It is now widely believed that Congress will fail to agree on a continuing resolution to secure short-term funding for the federal government while the Senate and House negotiate appropriations bills for the coming fiscal year. Federal officials accordingly are bracing for a partial government shutdown to begin at the start of the federal government’s new fiscal year on Oct. 1, 2023. Just as the shutdown will impact many of the federal government’s public-facing functions, it also creates uncertainty for federal contractors regarding government contract, labor and employment, and other laws.
Below are some of the critical issues federal contractors should consider to ensure they are reasonably positioned to respond to a partial federal government shutdown.
Government Contracts
Contractors, as a general matter, are required to continue performance of existing government contracts, even where the federal government has shut down. As a general rule, an existing federal contract with a remaining period of performance and obligated funding remains in effect and should be performed during a partial federal shutdown:
- unless the contract is terminated or placed on stop-work status by the contracting officer, or
- until, where relevant, obligated funding is exhausted.
Because many government employees will be furloughed and will be prohibited from conducting normal business during a shutdown, contractors should anticipate that contract options may not be exercised, new contract modifications may not be issued (including funding modifications), pending or new invoices may not be paid, and ongoing procurement activities (competitive and sole source) may be delayed. To that end, there has been anecdotal evidence of various agencies considering the issuance of requests for proposals on Sept. 29, 2023, ahead of previously contemplated schedules.
Contractors should analyze their contracts to estimate a “burn rate” and determine when and if obligated funding will run out. Contractors should also (a) pay close attention to any obligations to notify the federal government of the status of funds remaining on individual contracts, and (b) send “75% letters” even if a contractor does not believe the recipient of such notices will be working.
If funding on a given contract is exhausted during the shutdown, it will be up to the contractor to determine whether to stop work or to continue working at-risk, in anticipation of receiving reimbursement once the shutdown has ended. As occurred during prior government shutdowns, expect many contracting officers to issue guidance to contractors in the next 48 hours as the deadline approaches.
McGuireWoods strongly recommends proactive engagement with contracting authorities to the extent that a contractor has any unique considerations arising out of any particular contract. Further, contractors should review their prime contracts and subcontracts for considerations such as (i) prompt payment discounts (FAR 52.232-8), (ii) limitations on funds (FAR 52.232-2), and (iii) pay-when-paid provisions that could be uniquely implicated once the shutdown begins. Moreover, contractors should watch for and document any delays or other extracontractual costs that arise as a result of shutdown-related issues.
Work On-Site at Government Facilities
During a shutdown, typically only defined “essential personnel” are authorized to work on-site at U.S. government facilities. Depending on their individual roles, contractor employees may not qualify as essential personnel. Further, as a practical matter, contractor employees may have difficulty working on-site at U.S. government facilities since certain security offices, installation access points, and buildings may close during a shutdown.
If personnel are deemed “essential” to continuing work during the shutdown, contractors should seek to have this determination made in writing by the contracting officer, identifying specific employees by name or by labor category, where possible.
Some contractor employees may be permitted to work from alternate locations, such as from a contractor-owned facility, during the shutdown. Whether an employee can continue to be productive, can work with little or no supervision, and has the necessary equipment to perform necessary tasks may be a case-by-case determination that should be discussed with the contracting officer or contracting officer’s representative in advance of the shutdown.
Contractors with employees working on-site at U.S. government facilities should coordinate with contracting officers and contracting officers’ representatives in advance to determine whether contractor personnel will be permitted to access the facilities and whether government property and equipment will be available for use. Additionally, determine whether government personnel will be available for tasks such as supervising, approving, or testing contractor work.
Subcontractors
Many of the issues described above also apply to subcontractors. For example, if prime contractor employees are not permitted to work on certain federal government sites during a shutdown, then subcontractors also are unlikely to be granted site access. Prime contractors should be prepared to receive requests from subcontractors for authority-to-proceed commitments and for various forms of risk authorization. A careful review of the operative subcontract agreement is recommended to refresh recollection as to the commercial contractual obligations and agreements between prime contractors and subcontractors in the case of the potentially forthcoming shutdown.
