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Implications of a Government Shutdown on Federal Contractors (Déjà  vu)

  • September 20, 2013

[The government shutdown began on October 1, 2013. This article was last updated on October 2, 2013. Please see the Jackson Lewis Blogs and other Jackson Lewis articles (e.g., Imminent Danger is Focus of Government Safety Agencies’ Shutdown Strategies) for our updates on the shutdown.

[More information is presented at the Jackson Lewis Teleconference on the Government Shutdown (with ACC local): Call toll-free: 1-888-203-1112; Replay passcode 328327876#. There are a few minutes of silence before the audio begins. You can advance the recording by 30 seconds by pressing 9 (and can do so repeatedly), you can back up by 30 seconds by pressing 7.]

Once again, we face the specter of a government shutdown on October 1, when the current continuing funding resolution expires on September 30. The last threat of a government shutdown was in 2011 and the last actual shutdown occurred in 1995-1996. Posturing, negotiations and votes in Washington, D.C. will play out over the couple of weeks. But contractors should start their preparations should the worst happen on October 1.

How likely is a shutdown?

The 2011 shutdown was averted when the White House and House Republicans struck a last-minute deal to fund the government. Currently, key House Republicans have stated a commitment to passing a funding resolution to send to the Senate only if President Obama’s Affordable Care Act (“ACA”) is defunded as part of the resolution. The Senate then would be faced with accepting defunding ACA or defeating the measure, which would result in a government shutdown. In a high-stakes game of “tag, you’re it,” Senate leaders have vowed that the Senate will not agree to any resolution with defunding ACA and that they may vote to remove the defunding measure and send the resolution back to the House for a vote.  Senate Majority Leader Harry Reid has said any resolution sent over from the House defunding “Obamacare” is “dead.”

The employment and labor law concerns that a government shutdown raises include compliance issues with the Worker Adjustment and Retraining Notification (“WARN”) Act and wage and hour law, the impact on employee benefits and immigration status, and labor union and collective bargaining agreement issues. A plan for timely and effective communications with employees on these matters is equally important for employers.

WARN Act Issues

Under the federal WARN Act, an employer with at least 100 employees ordering a mass layoff or plant closing must provide 60 days’ written notice to affected non-union employees, union representatives, and certain government officials. A mass layoff is defined in terms of the number of workers at a single site of employment who suffer an employment loss (including a layoff for more than six months or a reduction in hours of more than 50 percent in each month of a six-month period). An employer that fails to provide appropriate notice faces steep penalties. An exception to this requirement has been made for “unforeseeable business circumstances.” This exception allows an employer to order a mass layoff or a plant closing without giving the full 60 days’ notice if the layoff or closing is caused by business circumstances not reasonably foreseeable at the time that notice would have been required. Notice must be given as soon as the triggering event is foreseeable. When notices should be issued in the case of a government shutdown, when the period of work disruption may be unknown, requires analysis on a case-by-case basis.

In addition to the federal WARN Act, employers should consider applicable state mini-WARN laws that often contain requirements that are different and more stringent than the federal law.

Wage and Hour Issues

The 1995-1996 shutdown led to a temporary loss of income for federal workers and a permanent one for many government contractors. Agencies paid workers retroactively once the doors reopened, but many government contractor employers were not reimbursed for the days their workers were idled on government contract projects. Whether agencies will have authority this time around to make retroactive pay adjustments to their employees, let alone to contractors’ employees who were impacted, is unclear.

Many employers will consider requiring mandatory use of paid leave and implementing furloughs, temporary shutdowns or reduced-hours plans as alternatives to layoffs. Those considering these options should be cautious about potentially jeopardizing the status of employees who are exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA) and applicable state laws by inadvertently violating the salary basis requirement of the exemption. Furloughing or reducing the hours of non-exempt workers typically is straightforward. Absent a contract or collective bargaining agreement providing otherwise, hourly workers need be paid only for actual hours worked. Employers should check state laws, however, for minimum hours pay requirements.

Under the FLSA and the laws of many states, to meet the salary basis test, an exempt employee must receive for each pay period a “predetermined amount” constituting all or part of the employee's compensation, the amount of which is not subject to reduction because of variations in the quality or quantity of work performed. With few exceptions, an exempt employee must receive his or her full salary (no less than $455 a week, although certain states require more) for any week in which the employee performs any work, regardless of the number of days or hours worked in that week. Salary deductions cannot be made for a full- or partial-day’s absence due to lack of work as “occasioned by the employer or by the operating requirements of the business.”

Use of Paid Time Off (PTO)

Under the FLSA, employers may make mandatory deductions from an exempt employee’s paid time off or other leave banks for a full- or partial-day’s absence during a shutdown, furlough or reduced-hours plan, without affecting FLSA-exempt status, as long as the employee receives his or her full salary. Use of leave is governed largely by state law, so employers should check such laws before mandating leave.

Mandating the use of PTO during furloughs or shutdowns may be particularly problematic in states where PTO is considered a “wage” under state wage payment and collection laws. Employers should review their PTO policies, paying particular attention to whether they have reserved discretion to require or prohibit the use of leave based on business needs.

Shutdowns, Furloughs of a Full Week

If the shutdown or furlough will last for a whole workweek, then the employer need not pay the affected exempt employees any salary. However, employers must ensure that these employees do not perform any work (including work that can be done from home, such as checking e-mails or calling clients or customers) during the workweek. An exempt employee on furlough may be considered to have performed work if, for example, the employee checks and responds to business e-mail, corresponds with other employees about work issues, or engages in administrative work. If this were to occur, the employee would have worked during the week and would be entitled to a full week of pay. Therefore, the employer should give clear, written instructions that employees may not perform work during the furlough workweek. The employer also may consider “impounding” work items, such as smartphones and laptops, or disabling company e-mail and network access for the week to reduce the risk of violation. Finally, the employer should ensure that all work responsibilities of the furloughed employee be covered by another employee for the week.

