“Take some more tea,” the March Hare said to Alice, very earnestly. “I’ve had nothing yet,” Alice replied in an offended tone: “so I ca’n’t take more.” “You mean you ca’n’t take less,” said the Hatter: “It’s very easy to take more than nothing.” 

--Lewis Carroll, Alice’s Adventures in Wonderland

The Federal Government generally takes the position that the cost of compliance with state laws, including changes therein made during the course of performance, is a risk that is generally assumed by the fixed-priced contractor, who should ostensibly include cost contingencies in his bid to cover that risk. As a result, the Federal Government usually refuses to give any price adjustment to a contractor for changes caused by state law.

An example of that is the common refusal of the Federal Government to give a price adjustment for state minimum wage increases, or worker’s compensation or unemployment benefits. See, e.g., Aleman Food Services, Inc. v. United States, 994 F.2d 819 (Fed. Cir. 1993). Similarly, where there is a change in state working time rules or by case law, which require payment of additional wages, the Federal Government may say that doesn’t give rise to any price adjustment. See Appeal of Parsons Government Services, Inc., ASBCA No. 61630 (April 24, 2020). However, the Federal Government must give a price adjustment for the cost  of newly declared federal holidays. Holmes & Narver Services, Inc., ASBCA Nos. 38867, 38868, 1990 ASBCA LEXIS 313 (Aug. 6, 1990). 

But sometimes the change in state law interact with the terms of the federal contract and requires a different result. For example, during the pandemic, California enacted a special Covid-19 related sick leave law requiring employers to give additional paid sick leave time off as an additive fringe benefit imposed by law. The California State Legislature enacted California Assembly Bill 1867 which required private employers with more than 500 employees to provide their California employees with supplemental paid sick leave related to the Covid-19 pandemic. Additionally, when that bill expired, the California State Legislature passed California Senate Bill 95 which effectively extended and expanded the prior paid sick leave requirement. Existing sick leave benefits had to be maintained on top of the Covid-19 leave benefit. This pyramids already generous sick leave benefits provided for in unionized collective bargaining agreements (“CBAs”). An employer performing a Federal contract in California, assuming it is not working in a federal enclave, must furnish both the CBA or other provided sick leave and an additional lump of California Covid-19 sick leave including for contacting Covid-19 and exposure to thereto (i.e., the worker doesn’t have to even test positive but just be exposed to someone who had Covid-19). The net result is considerable extra paid leave due to the workers who are invariably exposed to the virus in the workplace. 

In that case, like every state law situation, the Federal Government seems to think that the risk of state law changes should be borne by the contractor. That begs the issue of whether the increased fringe benefit cost was one required by operation of law, as specified in the Service Contract Act (‘SCA”) and Davis-Bacon Act (“DBA”) price adjustment clauses. This is particularly salient where the Federal contract expressly requires compliance with state law. And, of course, federal service contracts (FAR 52.222-43(b)) and many construction contracts contain a specific warranty clause where the contractor is made to promise that it hasn’t included any contingency in its bid or proposal mean to cover cost increases for fringe benefits due SCA or DBA covered workers. The SCA regulations also specifically provide that sick leave is a fringe benefit. See 29 C.F.R. 4.53. And the Air Force Price Adjustment Guide specifically provides that “increased … leave time may be an allowable adjustment.” Air Force Price Adjustment Guide section 10.5.6 at 16.

Thus, the Federal position would appear flawed when it comes to at least sick leave benefits. The Federal Government’s position also potentially ignores the terms of the CBA itself, which has become a section 4(c) wage determination under the SCA. That means the CBA is a material term of the contract. If the CBA requires compliance with state laws, then the CBA requires payment of the Covid-19 special additive sick leave benefit. And even, better, where the CBA specifically incorporates by reference or otherwise a requirement to pay any increased state leave benefit, that makes the additional leave a CBA requirement and thus the contractually specified wage determination requirement. And the significance of that is that benefits required by the CBA are per se subject to an SCA price adjustments.

Accordingly, careful drafting of CBAs, particularly on service contracts, should include some attention to language expressly making any state mandated fringe benefits into a CBA contractual requirement. At least that would be prudent for a contractor looking to get a price adjustment for state mandated benefits.