News
January 22, 2018

How Government Contractors Can Protect Themselves During a Government Shutdown

Advisory

At 12:01 a.m. on January 20, the Federal government began to shut down all non-essential operations, as Congress failed to pass a spending bill appropriating funding for government operations. Until Congress passes such a bill and the President signs it, federal employees, contractors, and grantees must operate in a very uncertain environment, as various federal laws restrict or prohibit government action beyond the appropriations authority that has just run out. The politics of a deal resolving the shutdown are unclear. Congress is discussing short-term funding extensions to resolve the shutdown in the short term, but these discussions do not resolve the underlying disagreements, and even if they succeed (which is uncertain), they may only postpone re-imposition of shutdown restrictions and prohibitions in the coming weeks.1

This Advisory is meant to guide federal contractors as they navigate their businesses through this uncertain period. Contractors should also monitor each of their customer agencies' websites for shutdown guidance. Many agencies, including the Department of Defense (DoD), Department of Homeland Security (DHS), State Department, and Department of Energy (DoE), and others issued such guidance on January 18 and 19. 2 Contractors should be sure to stay apprised of developments with their specific customers, as different agencies and program offices may take their own approach to the shutdown.

The Advisory proceeds in three parts. The first addresses when, if at all, contractors must stop performance during the shutdown. The second discusses how contractors may be reimbursed for work performed and costs incurred during the shutdown. The third addresses how contractors can save money during the shutdown without running afoul of applicable labor laws.

I. What Activities Can Continue During The Shutdown?

The most immediate question for a contractor to consider during a shutdown is whether to stop work or continue performing. A government shutdown is not a self-executing stop work order; nothing about the mere fact of the government shutdown impacts a company's contractual obligations to perform as promised or the government's obligation to pay for that performance. DoD Shutdown Guidance emphasizes this point: "The expiration of an appropriation does not require the termination of contracts (or issuance or stop work orders) funded by that appropriation unless a new obligation of funds is required under the contract and the contract is not required to support an excepted activity." 3 What matters is whether your work requires any new appropriation or authorization of spending, and whether you will have access to critical government personnel, facilities, and resources you need to carry your work forward.

Of course, regardless of the status of any appropriated funds, if your contracting officer issues a stop work order, then stop work and comply with the order (discussed further below). If you do not receive a stop work order, then the analysis becomes more nuanced, and involves assessing (a) whether your contract is deemed required to support "exempt" government activities and (b) how your contract is funded.

A. Is your contract required to support activities exempt from the Anti-Deficiency Act?

Many of the legal complications of a government shutdown derive from the Anti-Deficiency Act, which codifies Congress's so-called "power of the purse" by making it a criminal offense for any individual to obligate the United States to spend funds that Congress has not previously appropriated.4 The Anti-Deficiency Act permits four narrow types of activities without appropriations:

  • Obligations not impacted by annual appropriations, for example, multi-year appropriations, indefinite ("no-year") appropriations, or obligations authorized outside of annual appropriations bills. The most commonly cited indefinite appropriation is Social Security.
  • Obligations authorized by statutes that expressly permit obligations in advance of appropriations. For example, the Department of Defense and the Department of Homeland Security have statutory authority under the Civil War-era "Feed and Forage Act" to contract for necessary clothing, subsistence, forage, fuel, quarters, transportation, and medical or hospital supplies without an appropriation.5
  • Activities authorized by "necessary implication" based on the duties of a given agency. Such activities include, for example, writing and distributing Social Security checks, contracting for emergency services, and ensuring an orderly closing of government functions impacted by the shutdown.
  • Obligations necessary to discharge the constitutional duties of the executive and legislative branch, including certain foreign relations and national security functions.6

Besides prohibiting over-obligation of available funds, the Anti-Deficiency Act also prohibits accepting personal services without compensation. Relevant to a government shutdown, this provision contains a narrow exception permitting the government to employ personal services exceeding those authorized by law "for emergencies involving the safety of human life or the protection of property."7

