US Government Shutdown Averted – For Now: Action Items for Government Contractors

With approximately one hour to spare, Congress passed a temporary spending bill which allows the federal government to continue to operate for 45 days, averting what would have been the third government shutdown in the last five years. Government Contractors and Award Recipients should take advantage of this time to sure up plans for what could end up being a lengthy disruption to business operations if Congress cannot put together a complete 2024 budget. The following five categories of actions can be completed during this 45-day reprieve to insulant companies from financial exposure and to minimize impacts on day-to-day operations in the event a shutdown occurs at the expiration of the continuing resolution.

Confirm financial terms of contracts

A government shutdown will not have the same impact on all contracts (and subcontracts). Under Federal Acquisition Regulation ("FAR") 32.703-1, contracts that are fully funded, meaning funds have been obligated to cover the price of the services on a fixed-price basis or the estimated costs for cost-reimbursable contracts, should not be impacted by a government shutdown, as the funds have already been appropriated to the federal agencies. Contracts, however, that require incremental funding or that were set to begin with the new fiscal year will immediately feel the impact of a shutdown since there will be no funds for the goods or services at issue, absent a federal agency's ability to appropriate funds after the beginning of the shutdown.

Identifying which type of contract (or contracts) your organization has, and how many of each can serve as the foundation for all other actions a company needs to undertake if a shutdown occurs. Similarly, companies with subcontracts in support of US government contracts need to communicate with their prime contractors to understand these same issues.

Communicate with federal agencies

Importantly, however, regardless of the funding status for contracts, the administration of most contracts and awards will undoubtedly be impacted by a shutdown since the daily, if not weekly or monthly, actions needed to be taken by federal agencies will be slowed—if not stopped entirely—when government employees are furloughed, or government facilities are closed. Such actions as having invoices approved or staffing changes reviewed may not be possible on the normal cadence, if at all. It is imperative for companies to designate a point of contact with each customer, ideally the contracting officer, and obtain information regarding planned federal agency actions for the contract if a shutdown occurs.

Each federal agency has its own operational plan for a government shutdown based on instructions issued by the Office of management and Budget ("OMB"). This agency-specific plan will include information on how contracts will be administered during a shutdown. Communication on the following categories of information will best position government contractors during a shutdown: (1) will good and services continue during a shutdown, (2) are any interruptions or stoppages of work anticipated during the shutdown, (3) how will invoicing and payments continue, (4) who will be able to make contracting decisions if they are needed during a shutdown, and (5) notification to, and approval from, contracting officers on all contracts governed by the Limitation of Cost Clause (FAR 52.232-20) or the Limitations of Funds Clause (FAR 52.232-22) if the company anticipates performance costs to exceed the incremental funding provided on the project during the shutdown.

Inventory available & required employment actions

Once companies have a sense of their contract portfolio and the likely impact that a shutdown will have on operations, companies need to understand the legal and policy-driven options available to them to weather any downturn. These employment-related considerations include compliance with the Worker Adjustment and Retraining Notification (WARN) Act, federal and state wage and hour laws and employee benefit programs.

Plant closings & layoffs

Under the federal WARN Act, an employer with at least 100 employees ordering a mass layoff or plant closing must provide 60 days' written notice to affected non-union employees, union representatives and certain government officials, absent "unforeseeable business circumstances."

The term "unforeseen business circumstances" means business circumstances not reasonably foreseeable at the time that notice would have been required. Importantly, however, notice must be given as soon as the triggering event is foreseeable.

When notices should be issued in the case of a government shutdown when work disruptions may be unknown depends on the facts and circumstances of each contract and will likely be informed by the communications with each federal agency described above. If a company believes that plant closings or layoffs are going to be needed in response to a government shutdown, it needs to track not only whether the contemplated action is of sufficient size and scope that it triggers WARN notices, but also when that decision is made to ensure that notice is given with the required 60-day notice or that it is made once the layoff or plant closing was reasonably foreseeable.

Furloughs

In order to avoid layoffs, many companies require mandatory use of paid leave, implement furloughs or mandate reduced-hours plans. Any of these alternatives may run afoul of strict federal or state wage and hour laws, including the Fair Labor Standards Act ("FLSA"). Furloughing or reducing the hours of non-exempt (i.e., hourly) workers is laden with less risk since absent a contract agreement, such as a collective bargaining agreement, or an applicable state or local law setting minimum hours, hourly workers are only paid for actual hours worked. Furloughing or reducing the hours of exempt (i.e., salaried) workers, however, is much more difficult as this worker classification must receive his or her full weekly salary for any week in which the employee performs any work, regardless of the number of days or hours worked in that week. Accordingly, salary deductions cannot be made for a full- or partial-day's absence due to lack of work as "occasioned by the employer or by the operating requirements of the business," which would include a government shutdown. These wage and hour restrictions on exempt workers require employers to understand, plan and execute very carefully any planned furlough, or run the risk of creating greater financial liability under wage and hour violations than they save by the underlying furlough.

