The Next Shutdown: How Gov't Contractors Can Prepare

Congress' short-term spending bill signed on Monday ended the nearly three-day government shutdown. As this spending bill only appropriates funding for government operations for three weeks, however, and does not resolve the underlying political disputes, it is unlikely to put an end to shutdown politics for good, or even for long.

Participants in the federal market would be wise to review the issues and challenges presented by shutdowns in order to remain prepared for what may come.

What Activities Can Continue During a Shutdown?

During a shutdown, federal contractors must determine whether they may continue performing. A government shutdown is not a self-executing stop-work order; a shutdown itself does not suspend a company's obligations to perform or the government's obligation to pay for performance.¹ What matters is whether a contractor's work requires any new appropriation or authorization of spending, and whether critical government personnel, facilities, and resources are available.

Of course, if your contracting officer issues a stop-work order, then stop work and comply with the order. If you do not receive a stop-work order, then you must consider (1) whether your contract is deemed required to support "exempt" government activities and (2) how your contract is funded.

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 makes it a crime to obligate the United States to spend funds that Congress has not previously appropriated.² The Anti-Deficiency Act permits four narrow exceptions:

• Obligations not impacted by annual appropriations (multi-year appropriations, indefinite ("no-year") appropriations, or obligations authorized outside of annual appropriations bills. One example is Social Security.
• Obligations in advance of appropriations permitted by statute. For example, under the Civil War-era "Feed and Forage Act," the secretary of defense or the secretary of homeland security may contract for necessary clothing, subsistence, forage, fuel, quarters, transportation, and medical or hospital supplies without an appropriation.³
• Activities "necessarily implied" by the duties of a given agency during a shutdown (distributing Social Security checks, contracting for emergency services, closing impacted functions).
• Constitutional duties, including certain foreign relations and national security functions.⁴

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."⁵

Applying these exceptions to the Anti-Deficiency Act, the U.S. Department of Defense shutdown guidance provides detailed information about which DOD activities are "excepted" and can therefore continue during a shutdown.⁶ Moreover, contractors supporting these types of exempted programs may even receive new contract awards during a shutdown.⁷

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, than the principal question is how your contract is funded. If your contract is fully funded, then continue to perform unless and until your contracting officer directs otherwise.⁸ Certain agencies, such as the U.S. Department of Energy, for example, operates mostly on multiyear or no-year appropriations, and therefore expect little interruption of work during shutdowns.⁹

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 nonappropriated fund entities 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, a shutdown may nonetheless 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.¹⁰ 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 a shutdown, or a shutdown prevents a contractor from providing the contracting officer with t,he 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 the "reimbursement" section, below.

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 a shutdown. Specifically related to ongoing litigation or court-related activity, the DOD guidance makes clear that the DOD will continue to support "imminent or ongoing legal action."¹¹ 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 a shutdown and should be monitored for public announcements.

The federal judiciary, including the Court of Federal Claims, indicated during the shutdown that ended today that it maintained sufficient funding to continue operating as normal for three weeks.¹² The U.S. Government Accountability Office announced that it would treat shutdown days in accordance with its holiday rules, extending all filing deadlines that fall during the shutdown until the next day the GAO is open.¹³ The GAO adopted this approach during the 2013 shutdown, and will likely do the same for any subsequent shutdowns. The Civilian Board of Contract Appeals posted a notice on its website that it was open to accept filings and left its judges free to modify schedules, and stating "[a]ny statutory limitations on the time within which a filing may be made will not be waived or tolled during this period."¹⁴ This will likely be the policy during any subsequent 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.

Other Shutdown-Related Complications

A 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. A 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, a shutdown does not suspend those requirements, even if work must stop pending the resumption of work by federal inspectors. The U.S. Department of Homeland Security 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 a shutdown.¹⁵

Due to the Anti-Deficiency Act's restriction on accepting uncompensated personal labor, many federal employees may not even remotely check their email accounts while furloughed. Contractors should not expect or assume that any communication with a furloughed federal employee has been received, read or acted upon.

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 unavailable, 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 and Budget's guidance for shutdown furloughs¹⁶ 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.¹⁷

Reimbursement For Work Performed During A Shutdown

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 that work through a shutdown.¹⁸ 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, a shutdown itself does not prevent reimbursement for work performed during a shutdown. The practical reality of a 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 (1) subject to a stop-work order or (2) close to exceeding the funding obligated to them, obtaining reimbursement is more complicated. Each scenario is addressed in turn below.

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 Federal Acquisition Regulation 52.242-15, but contractors should check the specific terms of their contracts.

Paragraph (a) of the standard clause requires contractors to stop work and "take all reasonable steps to minimize incurrence of costs allocable to the work covered by the order during the period of work stoppage." 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 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. 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.

Paragraph (b) of the standard clause requires the government to provide an equitable adjustment 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.

Alternative language applicable to cost reimbursement contracts provides for an equitable adjustment to "the delivery schedule, the estimated cost, the fee, or a combination thereof."¹⁹ 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.

Working "At Risk"

For contracts subject to a "limitation of funds" or similar provision, the government is not required 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 accordingly performed "at risk." Unlike working under a stop-work order, there is no contractual right to an equitable adjustment resulting from insufficient government funding.

Contractors should generally avoid performing work at risk. Unfortunately, it is not always avoidable, particularly during a government shutdown, as it may be undesirable or unfeasible to shut down operations entirely and let personnel go, even while the government may later refuse to pay for these carrying costs.

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. 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 a shutdown should consider submitting an invoice for work performed during a shutdown along with a request for a letter modification whereby the contracting officer acknowledges that the invoice covers work performed during a 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.

Cost Savings and Employment Law Issues

Government contractor considering cost-savings measures with respect to their employees to mitigate the potential loss of revenue from government contracts during a shutdown must ensure that any cost-savings mechanisms they implement comply with the Fair Labor Standards Act, state law, and the U.S. 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 nonexempt employees (i.e., employees who are classified as nonexempt and entitled to overtime under the FLSA) on a partial-day or single-day basis. The FLSA 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 midweek, 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 nonworking 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.

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 percent 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 nonexempt 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 $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.²⁰ 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 midweek furlough for exempt employees.

Voluntary Leave Without Pay

Some employers seek volunteers to take unpaid time off due to insufficient work, even potentially 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 a shutdown.

Layoffs

Should a shutdown last long enough that employers find it necessary to lay-off personnel, they must comply with the Worker Adjustment And Retraining Notice Act,²¹ 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 a 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).²²

Conclusion

Government shutdowns rarely make life simpler for anyone, and federal contractors are no exception. Given the short duration of the new spending bill, contractors should educate themselves as to the implications of shutdowns and how they can prepare in advance to reduce confusion and minimize potential costs.

We encourage all federal contractors to discuss these issues with 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 a 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.