A Contractor's Guide to the Impending Government Shutdown

Editor's Note: The last time we faced an impending government shutdown, our Government Contracts Group posted a blog regarding what contractors should do in the event of a shutdown. That post has been updated below.

With time running short 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 Current Political Situation

With a divided government and Congress unable to agree on spending levels (even, in some cases, within the parties), the federal government seems poised for a shutdown or a series of short continuing resolutions (CRs), followed by a shutdown. Republicans may also need Democrats in the U.S. House of Representatives to pass a spending bill.

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."

Until the Carter Administration, the government routinely ignored the Anti-Deficiency Act and continued normal operations even without funding. That changed in 1980 when President Jimmy Carter's Attorney General, Benjamin Civiletti, prepared what is now known as the Civiletti Memorandum. Civiletti concluded that the government could not spend money that was not appropriated by Congress – with a few exceptions.

A 2013 Congressional Research Service Report detailed those exceptions, which include:

(1) activities "necessary to bring about the orderly termination of an agency's functions"; (2) administration of benefit payments provided through funds that remain available in the absence of new appropriations, including, in the case of DOD, military retirement benefits; (3) activities and purchases financed with prior year funds and ongoing activities for which funding has already been obligated; (4) activities undertaken on the basis of constitutional authorities of the President; and (5) activities related to "emergencies involving the safety of human life or the protection of property." The Defense Department attributes its authority to carry on national security-related operations mainly to Section 1342 of the Antideficiency Act, which permits the continuation of activities to protect human life and property.

Nevertheless, contracts in the above categories can be impacted if furloughed government workers or shuddered government sites are necessary for performance. Further, contracts will not be awarded, requests for proposal (RFPs) will not be released, and most procurement activities will grind to a halt.

A couple of other interesting issues that have presented problems in past shutdowns include:

• What happens with information technology (IT)/internet contracts? A government agency may host a website that has some services impacted by a shutdown and others that are not.
• What about prime contractors that do not flow down terminations for convenience in their subcontracts? Contracts between prime and subcontractors are generally viewed as commercial contracts, so such clauses need to be present.
• What about subcontractors? Subcontractors need to communicate with prime contractors to ensure they have direction, because subcontractors may not have insight into whether a prime contract would be impacted by a shutdown.

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 noted above and confirm that exception with the contracting agency
• documenting all wind-down and start-up costs and create 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
• documenting all actions and communicate with all parties involved
• mitigating costs whenever possible and
• 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 noted above.

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

What to Do With Your Employees

There are a number of employment laws that government contractors must be mindful of in the event of a government shutdown.

WARN ACT

Under the federal Worker Adjustment and Retraining Notification Act (WARN Act), employers generally must provide 60 days' written notice to covered employees in advance of a "mass layoff" resulting in an "employment loss." Under the law, an "employment loss" is defined to include 1) a termination, 2) a temporary layoff lasting longer than six months or 3) a reduction of work hours by more than 50 percent in each month of any six-month period.

In a government shutdown, the period of work disruption is typically unknown. Under the WARN Act, there is an exception to the 60 days' notice requirement for "unforeseeable business circumstances." Nevertheless, for government contractors who expect to potentially furlough or layoff at least 50 employees in response to a government shutdown, a case-by-case analysis is still recommended.

Government contractors should also consider applicable state laws governing employer obligations in the event of a mass layoff.

Wage and Hour

Mandating Use of Accrued Paid Time Off (PTO): Under the Fair Labor Standards Act (FLSA), government contractors may make mandatory deductions from an exempt employee's PTO or other leave banks for a full or partial day's absence during a shutdown, furlough or reduced-hours plan, without affecting the employee's FLSA-exempt status, as long as the employee receives their full salary. However, government contractors should also consider applicable state law. In states where PTO is considered an accrued wage, mandating use of PTO can be problematic.