Applying these exceptions to the Anti-Deficiency Act, the DoD Shutdown Guidance provides detailed information about which DoD activities are "excepted" and can therefore continue during the shutdown.8 If DoD deems your contract necessary to support an excepted activity, your contracting officer may expect you to continue performing as usual regardless of funding availability. Moreover, as indicated in the DoD Shutdown Guidance, contractors supporting these types of exempted programs may even receive new contract awards during the shutdown: "The Department may continue to enter into new contracts, or place task orders under existing contracts, to obtain supplies and services necessary to carry out or support excepted activities even though there are no available appropriations."9

Other agencies have likewise indicated that they may continue to issue new awards in limited circumstances.10

B. If your work is subject to the Anti-Deficiency Act, how is your contract funded?

If you do not receive a stop work order and do not perform a contract required to support an excepted activity, then the principal question to consider is how your contract is funded. If your contract is fully funded, then continue to perform unless and until your contracting officer directs otherwise. This is also clearly stated in the DoD Guidance: "Contractors performing under a fully funded contract (or contract option) that was awarded prior to the expiration of appropriations may continue to provide contract services, whether in support of excepted activities or not."11 This principle applies to contracts with other agencies as well.12 The Department of Energy's shutdown guidance, in particular, emphasizes that most of its appropriations are multi-year or no-year, and therefore it expects, "in the immediate future," its "employees to continue to report for work as scheduled" and to "continue performance of contracts and financial assistance instruments in accordance with their terms, including any provisions about limitations of funding."13

As a corollary to fully-funded contracts, some contracts do not depend on appropriated funds at all, and are therefore not obviously threatened by a gap in federal appropriations. For example, contracts with Non-Appropriated Fund Entities (NAFEs) may be funded with the revenue those entities generate on their own. Likewise, contracts that involve, for example, selling surplus government property, may not be directly impacted by a lack of agency funding, as they do not involve payment by the government, but rather sharing of profits on sales of government surplus with the government. However, if such contracts require deliveries from federal sources, or other federal approval or processing, the shutdown may prevent work from going forward.

The real concern during a shutdown is for contracts that are incrementally funded and subject to the Availability of Funds, Limitation of Funds, or Limitation of Cost clauses.14 While each clause is different, they all generally provide that the government has no obligation to pay for work performed or costs incurred unless and until funds are properly allocated and obligated to the contract. They also generally require contractors to provide notice at various times before the contract exceeds a certain value, and failure to provide such notice can further limit the government's liability. If a contract's funding runs out during the shutdown, or the shutdown prevents a contractor from providing the contracting officer with the required notice, the contractor may face the threat of performing "at risk", meaning the government will have no legal obligation to pay for the work performed or costs incurred. Managing this eventuality is addressed in Part II, below.

C. Impacts on Litigation and Administrative Deadlines

Contractors and their counsel should not assume that any deadline—whether statutory, contractual, court-imposed, administrative, or otherwise—is waived or tolled due to the shutdown. Specifically related to ongoing litigation or court-related activity, the DoD Guidance makes clear that DoD will continue to support "imminent or ongoing legal action."15 Such actions will, of course, be limited by the status of the courts and administrative tribunals, each of which may take a different approach to the shutdown and should be monitored for public announcements.

The Federal Judiciary, including the Court of Federal Claims, has already indicated that it will continue to operate as normal through at least February 9.16 The Government Accountability Office (GAO) has announced that it will treat shutdown days in accordance with its holiday rules,  extending all filing deadlines that fall during the shutdown until the next day GAO is open.17 GAO adopted this approach during the 2013 shutdown, extending such deadlines by 16 days. The Boards of Contract Appeals have not yet issued specific guidance for the 2018 shutdown. During the 2013 shutdown, the Civilian Board of Contract Appeals (CBCA) stayed open to accept filings and left its judges free to modify schedules. The CBCA's notice from that period expressly stated: "Any statutory limitations on the time within which a filing may be made will not be waived or tolled during this period," and the safe assumption is that the same rule will apply this time.18

As a practical matter, GAO's approach resulted in a flood of new protest filings when GAO opened after the shutdown, resulting in 280 active protests proceeding in tandem. Nevertheless, GAO reported that 241 of those protests were resolved within 100 days of filing, and the remaining 39 were resolved within 100 calendar days for the period that the government was funded (i.e., 100 days plus the 16 day extension).19 Contractors and protest counsel should be aware that GAO's resources may be strained in responding to protests filed during the shutdown.

In all events, contractors should consult the guidance of the specific forum and, absent clear guidance to the contrary, assume that all deadlines continue to apply.

