Key Considerations for Government Contractors Facing a Government Shutdown

December 14, 2018

By Jacqueline K. Unger and Nichole D. Atallah

A government shutdown is looming once again. Congress has already passed five of the twelve FY 2019 funding bills, which fund 70% of the government through September 2019, through two vehicles. H.R. 6157 includes funding for the Departments of Defense, Labor, Health and Human Services, Education, and related agencies. H.R. 5895 provides funding for the Departments of Energy, the Interior (Bureau of Reclamation only), Veterans Affairs, and related and independent agencies, as well as the Army Corps of Engineers civil works projects, and the legislative branch. However, the remaining departments and agencies have yet to be funded for FY 2019, leading to a potential partial government shutdown as of December 21st if another Continuing Resolution or funding measures are not passed.
 
In light of the possible shutdown, we address the steps that contractors can, and should, take to be prepared and mitigate damages, and we identify important labor and employment issues that contractors should keep in mind. The key takeaway is that negative impacts can be mitigated by being proactive and communicating with your contracting officers, employees, and teaming partners. 

Recommendations for Mitigating Negative Impacts

1) Understand the likely consequences of a shutdown 
At the very least, you should anticipate the following consequences of a shutdown of the affected Federal departments and agencies:

  • 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 shutdown. These include, 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 which have sufficient funding and period of performance (such as fixed-price contracts) and which 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. 

Most other contracts will be impacted, such as cost-type and IDIQ contracts since the government will not be able to incur new costs or make new orders, or fixed-price contracts that require access to closed government facilities or consultation with furloughed government personnel. 
 
3) Follow the contracting officer’s instructions
No matter what type of contract you have, you should reach out to your contracting officer in advance for instructions. Once the shutdown has commenced, the contracting officer may be furloughed and may not be available for the period of the shutdown. 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, and 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 will entitle you to an equitable adjustment for increased costs as a result of the work stoppage. If the contracting officer has instructed you to stop work or if performance is impossible but the contracting officer has given unclear instructions, you should not perform work on the contract as you might not be reimbursed for work performed during the Government shutdown. Therefore, it is critical to stay in close contact with your contracting officers and document those discussions to work out a “stop work” plan in advance, to the extent possible.

Only in a highly unusual case would a contracting officer terminate a contract for convenience in response to a shutdown, and in that case, reimbursement is recoverable under the applicable termination clause.
 
4) Keep the lines of communication open with subcontractors
Make sure to 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 has ordered a work stoppage, you should 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.
 
5) Mitigate costs
In determining whether to grant equitable adjustments for increased costs as a result of a shutdown, judges have analyzed whether 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 layoff employees.  
 
6) Document all costs and expenses
Make sure to document all costs incurred in connection with the shutdown (including wind-down, ramp-up, or acceleration of work, labor costs, and attorneys’ fees), all communications with contracting officers, employees, teaming partners, and vendors, and all actions you have taken in connection with 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 contracts, may provide a vehicle for recovering your costs. However, your ability to recover will be affected by your advance preparation and documentation of your costs.
 
7) Address outstanding issues before the shutdown
You should take steps to settle outstanding issues with the customer, such as approval of deliverables, payment of invoices, and issuance of modifications, to the extent possible. Also, afterwards, 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 risk 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 work week.
 
However, a company 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 companies 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 and impose steep penalties 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 bite 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 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 whether the analysis indicates a disparate impact or discriminatory intent.
 
5) Playing defense against False Claims Act/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 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) Communication is key  
Clear communication with employees is critical and avoids many employer-employee disputes. Keep in mind that once the government starts running again, the company will be expected to have those employees back to work and performing immediately. Give some thought to how you will notify employees of their work status. 

If you have any questions on how best to prepare for and respond to a government shutdown, contact Nichole Atallah at natallah@pilieromazza.com or Jackie Unger at junger@pilieromazza.com and they can be reached at 202-857-1000. 

About the Authors: About the Author: Nichole Atallah is a partner with PilieroMazza and heads the Labor & Employment Law Group. She may be reached at natallah@pilieromazza.com. Jackie Unger is an associate with PilieroMazza in the Government Contracts Group. She may be reached at junger@pilieromazza.com.
 
Please fill following information to download presentation