If Congress and the White House do not reach a deal on the sequestration, employers with federal contracts should be prepared to take immediate action to deal with drastic cuts in government spending that will result.
Federal contractors should anticipate how the sequestration will directly affect their workplace with respect to complying with Worker Adjustment and Retraining Notification (WARN) Act, wage and hour requirements, benefits and immigration status as well as unions and collective bargaining agreement issues. Employers should also expect possible lawsuits from workers laid off due to spending cuts.
What is the sequestration?
The sequestration relates to the Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012, under which the federal government is immediately required to cut $85 billion from its defense and domestic budgets unless Congress and the White House can reach an agreement. Federal contractors providing goods and services to government entities will be directly affected as a result of these cuts. The sequestration may take place as early as March 1.
What will happen?
Government agencies will cut back or terminate contracts or programs that they consider non-essential. Employers with federal contracts already in place may see significant modifications and the scope of the work reduced. Further, contractors may be required to cut their operational and administrative costs such as travel, training, facilities and supplies. As a result, individuals employed by federal contractors may be subject to reduced hours, layoffs or furloughs.
What can a federal contractor do to respond to the potential effects of sequestration?
Know WARN Act Obligations. The Worker Adjustment and Retraining Notification (WARN) Act requires some employers to notify employees regarding potential layoffs, depending on the number of workers to be laid off, among other factors. Generally, under the WARN Act, employers with at least 100 employees ordering a mass layoff or plant closing to provide 60 days' written notice to affected non-union employees, union representatives and certain government officials. While some federal contractors may have previously issued WARN notices, the WARN Act does provide an exception based on "unforeseeable business circumstances" that were unexpected and outside the employer's control. In fact the US Department of Labor (DOL) in a 2012 advisory and the White House Office of Management and Budget Office (OMB) in a 2012 memorandum issued guidance last year that WARN Act notification was not required nor appropriate since it was unknown whether the sequestration would actually occur. In any case, should sequestration occur, affected federal contractors should immediately issue WARN notices despite the government's advice to the contrary. Further, employers should take into account that some states have mini-WARN laws that may have different requirements.
Approach Wage and Hour Issues with Caution. To qualify for most exemptions from the overtime requirements of the Fair Labor Standards Act (FLSA), an employee must be paid on a salary basis. An employer that implements furloughs or otherwise reduces employee hours in response to the sequestration cannot reduce its exempt employees' salaries without violating the salary basis test. As a result, once-exempt employees on furloughs or reduced hours typically will need to be paid overtime for any hours they work beyond 40 in a workweek. An employer is also responsible for paying nonexempt employees for any work they perform while on furlough. An employer should monitor furloughed employees and may consider taking away electronic communication devices and access to the employer's networks that would enable them to perform work outside the workplace. If a federal contractor reduces the pay of an employee it also must take into account whether and how much advance notice is necessary and required under state or federal law.
Consider Benefit Issues. The sequestration may have a tremendous impact on employee benefits. Employers should determine whether a reduction in the number of hours worked due to furloughs or terminations will cause a loss of group health plan coverage and entitle employees to COBRA. Employers may also see an increase in loan requests from 401(k) plans in order to replace lost income.
Evaluate Immigration Issues. Federal contractors need to be aware of immigration issues with respect to the sequestration. Employers must file amended Labor Condition Applications and visa petitions with the government if there is a reduction of salary or hours or furloughs of certain nonimmigrant visa holder employees. Otherwise, federal contractors must comply with the information it attested to on visa sponsoring documents, such as the visa holder's salary.
Consider Union Issues. Federal contractors need to be aware of their obligations with respect to collective bargaining agreements before instituting any unpaid furloughs or reducing wages, hours worked or benefits. While a union cannot stop a furlough in this situation, they can demand to examine financial documents to ensure there is no other way to make the necessary budget cuts.
Communicate With Employees. Federal contractors need to effectively communicate with employees and provide them with the correct information regarding the effects of the sequestration. Employers should designate an individual to field questions and assure employees that they have their best interests at hand. Federal contractors should make sure that employees understand any changes in their obligations under the contracts and ensure that employees comply with the new contract requirements.
Know Unemployment Insurance Obligations. Depending on state law, employees that are laid off, have a reduction in hours worked or placed on unpaid leave following sequestration may be eligible for unemployment insurance benefits. Federal contractors should be aware of their obligations with regard to unemployment insurance benefits.
Maintain Documentation and Recordkeeping. Federal contractors should properly document all information regarding contract performance in the case of a termination, claim or other dispute arising out of a government contract. Employers should maintain proper documentation regarding all employees and comply with state and federal recordkeeping obligations.
Anticipate Lawsuits from Employees. .Federal contractors should be proactive and anticipate lawsuits from employees, particularly if the employer is forced to make an employment decision that adversely affects one employee over another. In doing so, employers should take into account protected class status as well as any other prior complaints on behalf of the affected employee that may lead to a possible discrimination or wrongful termination lawsuit.
XpertHR Legal Editors Michael Cardman, Tracy Morley, Melissa Gonzalez Boyce, Melissa A. Silver and Michael C. Jacobson also contributed information to this story.
How to Notify Required Parties of Impending Layoff or Reduction in Force (RIF) Under the WARN Act
Organizational Exit > Involuntary Terminations
Fiscal Cliff May Still Trigger WARN Act Protections Despite Government Guidance to the Contrary
Employee Compensation > Employee Classification
Employee Benefits > Health Care Continuation (COBRA)
How to Administer COBRA
Administering COBRA - Checklist
Employee Benefits > Legally Required Benefits
How to Prevent Discrimination in the Workplace