Mandatory Leave

Employee leave, and when and how it can be mandated, is governed by state law and company policies. As such, companies need to analyze all applicable laws and their own policies before mandating leave. Even before reviewing these laws, companies need to review their leave policies, specifically determining whether they have reserved ability to require or prohibit the use of leave based on business needs. Now is the time to revise and update policies if they do not allow management to require the use of mandatory leave during work stoppages, such as government shutdowns.

Generally speaking, the FLSA allows employers to make mandatory deductions from an exempt employee's paid time off or other leave banks for absences, either full-day or partial-day, during a shutdown, furlough or reduced-hours plan, without affecting FLSA-exempt status, as long as employees receive their entire weekly salary.

Importantly, requiring the use of leave during furloughs or shutdowns may violate state or local laws, where leave is included in the definition of "wage" under state wage statutes so companies should ensure any changes to policies are made in conjunction with a thorough legal review.

Benefits Implications

Employers should examine the terms of their group health plan to determine whether any of the above actions, including a reduction in hours due to furloughs or terminations, triggers a loss of coverage and entitlement to continued health care coverage under COBRA. In addition, furloughed employees, either for full or partial weeks, may be eligible for state unemployment benefits. The eligibility for unemployment benefits is dictated by state law, but many states provide benefits for a reduction in hours or temporary layoff, even where employment is not terminated. Therefore, before implementing any cost savings measures, a review of applicable state laws for eligibility requirements, waiting periods and benefits calculations is advisable.

Communicate with employees

A plan for timely and effective communications with employees on these matters is equally as important for companies to communicate with customers. While many employees have now experienced a government shutdown in the last five years, the reality of yet another shutdown poses meaningful challenges to employee morale and productivity.

Once a company has fully surveyed its contract portfolio, obtained information from relevant contracting officers and analyzed its employment policies, employers should timely communicate plans with employees. If a clear plan is not knowable given the uncertainty of the length of a shutdown and what actions the government will take, acknowledging this reality and setting a normal cadence for updates is a best practice. Moreover, executive leadership should ensure line-managers are armed with consistent and accurate information, so they can monitor communications and correct misinformation.

Administrative actions

As the different actions are being taken above, and any others that are determined to be necessary, it is critical that companies document their actions and communications and ensure that all costs (including labor hours and expenses) are properly coded to ensure that all reasonable and available costs associated with a government shutdown can be recovered.

• Identify a key group (or groups) of personnel across the organization that should work in coordination to obtain the information above and update other internal and external stakeholders as decisions are made. Often time, these Shutdown Teams, consistent of contract, finance, human resources and legal personnel.
• Create (or reactivate) charge costs specifically related to shutdown activities, including codes for all labor hours expended, including ramp-up and ramp-down costs, and other similar expenses.
• Formalize all communications with the contracting officers, including documenting any instructions, approvals or guidance provided regarding the operations of a contract during the shutdown (e.g., availability of personnel, facility access, invoicing requirements etc.).
• Track all performance schedule changes, including increased or decreased hours, including detailed records of personnel.
• Track all cost-saving actions taken, including furloughs or other work stoppages.
• Regulatory oversight may slow down or cease during a shutdown. Different agencies, including the Department of Labor, the Equal Employment Opportunity Commission, and different Office of Inspection General offices and even the federal courts, will have to change their staffing plans and may eventually furlough employees or close for certain types of investigations, audits or litigations. While these changes may occur, do not assume that they will change deadlines or other obligations already requested, published or ordered. When in doubt, submit proposals, responses or other documents according to originally planned timelines, unless expressly approved in writing by a government official with authority to change the deadline.
• Prepare for and anticipate a shift in timeline for contract awards. All appropriation of funds will cease during a government shutdown, meaning that both new contracts and option extensions will not be issued (or if they are, absent an availability of funds provision similar to FAR 52.232-18).

Next Steps

The current reprieve that the continue resolution gives the federal government is an opportunity for contractors and award recipients to sure up their shutdown contingency plan. US Government Contractors should monitor the situation, engage with outside consultants and experts as needed to plan for and execute any of the above actions as necessary to be in the best position by November 17, 2023.

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