D. Other Shutdown Related Complications

The shutdown creates many practical obstacles that may be just as daunting or limiting as those imposed by the statutes discussed above. Just because a contract is fully funded or does not depend on appropriated funds does not mean performance can or will continue as usual. The shutdown will ensure that many federal facilities are closed and employees furloughed. This can cause complications if, for example, no government personnel is available to accept contract deliverables. Furthermore, government furloughs can lead to a fully funded services contractor coming to work, but having no government personnel to serve. If inspection or approval from federal personnel is required for work to continue, the shutdown does not suspend those requirements, even if work must stop pending the resumption of work by federal inspectors. DHS Shutdown Guidance suggests contractors with fully funded contracts may find that their performance is nevertheless suspended based on an agency determination that it cannot provide adequate supervision during the shutdown.20

Due to the Anti-Deficiency Act's restriction on accepting uncompensated personal labor, many federal employees may not even remotely check their e-mail accounts while furloughed. Contractors should not expect or assume that any communication with a furloughed federal employee has been received, read, or acted upon. In sum, if your contract performance depends on gaining access to a certain facility or participation from a federal employee, you may encounter significant problems, regardless of whether your funding is secure.

The key to managing all of these scenarios is engaging with your contracting officer as much as possible. Contractors unsure whether they qualify as required to support government activities exempt from the Anti-Deficiency Act should seek clarity from the contracting officer immediately. If the contracting officer is not available, contractors must be wary of seeking affirmative guidance from others, as only the cognizant contracting officer has authority to bind the government. However, contractors may also consult the Office of Management & Budget's guidance for shutdown furloughs21 and your customer agency's shutdown contingency plan, which may state in advance what services will be open and which employees fall into the Anti-Deficiency Act's exceptions.22 As discussed in the following section, communication with the contracting officer is also critical for contractors concerned about managing performance and costs during a stop work order or after a contract's funding has lapsed.

II. Reimbursement For Work Performed During The Shutdown

The strict rule of the Anti-Deficiency Act generally precludes government liability during a shutdown. History shows that Congress often mitigates the harshness of this rule by passing laws after the fact to provide retroactive payment to furloughed federal employees and military and civilian personnel who work through the shutdown.23 Contractors should not expect the same courtesy. This should not necessarily be surprising, as the ability to quickly shed liabilities is, after all, a principal aspect of outsourcing and the Termination for Convenience clause.

As discussed above, for contracts that are fully funded or required to support exempt activities, the shutdown itself does not prevent reimbursement for work performed during the shutdown. The practical reality of the shutdown may, however, result in increased costs or schedule delays, all of which should be documented thoroughly, discussed with the cognizant contracting officer, and, depending on the circumstances, submitted in the form of a claim or request for equitable adjustment.

For contracts (A) subject to a stop work order or (B) close to exceeding the funding obligated to them, obtaining reimbursement is more complicated. Each scenario is addressed in turn below.

A. Recovering Costs Incurred Under A Stop Work Order

Once a stop work order is issued, the terms of the Stop Work Order clause apply. For most contracts, that will be the standard clause at FAR 52.242-15, but contractors should be careful to check the specific terms of their contracts. As relevant here, the clause addresses two different obligations—the contractor's obligation to stop work and minimize costs, and the government's obligation to provide for equitable adjustment once the order is lifted.

Paragraph (a) of the standard clause provides that: "Upon receipt of the order, the Contractor shall immediately comply with its terms and take all reasonable steps to minimize incurrence of costs allocable to the work covered by the order during the period of work stoppage." Minimizing incurrence of costs can be difficult where all of a contractor's work may be stopped at once. If a portion of a single contract is subject to a stop work order, it may be feasible to shift personnel and resources to other projects. But, when all of a businesses' contracts are subject to a stop work order, there is little ability to shift costs within the company.

This may place contractors in the awkward situation of choosing between shutting an operation down entirely or maintaining full capacity. Shutting down entirely, perhaps even letting employees go, may be the only way to truly "minimize incurrence of cost allocable to the work," but may also cause serious performance problems once the stop work order is lifted. On the other hand, maintaining full capacity may make resuming work easy, but creates some risk that the agency may dispute whether the contractor sufficiently complied with the duty to minimize costs. These determinations will be made at the discretion of the contracting officer, and a contractor dissatisfied with the determination may file a claim, and assert that it made the most efficient decision under the circumstances. Unfortunately, there is little case law from the Court of Federal Claim and Board of Contract Appeals to shed light on how these disputes might be handled on appeal.

