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10.16.2013 Legal News

Government Contractor Employment and Contract Issues Arising from the Government Shutdown


A host of issues affecting government contractors have arisen as a result of the government shutdown and the pending debt ceiling impasse.  Some concerns are contract-based; some are HR-based, and some concerns are practical.

Below is our current analysis of and guidance regarding a number of issues we have encountered in what is an evolving situation for which, in some situations, there are no definitive answers. As appropriate, we will issue additional alerts in the coming days.


Question 1:    Must I stop work if I have not received a stop work order?

ANSWER:  No, the only situation in which one must or may stop work on a government contract is if the agency has issued a stop work order.  Otherwise, you are expected to continue to work even if the government is shut down.  However, there may be situations where you are effectively forced to stop work because the onsite location where you are performing a contract is shut down or inaccessible.  In such instances, one should inform and seek guidance in writing from the contracting officer so that there is a paper trail to support your constructive work stoppage without an SWO.  Also, if telework is an option, you may be able to continue to perform your contract.  In any event, one should continue to endeavor to reach the contracting officer until the matter is resolved. 

Question 2:    If I receive an SWO, must I furlough or lay off all my employees working on the contract?

ANSWER: Please see the employment Q&A’s below for details.  Under an SWO, you are required to minimize expenses to the extent possible.  This may mean that you cannot charge the government for most of your employees and will need to place them on leave status or furlough them pending resolution.  However, it may be that, for certain key employees who are critical to a project, you may be able to justify their continued employment as a justifiable expense if there is no assurance that you can ensure their continued availability.  You should prepare a detailed justification to submit with your claim after the SWO is lifted.  With respect to critical equipment, you may be able to justify that it was necessary to continue to carry the expense of the equipment if it cannot be shifted to another project during the shutdown.

Question 3:    Do I as an employer have to give any notices to my employees whom I have had to put on leave or furlough? 

ANSWER:  Please review the employment Q&A’s below.  In addition, although not required, you may want to consider setting up a hotline, message center, or periodic conference call to keep your employees informed and let them know you are thinking of them.

Question 4     I am not sure what I can claim when the SWO ends.  Any guidance? 

ANSWER: Under an SWO, a contractor is required to “take all reasonable steps to minimize the incurrence of costs allocable to the work covered by the order during the period of work stoppage.”  Upon the end of an SWO, if contract work resumes, the contracting officer is required to make an equitable adjustment in the delivery schedule or contract price, or both, if the SWO 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.  What might be recovered will vary from contract-to-contract depending on individual circumstances and type of contract.  Within reason, one might prepare to claim a number of expenses that could not be avoided if they are allowable expenses and allocable to your contract, although you must be prepared that some of which ultimately may be denied by the government.  If denied, that sets up a potential claim situation.  However, it is critical that you start promptly upon stoppage of work to keep accurate records of whatever costs or time you think might be subject to an equitable adjustment, because insufficient records are one of the major reasons that such claims are denied.  When the SWO ends, you are expected to assert the request for adjustment within 30 days after resumption of work, which will be the same time during which there will be many other issues to address in resuming work.  Planning ahead will make the task easier at a busy time.

Question 5     My contracts are financed by a lending institution.  What do I do if the government is not paying my invoices and / or I am shut down without an income stream?

ANSWER:   Those in the financial industry are telling us that it is essential that you be in conversation with your lender to keep them informed about your situation.  Although they are following the situation generally, it is when they do not hear from you that they become concerned.


Question 1:    At the current time, do I have a legal obligation to provide workers furloughed due to the government shutdown with a WARN Act Notice?

Answer:  No.   Under the federal WARN Act, covered employers (those with 100 or more full-time employees) who implement a “plant closing” or “mass layoff” generally must provide 60 days’ advance notice to affected workers, or 60 days’ pay in lieu of notice.   For purposes of the WARN Act, the term “plant closing” refers to the shutdown of an employment site (or one or more units within an employment site) that results in an employment loss for 50 or more workers (excluding workers employed less than 6 months and/or 20 hours per week) during any 30 day period that lasts 6 months or more.   By contrast, a “mass layoff” refers to an employment loss of 6 months or more impacting 500 or more employees or one-third of a contractor work force with a headcount of 100-499 workers (excluding workers employed less than 6 months and/or 20 hours per week).  At the current time, unless you have received notice that a contract is being terminated for convenience, there is no reason to believe that employees furloughed due to the temporary government shutdown will be out of work for 6 months or more.  However, if the shutdown approaches the 4 month mark, it would be prudent for you to revisit the WARN Act issue.

This interpretation is consistent with advice contained in prior written guidance provided by DOL on July 30, 2012, in response to contractor inquiries regarding the need to issue WARN Act notices 60 days in advance of the January 2, 2013 sequestration date.  While DOL advised that the prospect for sequestration was too uncertain to trigger the notice requirement, DOL’s guidance also recognized that there might come a point when a contractor has sufficient information to reasonably foresee that the effects of the sequester would require a mass layoff or plant closure and that the contractor’s obligation to provide notices under the WARN Act would be triggered at that time.

Question 2:    Do I have an obligation to continue paying employees during the government shutdown?

Answer:       It depends upon how you classify employees under the Fair Labor Standards Act for overtime compensation purposes, and whether you employ foreign temporary workers in the H-1B visa category.

