contractors and Subcontractors

The Rule applies to prime contractors as well as subcontractors doing work on “or in connection with”:

• procurement contracts for construction that are covered by the Davis-Bacon Act;
• certain service contracts;
• concessionaire contracts; and
• contracts in connection with federal property or lands.

Contracts covered by the Davis-Bacon Act encompass a large swath of construction contracts, including all construction contracts valued above $2,000; it also covers contracts for facility alteration and repair and covers substantial and segregable construction portions of non-construction contracts. Subcontractors, materialmen, tradesmen, vendors and suppliers working under one of the four types of covered contracts will similarly be covered by the new Rule.

Understanding Coverage Exceptions

DOL has carved out several coverage exceptions to the Rule. For construction contractors, one or more exceptions might apply as a basis to escape compliance with the Rule. These exceptions are described below:

• Construction Projects Not Subject to Davis-Bacon Act. If a procurement contract for construction is not covered by the Davis-Bacon Act, then that contract would not be a covered contract within the meaning of the Rule, and, for that particular contract, the contractor would not have to pay employees for seven days of annual sick leave. That exception, however, applies only to the specific contract and would not otherwise excuse the contractor from compliance across all procurement contracts.
• Collective Bargaining Agreements. If a contractor’s employees are subject to a collective bargaining agreement (CBA) that provides for no fewer than seven days of annual paid sick leave, then those CBA employees would also not be covered by the Rule.
• 20 Percent Performance Threshold. Any employee who spends less than 20 percent of her work week in connection with covered contracts is not covered by the Rule. As an example, a human resources professional involved in hiring construction workers to work on a covered contract would be working “in connection with” that contract but not “on” that covered contract. The human resources professional would not be covered by the Rule if her time working in connection with the covered contract does not exceed 20 percent of her work week (eight of 40 hours).

Policies and Procedures to Achieve Compliance

The new administration could take action to cancel, rescind, suspend, ignore or forego enforcement of the Rule. Until the Rule is no longer applicable, contractors should err on the side of compliance with the Rule. Construction contractors should develop the necessary policies and procedures to review each newly solicited contract (again, beginning with solicitations issued on or after January 1, 2017), determine whether the contract is a covered contract and whether any exception(s) apply to each specific contracting opportunity and document the coverage determination on a contract-by-contract basis. When coverage questions arise, the company should confer with counsel to obtain guidance prior to submitting an offer or bid. Obviously, compliance with the Rule will give rise to increased costs of performance vis-à-vis increased indirect costs and/or increased project-specific direct costs.

The Risks of Noncompliance

Most contractors are well aware of the significant administrative discretion wielded by DOL when it comes to the enforcement of DOL’s rules and regulations. DOL can conduct extensive review and investigation of a contractor’s books and records, including payroll records, and DOL can draw on several remedial measures to address a contractor’s noncompliance, whether episodic or systemic. DOL remedies can include imposing administrative orders directing a contractor to pay the accrued benefits denied or lost by reason of noncompliance (with the Rule) and any other actual monetary losses sustained as a direct result of the noncompliance. DOL can impose appropriate equitable or other relief and has broad powers to suspend and debar contractors with a pattern of noncompliance with DOL rules and regulations.

Construction contractors that bid on and perform federally funded construction projects, along with their subcontractors, tradesmen, materialmen, suppliers and consultants, must adapt quickly to introduce new policies and procedures to comply with the Rule and to validate any determination that one or more of their newly awarded contracts are not covered by the Rule.