Reducing the Negative Impacts of a Government Shutdown for Federal Contractors

Once again, the specter of a government shutdown looms over the federal contracting community. The federal government is set to run out of funding on September 30 and tensions in the House are making it ever more likely that a shutdown will occur. Below are key steps your business should take to mitigate the possible negative impact of a government shutdown, along with shutdown-related labor and employment considerations for government contractors.

 A. Mitigating Damages

1. Understand the likely consequences of a shutdown.
   You should anticipate the following consequences of a shutdown for federal government facilities.

1. 1. Government facilities will be closed.
   2. No new contracts or modifications will be issued, and there will be delays in the acquisition process for procurements.
   3. Non-essential government employees will be furloughed and unavailable.
   4. Invoices will not be paid during a shutdown and may be delayed after a shutdown is over.
   5. Statutory deadlines for filing claims and bid protests will not be automatically extended.
2. Determine whether a 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, may continue. 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 contracts; indefinite delivery, indefinite quantity 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. Communicate with your contracting officer and subcontractors.
   1. 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 a 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 a 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.

   2. Subcontractors
      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 a 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 a shutdown, judges analyze 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 a 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 a shutdown, including wind-down, ramp-up, or acceleration of work, labor costs, and attorneys’ fees. You should also document all communications with contracting officers, employees, teaming partners, and vendors, as well as all shutdown-related actions. 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 a 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 a shutdown as the government will likely delay paying any invoices.

B. Managing Your Workforce
In addition to the steps outlined above, contractors should move to address 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, which 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 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, 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 checking 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. Decide whether to furlough or lay off.
   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 Consolidated Omnibus Budget Reconciliation Act coverage.

4. Avoid discrimination claims.
   When choosing whom to lay off 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 and determine whether the analysis indicates a disparate impact or discriminatory intent.

5. Play defense against False Claims Act and / or 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. Prepare for security clearance processing issues.
   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 a shutdown is over.

7. Process any employment verifications.
   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. Communicate 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.

C. What’s Next?
While a government shutdown has the potential to cause significant disruptions for government contractors, most contractors should be able to manage a shutdown, provided steps to mitigate risks are taken.

PilieroMazza’s attorneys are here to assist you before, during, and after a government shutdown. Please contact Jon Williams, Nichole Atallah, and Patrick Rothwell, or another member of our Government Contracts and Labor & Employment practice groups if you have any questions or need assistance.

____________________

Looking for practical insights on gaining a competitive advantage through a deeper understanding of the government’s compliance requirements? Check out PilieroMazza’s podcasts “GovCon Live!” and  “Clocking in with PilieroMazza.”