Unpaid Leave During a Full-Week Shutdown: So long as an employee does not perform any work, government contractors may treat an exempt employee's full-week furlough as unpaid leave. The burden is on the employer to ensure employees are not performing any work from home, even limited work such as checking email and minimally communicating with customers. Government contractors can help manage this by:

• giving clear written instructions to employees regarding the expectations for the employees to perform or not perform work
• temporarily collecting work computers and phones and/or disabling email and network access
• making sure all work responsibilities of furloughed employee are adequately covered by employees who are not furloughed and
• scheduling furloughed time on a week on/week off basis or scheduling limited employees to work partial weeks/reduced hours during the shutdown

Importantly, government contractors may not reduce the salary of an exempt employee who works any part of a workweek without violating the salary basis test as a reduction in salary due to a reduction of hours worked because the reduced hours are "occasioned by the employer or by the operating requirements of the business." However, as discussed above, employers generally can require the use of paid leave in such situations.

Reductions in salary because a "permanent change" in an employee's schedule (e.g., changing from 52 five-day workweeks to 40 five-day workweeks and 12 four-day workweeks over the course of a year) due to economic conditions will not jeopardize an exempt employee's status as long as the employee is still paid on a salary basis and still receives at least $684 per week. However, there are two main concerns with respect to these kinds of salary reductions. First, the pro-rated salary following any reduction still needs to equal at least $684 per week to meet the FLSA exemption requirement. A higher amount may be required under some states' laws. The salary threshold applies regardless of whether the employee is full-time or part-time. Second, the employer must carefully consider the time period for the reduced schedule and not make frequent changes in schedule and corresponding salary. Courts have suggested that frequent changes to the salary may render the salary illusory, particularly if the changes appear to correspond to fluctuations in workload so that the salary becomes a proxy for hourly wages. State laws also should be consulted before instituting a pay reduction; many require advance notice of changes in pay.

Benefits Issues

Continued Employee Coverage under Employer Sponsored Insurance Plans: Government contractors should review benefit plan documents to confirm if, and under what circumstances, a furlough triggers a loss of coverage eligibility. In such case, an employer is required to provide affected employees with notice of their rights and responsibilities under the Consolidated Omnibus Budget Reconciliation Act (COBRA).

Benefit Premiums: Government contractors should also consider how they will handle the employee portion of insurance benefit premiums, which are typically deducted directly from employee pay, in the event of an extended shutdown. Government contractors may also see an increase in employee applications for 401k loans and distributions.

Unemployment Benefits

Depending on applicable state law, employees who are furloughed (full or partial week) due to a government shutdown may be eligible for unemployment insurance benefits. Employees should be directed to obtain more information from the applicable state offices, and government contractors should not make any representations to employees regarding eligibility for unemployment insurance benefits.

Immigration Issues

H-1B, H-2B and E-3 employees who are placed on a non-productive status or reduced work schedules must continue to be paid at the full rate specified on their visa documentation, unless filing an amended Labor Condition Applications with the U.S. Department of Labor and H-1B/H-2B/E-3 visa petitions with the U.S. Citizenship and Immigration Services (USCIS). However, government processing won't occur, and web-based filing resources will be unavailable.

E-verify will be unavailable. Employers must continue to complete I-9s for new hires, but 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

• Government contracts who are unionized 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.
• Unilateral implementation of layoffs or reductions in wages, forced shutdowns and vacations could constitute unfair labor practices and lead to National Labor Relations Board (NLRB) proceedings.
• NLRB budgets for investigations and hearings might be curtailed, leading to issuance of complaints without investigations and shorter hearings without briefing.

Communications with Employees

Unpaid furloughs and/or being required to use accrued PTO as a result of a government shutdown will likely have a significant negative impact on employees. Government contractors should be mindful of communications that promote, rather than undermine, morale and productivity.

Government contractors should share their plans with employees promptly and clearly. If employers are in a "wait and see" mode, employees should be told their employers are monitoring the situation, but recognize their anxiety and have designated management personnel to answer questions, address concerns and correct misinformation. Steps should be taken to make sure all managers and supervisors are informed about the employer's plans and communication strategies as appropriate.

Next Steps

Holland & Knight's Government Contracts Group will continue to monitor this situation and issue additional alerts as necessary.