  1.  With respect to your hourly-paid employees, unless you have an employment policy or contract that provides to the contrary, you don’t have to pay wages unless they are actually working. 
  2. For employees you have classified as exempt from payment of overtime pay based on their duties as executives, administrators, professionals, computer specialists, and outside sales workers, special rules apply.  You must pay such workers their full salary for any workweek in which they perform any services for the company – including incidental services such as checking and responding to work emails – and you cannot dock their pay for absences of less than a day or for lost work days due to the unavailability of work.  Failure to comply with these rules could undermine your claim to the overtime exemption for these workers and could expose you to class-based overtime lawsuits, liquidated penalties and attorney’s fees.
  3. If you employ H-1B foreign specialty workers, you must continue to pay these workers a pro-rata portion of the “required wage” specified in their approved labor condition applications (LCA) and I-129 petitions, plus any salary or wage rate increase granted during their current H-1B approval period – even if the government is shut down and you have no other work to give them.    If you fail to pay the pro-rata required wage during the government shutdown and that fact is reported to DOL, you could be subjected to an across-the-board LCA compliance audit and ordered to pay back wages and civil money penalties, and potentially face debarment from participation in all employment-based immigration sponsorship programs.

Question 3:    May I compel employees to use their accrued paid leave during the government shutdown?

Answer:       In the absence of a collective bargaining agreement, employment policy or procedure, or state law requirement providing to the contrary, you could require employees to use their accrued paid leave to continue paying them during the shutdown.

Question 4:    Must I continue to make employer contributions to our company health and welfare plans and 401(k) plans during the shutdown period?

Answer:   The extent to which you must continue contributions to employer-provided health and welfare plans and 401(k)/profit sharing plans depends on the terms of your plans.  During a furlough, employees typically will no longer qualify for health plan coverage and will not earn compensation from which 401(k) elective deferrals may be made. Furloughed employees who lose health plan coverage will, however, be eligible for COBRA continuation coverage if you employ at least 20 employees.

Question 5:    If an employee doesn’t have enough paid leave to continue being paid during the shutdown and employee premiums contributions are not being paid, may I terminate the employee from our benefit plan without first giving notice to the employee?  What kind of notice is required?

Answer:   Answer:  Health plan coverage may be terminated if an employee fails to pay premiums.  A loss of coverage due to a failure to pay premiums does not entitle an employee to COBRA continuation coverage.  If the loss of coverage is due a reduction of hours of employment, however, the employee will be eligible to elect COBRA continuation coverage.   Dependents must be notified and allowed to elect COBRA.  A single notice provided to the employee is sufficient if the dependent child lives with the employee.  Advance notice is not required, but the conditions for termination of coverage must be described in a summary plan description distributed to participants.

Question 6:    What is the impact of the shutdown on employees who are currently on FMLA leave?

Answer:       If your business activities have been suspended and your employees are not expected to report for duty, the suspension period cannot be counted against an employee’s 12-week FMLA entitlement.  Once your regular business activities resume, you would resume counting absences against the 12-week entitlement.  Should the government notify you that the contract under which the employee is employed is being terminated for convenience and this results in a decision to terminate all workers previously employed under that contract, you may terminate the employee on FMLA leave as well.   Employees on FMLA leave are entitled to equal, not better, treatment than co-workers who have not taken FMLA leave.

Question 7:    May I hire new “essential” workers for work on contracts subject to the E-Verify requirement, notwithstanding the unavailability of the E-Verify on-line service?

Answer:       The Department of Homeland Security has advised that E-Verify services will not be available during the government shutdown.  As a result, DHS has suspended the “three-day rule” for E-Verify cases affected by the shutdown. This does NOT affect the Form I-9 requirement, however.  You must still complete the Form I-9 no later than the third business day after an employee starts work for pay.  

If you received a Temporary Non-Certification (TNC) notice prior to the shutdown, the normal time period for an employee to resolve a TNC notice is being extended, and the days when the federal government is closed will not count towards the 8 federal government workdays the employee has to go to SSA or contact DHS. You may not take any adverse action against an employee because of an E-Verify interim case status, including while the employee’s case is in an extended interim case status due to the federal shutdown.

If you have employees subject to FAR E-Verify regulation who cannot be verified due to the shutdown, DHS has advised that you should contact the contracting officer to inquire about extending deadlines.

Question 8:    Are my employees eligible for unemployment compensation while they are out of work due to the government shutdown?

Answer:       Yes, your W-2 employees are eligible for unemployment benefits if they are out of work due to the shutdown, provided they have earned sufficient wages during the applicable base period in the state where their wages are reported.  Self-employed (1099) contractors would only be eligible for benefits if they reported their wages in the state where they were employed and paid the unemployment tax due on those wages.


Question 9:    Some of my laid off workers are unionized.  What are my obligations where they are concerned?

Answer:       You are required to provide prompt notice to the union as soon as you learn that members of the bargaining unit could be affected by the shutdown and provide the union with an opportunity to bargain with you over the impact and effects of the shutdown on the bargaining unit.  To the extent the collective bargaining agreement contains express provisions regarding the order in which employees are to be laid off and recalled, those provisions will control.   A failure to comply with the duty to bargain is an unfair labor practice and unilateral changes resulting in a loss of pay or benefits may result in unfair labor practice charges and grievance arbitration proceedings.  Because mistakes can be very costly, it is best to seek counsel before taking action.