The WARN Act
If payment delays caused by the shutdown force contractors to lay off or significantly cut scheduled hours for employees assigned to such work (or otherwise), the federal Worker Adjustment and Retraining Notification (WARN) Act or one of many equivalent state statutes may require advance written notification to employees affected by a facility closing or layoff event, depending on various factors.
The WARN Act generally requires employers of 100 or more employees, excluding part-time employees, or 100 or more employees who in the aggregate work at least 4,000 hours per week (exclusive of overtime hours), to give written notice to affected employees and certain governmental offices of a covered facility closing or mass layoff at least 60 days prior to such action.
A WARN Act notice must be specific, including such information as the employees who will be affected and the timing of the expected separation from employment. However, a notice may be issued contingent on the occurrence of a future event, such as the potential but uncertain cancellation of a federal contract.
A WARN Act notice regarding a facility closing or layoff focuses on “loss of employment,” which generally involves a termination without cause and without any intent on the part of the employer to rehire. The definition of “employment loss” specifically includes:
- an employment termination, other than a discharge for cause, voluntary resignation, or retirement;
- a layoff exceeding six months; or
- a reduction in work hours of more than 50% during each month of any six-month period.
Whether a WARN Act notice is appropriate turns on the number of employees to be terminated and their employment or job site location. Further, whether notices should be issued as a result of a government shutdown, when the period of work disruption may be unknown, requires a fact-specific inquiry.
Prior to the sequestration and government shutdown in 2013, the U.S. Department of Labor (DOL) announced its position that WARN Act notices would not be required. However, DOL did not issue a similar announcement concerning the 2018 shutdown. Further, there is no guarantee that courts will give deference to any DOL guidance, leaving employers subject to a court’s individualized determination of whether the WARN Act applies. In addition, contractors should be mindful that several states have “mini-WARN” statutes that are equivalent to the WARN Act, but which carry additional requirements.
Furloughs and Reduced Hours
To control labor costs during a shutdown, many contractors may consider adopting furloughs or mandatory reduced hours. Employers utilizing either approach should take proactive steps to ensure compliance with federal and state wage and hour laws, employee benefit laws, anti-discrimination laws, and contractual collective bargaining agreements. Moreover, furloughs and reduced hours can, in some circumstances, trigger state unemployment benefit eligibility.
The FLSA and State Wage and Hour Law
Potential furloughs involving “exempt” employees present a complicated set of problems for employers. For example, in implementing furloughs for exempt workers, employers risk losing the exemption by violating the “salary-basis” requirement.
Under federal and most state laws, exempt employees must be paid the same minimum salary for each pay period. Except under limited circumstances, this predetermined amount is not subject to reduction if an exempt employee performs any work during a workweek. Federal Fair Labor Standards Act (FLSA) regulations specifically provide that employers may not make deductions from an exempt employee’s predetermined salary for absences “occasioned by the employer” or caused by “the operating requirements of the business.” If an exempt employee is “ready, willing, and able to work,” an employer may not make deductions for time when work is unavailable. Thus, if a government shutdown results in a partial-week furlough, or a reduction in hours, employers need to ensure that their exempt employees receive their guaranteed weekly salary if they performed any work during a given workweek.
Although furloughing or reducing the hours of “non-exempt” employees is relatively straightforward, employers need to be aware of the risks involved for such workers as well. Non-exempt employees need only be paid for the work they actually perform (i.e., “hours worked”). Nevertheless, employers furloughing or reducing the hours of non-exempt employees must ensure proper payment for work performed on the employees’ regularly scheduled payday.
Health Insurance
Employers should examine their group health insurance plans to determine whether a furlough or reduction in hours caused by a shutdown will trigger loss of coverage and entitlement to continued health insurance coverage under the Consolidated Omnibus Reconciliation Act (COBRA).
Discrimination
Lastly, when making decisions on which employees will be subject to layoff, furlough, or reduction in hours, contractors should ensure that these decisions are based on consistent and articulable business reasons. Otherwise, employers could expose themselves to claims of unlawful discrimination and retaliation if the individuals impacted by these decisions belong to a protected classification.
For further information or questions about the information contained in this legal alert, or for help preparing for a government shutdown, please contact the authors, your McGuireWoods contact, or a member of the firm’s government contract, affirmative action, or labor and employment teams.