United States: Planning For A Possible Government Shutdown: Labor And Employment Issues For Government Contractors

With the federal government funded only through Sept. 30, 2015, unless Congress acts quickly, there is a reasonable likelihood of another government shutdown beginning Oct. 1, 2015. The looming shutdown will create uncertainty for many government contractors with respect to various labor and employment laws. Thus, below are some of the critical issues that government contractors should consider in advance of Oct. 1 to ensure they are well-positioned to respond to a government shutdown.

In addition, for information regarding other issues facing federal contractors due to the potential shutdown, please see our separate Sept. 24, 2015 alert.

The WARN Act

The Worker Adjustment and Retraining Notification Act (WARN Act) requires employers that employ 100 or more employees, excluding part-time employees, or 100 or more employees who in the aggregate work at least 4,000 hours per week (exclusive of overtime hours), to give written notice to affected employees (and certain governmental offices) of a covered facility closing or mass layoff at least 60 days prior to such action.

A WARN Act notice must be specific, including such information as the employees who will be affected and the timing of the expected separation from employment. However, the notice may be issued contingent on the occurrence of a future event, such as the potential but uncertain cancellation of a federal contract.

A WARN Act notice regarding a facility closing or layoff focuses on "loss of employment," which generally involves a termination without cause and without any intent on the part of the employer to rehire. The definition of "employment loss" specifically includes:

  • an employment termination, other than a discharge for cause, voluntary resignation, or retirement;
  • a layoff exceeding six months; or
  • a reduction in work hours of more than 50 percent during each month of any six-month period.

Whether a WARN Act notice is appropriate turns on the number of employees to be terminated and their employment or job site location. While there are a few exceptions, an employer who does not give the required 60-day advance notice is liable to each affected employee for an amount including up to 60 days of back pay and benefits, as well as civil penalties of up to $500 per day plus attorneys' fees.

Whether notices should be issued as a result of a government shutdown (when the period of work disruption may be unknown) requires a fact-specific inquiry. Prior to the sequestration and government shutdown in 2013, the U.S. Department of Labor (DOL) announced its position that WARN Act notices would not be required. The DOL has not issued a similar announcement concerning the potential Oct. 1, 2015, shutdown. Even so, there is no guarantee that courts will give deference to DOL guidance, leaving employers subject to a court's individualized determination of whether the WARN Act applies to contracts terminated or reduced as a result of a government shutdown.

In addition, many states have statutes that are equivalent to the WARN Act, but which carry additional requirements. These so-called "mini-WARN" statutes must be considered as an employer decides whether to forgo providing a state or federal notice in reliance on the federal "unforeseeable business circumstances" provisions of the WARN Act. Importantly, some state WARN statutes do not expressly provide for shortened notices, such as in California, Illinois and New Jersey.

In light of the above, federal contractors should: (1) consider the scope of any impact that a government shutdown would have on particular facilities, (2) determine the risk associated with not providing a contingent WARN Act notice to potentially impacted employees, and (3) conduct a review of possible state mini-WARN obligations. Based on these action items, employers may wish to consider providing contingent WARN Act notices to employees who may be impacted.

Furloughs and Reduced Hours

In the event of a federal government shutdown, many contractors will consider furloughs or mandatory reduced hours as measures to save on labor costs. Employers utilizing either approach must take proactive steps to ensure compliance with federal and state wage and hour laws, employee benefit laws, anti-discrimination laws and contractual collective bargaining agreements. Moreover, as discussed in more detail below, furloughs and reduced hours can, in some circumstances, trigger state unemployment benefit eligibility.

State Unemployment Benefits

While each state has its own eligibility requirements, employees subject to layoff or unpaid leave as a result of a government shutdown may be eligible for unemployment insurance benefits. Assuming that the layoff or unpaid leave lasts longer than the common seven-day waiting period, employees in many states will be eligible for benefits, so long as they: (1) were working and being compensated prior to the shutdown, (2) are no longer working and no longer being compensated as a result of the shutdown, and (3) otherwise qualify for unemployment insurance benefits.