Shutdowns, Furloughs of Less Than a Full Week or Reduced Hours, Pay

Employers may not reduce the salary of an exempt employee who works any part of a workweek without violating the salary basis test as a reduction in salary due to a reduction of hours worked because the reduced hours are “occasioned by the employer or by the operating requirements of the business.” However, as discussed above, employers generally can require the use of paid leave in such situations.

Reductions in salary because a “permanent change” in an employee’s schedule (e.g., changing from 52 five-day workweeks to 40 five-day workweeks and 12 four-day workweeks over the course of a year) due to economic conditions will not jeopardize an exempt employee’s status as long as the employee still receives at least $455 per week. There are two main concerns in doing this. First, the pro-rated salary following any reduction still needs to equal at least $455 per week to meet the FLSA exemption requirement. A higher amount may be required under some states’ laws. The salary threshold applies regardless of whether the employee is full-time or part-time. Second, the employer must consider carefully the time period for the reduced schedule and not make frequent changes in schedule and corresponding salary. Courts have suggested that frequent changes to the salary may render the salary illusory, particularly if the changes appear to correspond to fluctuations in workload, so that the salary becomes a proxy for hourly wages. However, courts have approved adjustments to the salary as frequently as once per quarter. State laws also should be consulted before instituting a pay reduction; many require advance notice of changes in pay.

Benefits Issues

Employers should examine the terms of their group health plan to determine whether a reduction in hours due to furloughs or terminations will trigger a loss of coverage and entitlement to continued health care coverage under COBRA. In addition, employers who alter employee work schedules may see a rise in applications for loans or hardship distributions (from furloughs) and full distributions (from employment terminations) from 401(k) plans to replace lost wages. While reducing costs associated with employee benefit plans may appear suitable to reducing overall expenses, employers should consider carefully the long-term impact of any such reductions in terms of public relations and increased internal administration.

Unemployment Issues

Employees who are furloughed for full or partial weeks may be eligible for unemployment benefits. Unemployment eligibility and benefits are determined by state law, but many states provide benefits for a reduction in hours or temporary layoff even where employment is not terminated. Employers should consult state law to determine eligibility, waiting periods and benefits calculations.

Immigration Issues

State and federal wage and hour requirements aside, H-1B, H-2B and E-3 employees who are placed on a non-productive status or reduced work schedules nevertheless must continue to be paid at the full rate specified on their visa documentation. Implementation of salary reduction, reduced work schedules or furloughs likely will trigger the need to file amended Labor Condition Applications and H-1B/H-2B/E-3 visa petitions with the U.S. Department of Labor and the U.S. Citizenship and Immigration Service, respectively.

The Department of Labor, Office of Foreign Labor Certification will not accept or process applications or responses it receives, including Labor Condition Applications, Applications for Prevailing Wage Determinations, Applications for Temporary Certification, or Applications for Permanent Employment Certification.  Web-based resources including the ICERT Visa Portal System and Perm system will be unavailable during shutdown.

In addition, E-Verify, the government’s web-based system to verify employee work authorization, will be inaccessible during the shutdown.  Employers must continue to complete the Form I-9 for all new hires, but employers who are current E-Verify users will be unable to verify new employees, run reports or perform any functions requiring access to the E-Verify system.  USCIS is suspending the “3 day rule” for completion of E-Verify, and will provide follow up guidance once E-Verify is back on line.  Similarly, employees will be unable to resolve Tentative Non-Confirmations during this period.  USCIS specifically indicated that the time period for resolving Tentative Non-Confirmations will be extended and days the federal government is closed will not count towards the eight federal government workdays the employee has to go to SSA or contact DHS.  Employers are advised that they 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 a federal government shutdown.  Employers who intend to sign up for E-Verify will be unable to do so during the shutdown.  Federal Contractors who are required to use E-Verify should contact counsel or their contracting official to determine how best to proceed during this period.

The U.S. Department of State advises that U.S. Embassies and Consulates will continue to operate as normal for the time being, including providing visa services for work and business related travelers.  The State Department will be continuously and closely monitoring available funding sources and will advise should the situation change.

Union Issues

Employers may have to enter into mid-contract negotiations with unions if immediate layoffs and exceptions to layoff and other collective bargaining agreement provisions are required. Unilateral implementation of layoffs or reductions in wages, forced shutdowns and vacations could constitute unfair labor practices and lead to National Labor Relations Board proceedings. Substantial back pay awards could result. The NLRB itself likely would be affected by a shutdown with forced reductions in Regional workforces. Budgets for investigations and hearings might be curtailed, leading to issuance of complaints without investigations and shorter hearings without briefing.

Communications with Employees

Both the threat of a shutdown and an actual shutdown pose significant challenges to employee morale. Distraction also wreaks havoc on employee productivity. Effective employee relations skills matter most at times like these. If their employers do not inform them, employees may misinform themselves. They also may seek guidance from government customers and compromise their employer's business relationship.

Employers should share their plans with employees promptly and clearly. If employers are in a “wait and see” mode, employees should be told their employers are monitoring the situation, but recognize their anxiety, and have designated management personnel to answer questions and concerns. Monitor information and correct misinformation. Make sure managers are informed about employer plans and communication strategies. This is an opportunity to engender loyalty from employees during a trying time.


If you have any questions, please contact the Jackson Lewis attorney with whom you regularly work.

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