As with most things, the best way to approach this issue is to document everything thoroughly and maintain communication with the contracting officer. Of course, given the practical realities of a shutdown, the contracting officer simply may not be accessible.

Paragraph (b) of the standard clause addresses the government's obligation to provide an equitable adjustment:

The Contracting Officer shall make an equitable adjustment in the delivery schedule or contract price, or both, and the contract shall be modified, in writing, accordingly if:

  1. the stop work order results in an increase in the time required for, or in the Contractor's cost properly allocable to, the performance of any part of this contract; and
  2. the Contractor asserts its right to the adjustment within 30 days after the end of the period of work stoppage; provided, that, if the Contracting Officer decides the facts justify the action, the Contracting Officer may receive and act upon a proposal submitted at any time before final payment under this contract.

Note that, while the language above applies directly to fixed price contracts, there is alternative language for cost reimbursement contracts that provides for an equitable adjustment to "the delivery schedule, the estimated cost, the fee, or a combination thereof."24 Again, in order to obtain any such adjustment in delivery schedule or price, it is important that contractors document all costs incurred, delays suffered, and actions taken when the stop work order is in place.

B. Working "At Risk"

Thus, for contracts subject to a Limitation of Funds or similar provision, the government has no authority to pay for work performed or costs incurred beyond the limit already obligated to that contract. Any work performed or costs incurred after that point are performed "at risk," and the government has no obligation to retroactively pay for it. The government is not prohibited from reimbursing contractors for such work, but they are not required to do so, which gives the government discretion and leverage. Unlike working under a stop work order, there is no contractual right to an equitable adjustment resulting from insufficient government funding.

As a general rule, contractors should seek to avoid performing work at risk. Unfortunately, it is not always avoidable, particularly during a government shutdown. Contractors may find themselves in the same predicament as those receiving a stop work order: is it better to (a) shut down operations entirely and perhaps let personnel go, even though that will make resuming performance difficult if not impossible, or (b) maintain operations and take the risk that the government will refuse to pay for any work performed or costs incurred?

If you must perform work at risk, be sure to document everything, and begin working with your contracting officer and counsel as soon as possible to determine whether the government will pay for the work performed. In a scenario where shutting down all operations would be significantly more expensive and disruptive than continuing performance, a contracting officer may be willing to commit to reimbursing work performed at risk, and that commitment may be binding. Any such commitment should be reduced to writing if at all possible.

Contractors that do perform work at risk during the shutdown should consider submitting an invoice for work performed during the shutdown along with a request for a letter modification whereby the contracting officer acknowledges that the invoice covers work performed during the shutdown and waives any government claim that the contractor is not entitled to payment for that work. Depending on the circumstances, a contractor may also need to submit a formal request for equitable adjustment.

III. Cost Savings and Employment Law Issues

Government contractors will consider cost-savings measures with respect to their employees to mitigate the potential loss of revenue from government contracts during the shutdown, particularly in the event of stop work orders on contracts with funding lapses, closed government facilities, and/or unavailability of government inspectors required for performance. Importantly, employers must ensure that any cost-savings mechanisms they implement comply with the Fair Labor Standards Act (FLSA), state law, and the Department of Labor's regulations regarding employee furloughs and pay reductions. We outline below several types of cost-savings measures that a government contractor can potentially take with respect to personnel during a shutdown, as well as some employment law issues to take into consideration when considering such measures.

  • Furloughs: Employers can furlough non-exempt employees (i.e., employees who are classified as non-exempt and entitled to overtime under the FLSA) on a partial-day or single-day basis. The FSLA does not preclude an employer from reducing the number of hours that an hourly employee is scheduled to work, and employers are not required to pay non-exempt employees for hours that they do not work.

