United States: POTENTIAL GOVERNMENT SHUTDOWN – What Every Government Contractor Needs To Know

Once again, a government shutdown seems inevitable. During previous government shutdowns, government agencies and departments issued stop-work orders, grinding work on government projects and contracts to a halt. Contractors were then faced with the difficult task of remaining in compliance with their obligations to their employees while work and funding for those contracts has ceased.

Contractors have been asking for input regarding how to handle employees impacted by the anticipated federal shutdown. Although the discussion below is not comprehensive, it discusses many of the most significant employment-related issues.

Wage and Hour Considerations

During a shutdown, non-essential government employees are typically furloughed and the federal government need not be concerned with wage and hour legal issues. Government contractors, on the other hand, must remain mindful of obligations under both federal and state wage and hour laws. For example, a government contractor that begins a furlough mid-week may consider not paying its employees for the days during that week the employees are on furlough. However, doing so for employees exempt from overtime under federal and state laws could place their exempt status in jeopardy.

Generally, to be exempt from overtime under the federal Fair Labor Standards Act ("FLSA"), an employee must be paid on a salary basis of at least $455 per week, regardless of the amount of work performed. Accordingly, while an employer can withhold payment for any full week in which the employee does not work, it cannot do so for any part of a week in which the employee does not work due to a furlough without jeopardizing exempt status.

During previous shutdowns, some government contractors mitigated various wage issues by requiring exempt employees to use vacation pay or paid time off leave ("PTO") to cover compensation for non-working days during partial furlough weeks. Although this practice complies with the FLSA's exemption requirements, contractors must still ensure that they do not run afoul of state wage and hour laws. For example, some states require employers to comply with their own published leave policies. Therefore, in such states, employers should review their paid time off policies and applicable laws before mandating the use of vacation time or PTO.

Contractors should instruct employees not to perform any work while on furlough. If an exempt employee performs work during the week (such as checking and responding to emails), he or she must be paid his or her salary for the entire week. If a non-exempt employee performs work, he or she must be paid for all work performed. For this reason, employers should clearly communicate to supervisors and employees that work may not be performed while they are on furlough. During past shutdowns, some contractors confiscated company-issued smartphones and computing devices to ensure no work was performed.

Another approach contractors have considered during previous shutdowns is requiring exempt employees to work a reduced workweek. Contractors considering this approach must be mindful of the salary basis implications. That being said, in limited circumstances it may be permissible to adopt a reduced work-hours program during a period of economic hardship. The Department of Labor has stated in various opinion letters that "a fixed reduction in salary effective during a period when a company operates a shortened workweek due to economic conditions would be a bona fide reduction not designed to circumvent the salary basis payment. Therefore the exemption would remain in effect as long as the employee receives the minimum salary required by the regulations and meets all the other requirements for the exemption." Opinion Letter FLSA2009-18.

Before instituting such a change, however, employers must consider a number of issues, including: (1) any contractual obligations to employees; (2) state and local notice requirements for changes in compensation; (3) requirements for foreign workers on work authorizations (discussed below) and (4) compliance with other requirements for overtime exemptions (including state requirements).

The WARN Act

The looming government shutdown also brings with it the prospect of furloughing large numbers of employees. These potential furloughs may implicate the federal Worker Adjustment and Retraining Notification ("WARN") Act and its state equivalents. The WARN Act requires, with some exceptions, that employers provide 60 days' notice to employees affected by a "plant closing" or "mass layoff." However, depending on what a government contractor plans to do in response to the shutdown, the WARN Act may not apply.

Historically, some contractors have furloughed workers on suspended projects until they are resumed. The WARN Act only applies if there is an "employment loss," which is defined as: (1) an employment termination; (2) a layoff exceeding six months; or (3) a reduction in an employee's hours of work of more than 50 percent in each month of a six-month period. Because it is not anticipated that a government shutdown will exceed six months, for most government contractors the WARN Act will not apply. In the unlikely event that the government shutdown continues for more than four months, contractors will have to consider whether to provide the notices required under the WARN Act.

However, even if the WARN Act does not apply to a government contractor's furlough program, contractors should be aware that analogous state laws may be triggered by their furloughs.

E-Verify

Government contractors are required to utilize the Internet-based employment verification system called E-Verify to confirm the employment eligibility of their new hires and current employees. The website, which is administered by the Department of Homeland Security, has historically been unavailable during government shutdowns.

If this is the case again, government contractors should complete I-9 paperwork in an accurate and timely fashion while E-Verify is unavailable. In addition, if an employee has received a "Tentative Non-Confirmation" notice from E-Verify, he or she likely will not be able to resolve the issue during the shutdown. If that is the case, the deadline for responding to the Tentative Non-Confirmation will likely be extended for the duration of the shutdown. During this period, the employer should not take any adverse action against the employee as a result of the notice.

Foreign Workers

A government shutdown can have major implications for foreign workers working in the United States on visas. When employers sponsor foreign workers under H-1B, H-2B and E-3 visas, they are required to pay the rate set forth in the labor condition applications certified by the Department of Labor.

Given that the government contractor's only alternative to paying furloughed foreign workers is to terminate their employment – resulting in the employees having to leave the United States – the employer is faced with two undesirable options: pay the furloughed foreign workers even though they are not paying their American counterparts, or terminate them and lose the knowledge and expertise that will be needed once work resumes on the contract. The option the government contractor chooses is ultimately a business decision that should be made after analyzing the specific legal requirements.

Benefits Issues

If a government shutdown lasts longer than anticipated, there may also be certain benefits implications for furloughed employees. First, reduction in employees' hours may cause some employees to lose coverage under the terms of the employer's COBRA-covered health plans. In this case, employers are required to send out qualifying event notices to impacted employees. The employees and dependents must be offered the ability to continue coverage under these plans during the period of the furlough (up to the maximum COBRA continuation period) at their own expense. If a furloughed employee is later terminated, the termination generally will not be considered a second qualifying event that would entitle the employee to an extension of the COBRA continuation period.

Unemployment Benefits

Government contractors should also be aware that furloughing their employees may make the employee eligible for unemployment benefits. Contractors should consult their state laws to determine the impact of furloughs on unemployment benefits.

Conclusion

A government shutdown would require many government contractors to make difficult choices. If there is a government shut-down, government contractors should consult with employment counsel familiar with government contracting requirements to ensure that short-term solutions to the shutdown do not result in costly legal liabilities.

POTENTIAL GOVERNMENT SHUTDOWN – What Every Government Contractor Needs To Know

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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