A Contractor’s Guide to the Impending Government Shutdown

by Holland & Knight LLP
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Editor's Note: The last time we faced an impending government shutdown, our Government Contracts Team posted a blog regarding what contractors should do in the event of a shutdown. That post has been updated below and information regarding labor and employment issues has been added.

With less than a day before the federal government's appropriated funding runs out, confidence in avoiding a potential shutdown is waning. Because of that, contractors should exercise prudence and immediately begin preparations for a potential shutdown.

The Anatomy of a Government Shutdown

A shutdown is simply caused by a lapse in appropriated funding. The requirement that the government only spends what has been appropriated by Congress is based on Article 1, Section 9, Clause 7 of the U.S. Constitution and reiterated by the Anti-Deficiency Act (31 U.S.C. § 1341) which provides, in relevant part, that: "(a)(1) An officer or employee of the United States Government…may not- (A) make or authorize an expenditure or obligation exceeding an amount available in an appropriation or fund for the expenditure or obligation; (B) involve either government in a contract or obligation for the payment of money."

A shutdown does not automatically stop all government functions. Administration of benefit payments continue, as do DoD national security-related operations. Government contractors should have a plan in place to mitigate impacts of the shutdown and to deal effectively with its workforce. The following sections provide guidance for such a plan.

A Contractor's Action Plan

Contractors are, of course, obligated to continue performance unless they hear otherwise from the government. Nevertheless, contractors should reach out to their contracting agencies for guidance on the status of their contracts.

Moreover, contractors would generally also be best served by:

  • taking inventory of their contracts and personnel on those contracts and drafting an action plan
  • determining whether a contract may fall under the exceptions to the general shutdown and confirm that exception with the contracting agency
  • documenting all wind-down and start-up costs and creating separate accounting categories for those costs
  • deciding whether employees on impacted contracts can be reassigned or be asked to take paid vacation or overdue training
  • determining how to recover shutdown costs based on the clauses in each contract
  • documenting all actions and communicating with all parties involved
  • mitigating costs whenever possible
  • in the event of a shutdown, seeking recovery of expenses as soon as possible

What happens to each particular contract depends on the type of contract, how it is funded and whether it falls under an exception to the general shutdown. The best course is maintaining a good line of communication with contracting agencies and keeping track of costs.

Because the political situation is uncertain, contractors would be wise to pay attention to their contracts and the news to see what happens next.

Employee Considerations

Government contractors must be aware of their obligations to employees in the event of a shutdown.

WARN Act

Notice under the Worker Adjustment and Retraining Notification Act (WARN Act) is not a foregone conclusion. There is an exception to the 60 day notice requirement for 'unforeseeable business circumstances" and in a government shutdown, the period of work disruption (a required component of the notice) is typically unknown. However, case-by-case analysis regarding the issuance of a contingent notice is still recommended. Employers should consider any applicable state laws as well. 

Wage and Hour

Paid Time Off

Under the Fair Labor Standards Act (FLSA), as long as an exempt employee continues to receive their full salary, employers may make mandatory deductions from an exempt employee's paid time off balance for a full- or partial-day's absence as a result of a furlough or reduced hours resulting from a shutdown, without affecting FLSA-exempt status. Employers should also consider applicable state laws in states where accrued paid time off is considered wages, requiring employees to use PTO can be problematic.

Wage Deductions

For a full week absence during a shutdown, employers do not need to pay exempt employees any salary so long as the employee performs no work. The employer should take proactive steps to ensure no work is being performed remotely (checking email, calling customers, etc.). 

Recommended best practices include:

  • give clear written instructions regarding expectations for no work
  • consider holding onto work computers/phones, disabling email and network
  • make sure any essential job duties of furloughed employees are assigned to another employee not on furlough

For a partial week absence or reduced hours absence during a shutdown, employers may not reduce the salary of an exempt employee who works any part of a workweek without violating the salary basis test. However, as discussed above, employers may be able to require the use of paid leave in such situations.

Benefits Issues

Employers should review their health insurance plan to determine if and how the shutdown could trigger loss of coverage and COBRA entitlement.  In the event of an extended shutdown, employers may see increased applications for 401k loans and in-service distributions.

Depending on state law, employees who are furloughed on either a full or partial week basis due to government shutdown may be eligible for unemployment benefits.

Communications with Employees

Furloughs and forced reductions in schedule can be a significant cause of poor morale and negatively impact employee productivity. Open communication is key. Employers should share their plans with employees promptly and clearly. If employers do not have all the information necessary to develop and implement specific plans, employees should be told their employers are monitoring the situation, and have designated management personnel to answer questions and concerns. Steps should be taken to make sure all managers and supervisors are informed about the employer's plans and communication strategies as appropriate.

Other Employee-Related Considerations

Immigration

E-verify will be unavailable. Employers must continue to complete I-9s for new hires but United States Citizenship and Immigration Services (USCIS) will likely suspend the 3-day completion rule. Employers should not take any adverse action because of E-verify interim case status without consulting with immigration counsel.  Employers should also consult with counsel regarding H-1B, H-2B and E-3 employees who are placed on a non-productive status or reduced work schedules.

Union Issues

Employers may have to enter into mid-contract negotiations with unions if immediate layoffs and exceptions to layoff and other collective bargaining agreement provisions are required. Employers should consult with labor counsel prior to implementing unilateral layoffs, reductions in wages, or forced vacations.

We will continue to monitor this situation and issue additional alerts as necessary.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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