In addition, employees who are furloughed for full or partial weeks may be eligible for unemployment benefits as well. Indeed, some states provide benefits for a reduction in hours or temporary layoff even where employment is not actually terminated.

State law will govern employee eligibility, waiting periods and potential benefits calculations. Further, triggering unemployment insurance generally leads to an increase in an employer's unemployment insurance rates.

The Fair Labor Standards Act and State Wage and Hour Law

Furloughs involving exempt (or salaried) employees present a complicated set of problems for employers. For example, in implementing furloughs for exempt employees, employers risk losing the exemption by violating the "salary-basis" requirement.

Under federal and most state laws, exempt employees must be paid the same minimum salary for each pay period. Except under limited circumstances, this predetermined amount is not subject to reduction if an exempt employee performs any work during a workweek. The federal Fair Labor Standards Act (FLSA) regulations specifically provide that employers may not make deductions from an exempt employee's predetermined salary for absences "occasioned by the employer" or caused by "the operating requirements of the business." If an exempt employee is "ready, willing and able to work," an employer may not make deductions for time when work is unavailable. Thus, if a government shutdown results in a partial-week furlough or a reduction in hours, employers need to ensure that their exempt employees receive their guaranteed weekly salary if they performed any work during a given workweek.

Although furloughing or reducing the hours of non-exempt employees is relatively straightforward, employers need to be aware of the risks involved for such workers as well. Non-exempt employees need only be paid for the work they actually perform. Nevertheless, employers furloughing or reducing the hours of non-exempt employees during a shutdown must ensure proper payment for work performed on the employees' regularly scheduled payday.

The federal government currently is defending a FLSA collective action filed by a group of essential non-exempt employees who worked during the government shutdown from Sept. 22 through Oct. 5, 2013. These government employees allege that they received only partial payment on their regularly scheduled payday and did not receive any pay for time worked from Oct. 1 through Oct. 5, 2013. Even though the federal government retroactively paid the wages due, the employees claim that the government's failure to pay them for the work on their regularly scheduled payday violated the FLSA. In March 2015, the federal government began sending court-approved notice to employees covered by the lawsuit.

In addition to dealing with the exemption and payroll issues described above, employers must ensure that their employees do not work "off the clock" or, if they do so, that employees are compensated properly. The prevalence of smartphones, personal digital assistants, laptops and other remote-access technology means it is likely that at least some exempt and non-exempt employees will check their voicemail or email or otherwise perform "work" while on furlough. As described above, (a) exempt employees must be paid for any workweek in which they perform work, and (b) non-exempt employees must be paid for all time worked that is not otherwise deemed de minimus. Thus, employers should make it clear that work is not authorized during the furlough period without advance written approval and should ensure that management is aware of this prohibition.

Health Insurance

Employers should examine their group health insurance plans to determine whether a furlough or reduction in hours due to a government shutdown will trigger loss of coverage and entitlement to continued health insurance coverage under the Consolidated Omnibus Reconciliation Act (COBRA).

Discrimination

When making decisions on which employees will be subject to furlough or reduction in hours, employers should make sure that these decisions are based upon consistent and articulable business reasons. If not, employers could expose themselves to claims of unlawful discrimination and retaliation if the individuals impacted by these decisions belong to a protected classification.

Other Considerations

Given these and other complications that can arise during a government shutdown, employers should establish a comprehensive plan involving payroll, benefits and management personnel to ensure that employees are properly compensated in the event of a government shutdown. In addition to the above-described issues, employers also should consider updating their leave policies. Many states allow employers to mandate how and when paid time off is used, including requiring employees to use any paid time off during a furlough. Some states, however, permit this only if the requirements are specifically set forth in a policy that is shared in advance with employees prior to leave accrual. Because state laws differ, employers should review their leave policies for each state in which they have employees who may be affected.

Employers utilizing furloughs or reduction in hours also should consider the impact of any collective bargaining agreements covering the furloughed employees. Some collective bargaining agreements require employers to bargain before implementing a furlough or a reduction in hours or requiring the use of paid time off during a furlough. An employer's unilateral action in this arena could constitute an unfair labor practice, which ultimately could result in back pay awards for affected unionized employees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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