Defense Department Signals Way Forward for Contractor Paid Leave Reimbursement Under CARES Act Section 3610

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Introduction

At a June 10, 2020 hearing of the House Armed Services Committee, Under Secretary of Defense for Acquisition and Sustainment Ellen Lord and her staff outlined the Defense Department's plan for addressing contractor requests for reimbursement for leave paid employees and subcontractors during the pandemic, under Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act.

In her testimony, Lord reported that the Defense Department expects billions of dollars in contractor requests for reimbursement under Section 3610. Although implementation of Section 3610 has been very uneven across the government, at the June 10 hearing the Defense Department signaled a clearer way forward for Section 3610 reimbursement: a coordinated request from the Defense Department for billions of dollars in additional appropriations for contractor costs caused by the COVID-19 pandemic, and possible "global settlements" with some – but not necessarily all – contractors affected by the pandemic.

Background on Section 3610

Section 3610 of the CARES Act allows agencies to reimburse contractors for certain costs incurred in allowing employees and subcontractors paid leave during the pandemic. In passing the CARES Act, Congress sought to provide a fiscal stimulus (both to individuals and to businesses) and to protect public health. Section 3610 of the CARES Act – the only provision focused on contractors – addressed the pressures of the pandemic by allowing agencies to reimburse contractors for leave paid to employees under state and local stay-at-home orders. While other long-established contractual provisions provided contractors some shelter from risk in the pandemic,¹ Section 3610 focused on contractors' costs due to employees who could not work during the COVID-19 pandemic.

Section 3610& allows agencies to use any available appropriations to reimburse contractors for paid leave, specifically leave afforded to "protect the life and safety of Government and contractor personnel" to preserve the contractor base by keeping "employees or subcontractors in a ready state."

Agencies' Implementing Guidance

A number of agencies issued guidance on Section 3610 in the months following passage of the CARES Act.² The agency guidance is detailed in a series of updates published by members of our group,³ including a June 10, 2020 piece in the Government Contractor which reviewed the various agencies' guidance in detail.⁴ The guidance varied materially from agency to agency, and many observers hoped that the White House, through the Office of Management and Budget (OMB) or otherwise, would issue governmentwide guidance to reconcile the agencies' conflicting guidance.

But when OMB issued its guidance for implementing Section 3610 on April 17, 2020,⁵ the OMB guidance both deferred to and sometimes conflicted with the agencies' guidance. OMB, for example, would have reimbursement begin on March 27, 2020, the day the CARES Act became law, rather than when the health emergency was declared on January 31, 2020 – the starting date used by many agencies. This specific problem would be corrected by H.R. 6800, the HEROES Act, which is the latest round of COVID-19 relief legislation now pending before the Senate.⁶ Section 70402 of the HEROES Act, as passed by the House, would require OMB to issue corrected guidance pushing the effective date for relief back to January 31, 2020, the date the COVID-19 emergency was declared by Secretary of Health and Human Services Azar.⁷ But broader problems with the OMB guidance – including its failure to set a clear governmentwide process for reimbursement – would not be resolved by the HEROES Act.

Draft Defense Department Process Guidance

While the HEROES Act would not resolve all the problems left by the OMB guidance, draft process guidance published by the Defense Department would facilitate contractor reimbursement under Section 3610.⁸ The draft process guidance is described in detail in the June 10 Government Contractor piece published by members of our group.⁹ Among other things, the Defense Department's draft guidance would:

• Allow a contractor to consolidate its requests for reimbursement across multiple contracts or even across an entire corporation.
• Allow the Defense Department to review a contractor's request for reimbursement at any level of the Department, presumably to allow the Defense Department to coordinate its policies and practices for Section 3610 reimbursement, and to allow the Department to manage the funds to be rerouted to Section 3610 reimbursement.
• Grant contracting officers "sole discretion" to decide on reimbursement requests, although other guidance earlier issued by the Air Force stated that funds spent on reimbursing contractors must be coordinated by contracting officials with the affected Air Force programs.¹⁰

This draft guidance is being reviewed and revised by the Defense Department, based upon comments submitted by industry and others.¹¹ In the meantime, contractors need more direction in how to prepare reimbursement requests, as the June 10 hearing before the House Armed Services Committee made clear.

House Armed Services Committee Hearing – June 10

While the June 10 hearing¹² before the House Armed Services Committee was called to discuss a broad range of COVID-19 issues across the Defense Department's industrial base, and Under Secretary of Defense Ellen Lord's prepared testimony touched on Section 3610 only in passing, the follow-up questions from members of the committee showed how important Section 3610 reimbursement is to Congress – and to the Defense Department.

Responding to committee members' demands for more specific guidance on Section 3610, Under Secretary of Defense Lord and her staff committed to issuing final guidance within 30 days. She reported that Secretary of Defense Mark Esper spoke on June 10 with major prime contractors, to discuss contractors' emerging "COVID-related" costs. Lord reported as well that the Defense Department has submitted estimates of those costs to the Office of Management and Budget.

One of the leading Defense Department prime contractors, Lord noted, projected that it would seek reimbursement of roughly $1.5 billion for employee and subcontractor paid leave under Section 3610, and would seek in excess of $1 billion in other costs caused by the pandemic. Lord estimated that COVID-related contractor costs would total in excess of $10 billion. She said that the Defense Department's Chief Management Officer (CMO) Lisa Hershman had undertaken a careful review of funding available for COVID-related costs, but Lord cautioned that diverting funds to COVID-19 relief could undercut the Defense Department's modernization and readiness.

Members of the House Armed Services Committee pressed for more detailed information on the total projected COVID-related costs, so that they can coordinate with members of the House Committee on Appropriations to seek additional funding, possibly in another round of COVID-19 relief legislation in July.

Committee members asked for improvements in the Section 3610 reimbursement process. Lord and her staff indicated that contractors generally have not yet submitted claims for Section 3610 relief, because of the still-unfolding situation. Lord asked Kim Herrington, the Defense Department's Acting Principal Director, Defense Pricing & Contracting (DPC), to speak to the reimbursement process, and he voiced support for "global settlements" with contractors, which he said would "make sense in a lot of cases."

Next Steps

As the prior updates from our group explained, contractors should carefully prepare and document any requests for reimbursement under Section 3610. While the Defense Department's guidance for Section 3610 reimbursement may be updated in the next month, the existing guidance from the Defense Department and other agencies provides a useful framework for requesting reimbursement. Agencies will be able to take a more liberal approach to Section 3610 reimbursement if Congress appropriates funds for the Defense Department and other agencies for contractor reimbursement; much may depend, therefore, on whether Congress passes another COVID-19 relief package in the coming month.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.