As of this writing, and in the absence of a continuing resolution being enacted by Congress, there will be a shutdown of most government operations on October 1, 2021. It is not clear whether the House and the Senate will be able to pass a continuing resolution before that date. PilieroMazza summarizes below steps government contractors should consider to prepare for and mitigate damages arising from a government shutdown. We also identify important labor and employment issues that contractors should keep in mind.
Recommendations for Mitigating Negative Impacts
1. Understand the likely consequences of a shutdown.
You should anticipate the following consequences of a shutdown of federal government facilities.
- Government facilities will be closed.
- No new contracts or modifications will be issued and there will be delays in the acquisition process for procurements.
- Non-essential government employees will be furloughed and unavailable.
- Invoices will not be paid during the shutdown and may be delayed after the shutdown is over.
- Statutory deadlines for filing claims and bid protests are not automatically extended.
2. Determine whether the shutdown is likely to impact your contracts.
Certain contracts can continue even in the face of a government shutdown. For instance, contracts funded by appropriations that do not expire at the end of the fiscal year (such as multiple-year or indefinite appropriations), including certain kinds of revolving fund operations. Additionally, contracts that have sufficient funding and period of performance, like fixed-price contracts that do not require access to federal personnel or facilities can continue to be performed, though payment of invoices may be delayed. It may be possible for contractor personnel to access the worksite and continue to work, even in the event of a shutdown.
That said, most other contracts will be impacted, including cost-type and IDIQ contracts since the government will not be able to incur new costs or make new orders and fixed-price contracts that require access to closed government facilities or consultation with furloughed government personnel.
3. Communicating is key.
- Contracting Officers
No matter what type of contract you have, maintain close contact with the contracting officer in advance for instructions. It is important to remember that once the shutdown commences, the contracting officer may be furloughed and unavailable. The Federal Acquisition Regulation (FAR) does not specify what actions to take when there is a shutdown, so contracting officers have some discretion to handle contracts in different ways. Contractors should be prepared to receive different instructions from contract to contract. If FAR § 52.242-15, Stop-Work Order, is in your contract, the contracting officer may issue a stop-work order, which entitles you to an equitable adjustment for increased costs as a result of the work stoppage. If the contracting officer instructs you to stop work or if performance is impossible but the contracting officer gives unclear instructions, you should not perform work on the contract as you might not be reimbursed for work performed during the shutdown. It would be very unusual for a contracting officer to terminate a contract for convenience in response to a shutdown. If that occurs, reimbursement is recoverable under the applicable termination clause.
Stay in contact with subcontractors, review your agreements as necessary to understand the “stop work” terms, and give subcontractors clear instructions on how to proceed (or not) on contract performance during the shutdown. If the contracting officer ordered a work stoppage, make sure the subcontractor is not performing on the contract; otherwise, you will owe the subcontractor for amounts you will not be able to recover from the government.
4. Mitigate costs.
In determining whether to grant equitable adjustments for increased costs resulting from the shutdown, judges will analyze if contractors took steps to mitigate losses. You can mitigate costs by developing an alternative work plan for employees, such as reassigning them to other projects that must be performed during the shutdown, encouraging them to take vacation time, or having them work on non-billable matters such as training. As a last resort, you may need to furlough or lay off employees.
5. Document all costs and expenses.
Document all costs incurred in connection with the shutdown (including wind-down, ramp-up, or acceleration of work, labor costs, and attorneys’ fees), as well as all communications with contracting officers, employees, teaming partners, and vendors, and all actions taken related to the shutdown. Generally, expenses incurred as a result of a shutdown should be recoverable, with the exception of back pay and consequential damages which are not generally recoverable. Both the Stop Work Order and the Changes FAR clauses, to the extent incorporated into your contract, may provide a vehicle for recovering your costs. However, the ability to recover will be affected by advance preparation and documentation of your costs.
6. Address outstanding issues before the shutdown.
To the extent possible, take steps now to settle outstanding issues with the customer, such as approval of deliverables, payment of invoices, and issuance of modifications. Do the same after the shutdown as the government will likely delay paying any invoices.
Labor and Employment Considerations
In addition to the steps outlined above, contractors should take heed of a number of important labor and employment issues implicated by a shutdown.
1. Don’t risk exemptions under the Fair Labor Standards Act (FLSA).
Employers should exercise caution so as not to lower the risk of losing an employee’s exempt status that may trigger liability for overtime hours the employee worked prospectively and retrospectively. An exempt, salaried employee is entitled to receive his or her full salary for any week in which the employee performs any work. Therefore, if the employee works on Monday and the government shuts down on Tuesday, the employee will be entitled to his or her salary for the entire workweek.
However, an employer can ask employees to take accrued paid time off for any partial week worked. Employers do not have to pay employees for full work weeks not worked, but it is critical that employers make sure that employees conduct no work at all during that week, not even so much as checking an email. Employers may want to consider instructing non-working employees not to do any work until instructed to do so, securing all remote devices, and restricting access to work applications.
2. Beware of state wage and hour laws.
Be sure to check state wage and hour laws and regulations to ensure compliance. Many state laws regulate wages and benefits that the FLSA does not regulate. Steep penalties are imposed for non-compliance, for example, with respect to requirements for how frequently an employee must be paid. When the federal government shuts down, many employers struggle to make payroll, which often runs afoul of state law. Wage and hour issues generally do not affect employers now, but tend to surface down the road after termination.
3. To furlough or layoff?
The term ‘furlough’ is generally associated with government employees but has more recently been used by private industry. A furlough is generally expected to be a temporary disruption while a layoff is generally more definite. In either case, it is likely an employee is eligible for unemployment benefits. However, in a furlough situation, the employer still maintains fringe benefit programs, like health insurance, and collects or absorbs the employee portion of any premiums. With a layoff, the employee is effectively terminated, however temporarily, and may be eligible for 401(k) benefits and COBRA.
4. Avoid discrimination claims.
When choosing whom to layoff or furlough, approach the decision as you would any layoff. Before instituting the employment action, have a sound and well-documented process for selecting those who will be subject to the furlough or layoff. Make sure you analyze the results of your decision to determine and whether the analysis indicates a disparate impact or discriminatory intent.
5. Playing defense against False Claims Act and /whistleblower statutes.
False Claims Act and whistleblower allegations are common where there are complex staffing and billing situations. Be mindful of the impact that workforce decisions will have on your ability to bill the government for certain workforce costs. You should also carefully review payments to the government and reconcile any discrepancies.
6. Security clearance processing.
Security clearances will usually not be processed during a shutdown. This is important for contract administration and staffing concerns. Advance staff management and planning will be critical to many employers who will have to ramp back up when this is all the shutdown is over.
7. What to do when you can’t E-Verify?
The E-Verify system is usually offline during a shutdown. However, all new hires continue to be subject to I-9 employment verification by employers and must be processed through E-Verify as soon as possible.
8. Communicating with employees.
Clear communication with employees is critical and avoids many employer-employee disputes. Keep in mind that once the government starts running again, employers are expected to have those employees back to work and performing immediately. Consider how you will notify employees of their work status.
While a government shutdown has the potential to cause significant disruptions to government contractors, most contractors should be able to manage the shutdown provided steps to mitigate risks are taken.
PilieroMazza’s attorneys are here to assist you before, during, and after the government shutdown. Please contact Jon Williams, Nichole Atallah, Patrick Rothwell, Kevin Barnett, or a member of our Government Contracts or Labor & Employment practice groups.