For employees who are classified as exempt under the FLSA, employers should avoid partial- or single-day furloughs and implement furloughs in full week increments. This is because FLSA-exempt employees must be paid their regular weekly salary for any week in which they perform any work, even if it is not a full week. Thus, an employer implementing a furlough that begins mid-week, for example, would have to either pay its exempt employees their entire weekly salary, or require those employees to use vacation or other paid time off to cover the non-working days (as discussed below, provided that such requirement complies with state law). Any attempt to pay a partial salary to exempt employees for a partial work-week would jeopardize those employees' exempt status.

It is imperative that employees be prohibited from performing any work during the furloughed period, as the contractor may be obligated to pay for such work without reimbursement from the government. Non-exempt employees must be paid for all hours worked, and exempt employees would be entitled to their full weekly salary, even if they only work a few hours while on furlough.

Employers should be aware that furloughed employees may be eligible for unemployment benefits for the time they are unpaid or on furlough; eligibility is determined by state law. In addition, an extended furlough could affect an employee's eligibility for certain employee benefits, such as health and welfare or retirement plans, depending on the applicable plan or policy, and could trigger COBRA and other rights under those plans.

  • Reduction in Pay and/or Hours: Subject to any employment agreements that provide otherwise, rather than furlough employees, employers can prospectively reduce salaries or the rate of pay for nonexempt employees, and in certain circumstances, exempt employees. For example, an employer could generally implement an across the board 25% reduction in pay for all employees. The pay rate for hourly employees can be reduced provided that the new rate paid is at least the minimum wage, and meets any requirements under the government contract or subcontract, as well as relevant laws such as the Service Contract Act. In addition, contractors could reduce the hours worked by non-exempt employees.

With respect to exempt employees, reductions in salary—either alone or in connection with a reduction in work hours—can be permissible during a business or economic slowdown provided that the employee is paid at least US$455 per week on a salary basis, and provided that the reduction is prospective in nature, bona fide, not sporadic, and not intended to evade the FLSA's salary requirements.25 For example, employers may not adjust an exempt employee's salary each week depending on how much he or she works, and call the resulting salary "full weekly pay" for partial work. Employers should also keep state laws in mind, including advance notice requirements before reducing an employee's rate of pay.

  • Required use of leave: In most states, and depending on the company's leave policies, employers can require employees to use any accrued paid leave. Although this measure may delay the need for furloughs, it is not actually a significant cost-saving measure, as employers will still be paying employees for time off from work. As discussed above, it may be used in conjunction with a mid-week furlough for exempt employees.
  • Voluntary Leave Without Pay: Some employers seek volunteers to take unpaid time off due to insufficient work, and this can potentially be done even with exempt employees. When an exempt employee volunteers to take time off from work without pay for personal reasons other than sickness or disability, salary reductions may be made for one or more full days of missed work without risking the employee's exempt status. The employee's decision must be completely voluntary and we suggest having the employee sign a voluntary leave without pay agreement.
  • Temporary reassignment of employees: To the extent feasible, government contractors may consider mitigating the loss of revenue by temporarily reassigning employees to other work that is not affected by the shutdown.
  • Layoffs: Should the shutdown last long enough that employers find it necessary to lay off personnel, they must comply with the Worker Adjustment And Retraining Notice (WARN) Act,26 and similar state laws. Where applicable, the WARN Act requires covered employers to provide written notice to employees who suffer an employment loss at least 60 calendar days in advance of covered mass layoffs (and some states have longer notice requirements). A temporary furlough or reduction in hours is unlikely to be considered an employment loss unless it lasts for six months. In addition, government contractors may be able to invoke the exception to the 60-day notice requirement by arguing that the shutdown falls under the "unforeseen business circumstances" exception. (For more information on the WARN Act and the unforeseen business circumstances exception, please refer to our prior Advisory on the subject).27

IV. Conclusion

Government shutdowns rarely make life simpler for anyone, and federal contractors are no exception. Whether the shutdown of 2018 lasts days, weeks, or months, complicated legal and practical issues are bound to arise. Contractors cannot control the political process that extends or shortens the shutdown, but can and must stay informed and adapt as needed.

We encourage all federal contractors to seek guidance from their customers and maintain communication with their contracting officers. As discussed, internal government decisions categorizing activities and personnel, and the availability of government personnel during the shutdown, are critical factors in whether contractors can continue activity, when they must stop, and when they are at risk. As always, contractors must document everything thoroughly, and, of course, obtain legal counsel as needed.

© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. NOTICE: ADVERTISING MATERIAL. Results depend upon a variety of factors unique to each matter. Prior results do not guarantee or predict a similar results in any future matter undertaken by the lawyer.

  1. "Senate adjourns without deal to end government shutdown; vote postponed until noon Monday," Washington Post, Jan. 22, 2018 (last visited Jan. 22, 2018).

  2. DoD Shutdown Guidance (Jan. 18 2018); DHS Shutdown Guidance (Jan. 19, 2018); State Dept. Shutdown Guidance (Jan. 19, 2018); DOE Shutdown Guidance (Jan. 19, 2018).

  3. DoD Shutdown Guidance supra, at 6.

  4. 31 U.S.C. § 1341(a).

  5. 41 U.S.C. § 11. Under the DoD Guidance, spending in such general categories must be "authorized by the Secretary of Defense." DoD Shutdown Guidance supra, at 6. In effect, this is an example of government discretion in managing shutdown operations about which contractors should seek information from their contracting officers.

  6. See 43 Op. Att'y Gen. 293 (1981); Supp. Att'y Gen. Memo. (Aug. 16, 1995).

  7. 31 U.S.C. § 1342. See Supp. Att'y Gen. Memo. (Aug. 16, 1995).

  8. DoD Shutdown Guidance supra at 7-12.

  9. Id. at 6.

  10. See e.g. State Dept. Shutdown Guidance, supra, at 20 ("New contractual commitments during a lapse in appropriations may be made only if necessary to support excepted activities authorized for continuance under the Department's shutdown plan or if genuinely needed to protect Government property or human safety."); DHS Shutdown Guidance, supra, at 15 ("DHS may not incur a new obligation by signing a new contract, by extending a contract, or by exercising an option when the funding source for that obligation is a lapsed appropriation unless the contract is required to support those functions defined as exempt for DHS, such as safeguarding human life or protecting property.").

  11. Id.; see also FAR 32.703-1.

  12. See e.g., State Dept. Shutdown Guidance, supra, at 19 ("Previously awarded contracts that continue in performance during a lapse in appropriations and have adequate funding previously obligated to permit continued performance during a shutdown period should generally be permitted to continue unless the post/contracting activity cannot provide adequate oversight of contract performance during a shutdown period by excepted employees.").

  13. DOE Shutdown Guidance, supra.

  14. FAR 52.232-18 (Availability of Funds); 52.232-20 (Limitation of Costs); FAR 52.232-22 (Limitation of Funds).

  15. DoD Shutdown Guidance, supra, at 10.

  16. Judiciary Open During Government Shutdown, United States Courts.

  17. See File a Bid Protests, US Government Accountability Office.

  18. Judge Anthony S. Borwick Retires, US Civilian Board of Contract Appeals (Dec. 2013).

  19. Congressional Research Services,GAO Bid Protests: An Overview of Time Frames and Procedures, at 9-10 (Jan. 19, 2016); GAO Bid Protest Annual Report to Congress, GAO-15-256SP (Nov. 18, 2014).

  20. See DHS Shutdown Guidance, supra, 14-15 (explaining that its Heads of Contracting Activity are working to to "identify and maintain a list of contracts for which Stop Work Orders or Partial Terminations for the Convenience of the Government should be issued to contractors, and to allow Contracting Officers sufficient lead time to prepare modifications to de-scope contracts and prepare any necessary justifications and other supporting documentation for contracts that will be partially terminated.")

  21. Guidance for Shutdown Furloughs, US Office of Personnel Management (Sept. 2015).

  22. Agency Contingency Plans, Office of Management and Budget.

  23. For example, in 2013, Congress passed the Pay Our Military Act, Pub. L. No. 113-39, which appropriated funds for active-duty military pay and pay for DoD and DHS civilians supporting active-duty military, right before the shutdown.

  24. See FAR 52.242-15 Alt. I (Apr. 1984).

  25. For further guidance, see "Fact Sheet #70: Frequently Asked Questions Regarding Furloughs and Other Reductions in Pay and Hours Worked Issues (Nov. 2009)," U.S. Dep't of Labor Wage and Hour Division.

  26. 29 U.S.C. §§ 2101-2109.

  27. See "When to WARN employees about the effects of Sequestration," Arnold & Porter LLP Advisory (March 2013).

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