Navigating Government Shutdowns: Legal Issues for Federal Contractors

January 23, 2018

With the end of the federal government shutdown that began on Jan. 20, 2018, there is a reasonable likelihood that the budget impasse will just be resurrected when yet another short-term funding extension enacted by Congress expires — this time on Feb. 8, 2018.  This, in turn, will prolong uncertainty for many federal contractors regarding government contract, labor and employment, and other laws. It also, however, gives them a chance to prepare for the next shutdown.

Below are some of the critical issues federal contractors should consider to ensure they are well-positioned to respond to any government shutdown.

Government Contracts

Funding and required performance for existing government contracts generally do not stop simply because the federal government has shut down. An existing federal contract with a remaining period of performance and obligated funding remains in effect and should be performed during a shutdown:

  • unless the contract is terminated or placed on stop-work status by the contracting officer, or
  • until obligated funding is exhausted.

Work On-Site at Government Facilities

During a shutdown, only defined “essential personnel” are authorized to work on-site at U.S. government facilities. Depending on their individual roles, contractor employees may not qualify as essential personnel. Further, as a practical matter, contractor employees may have difficulty getting to work on U.S. government facilities since certain security offices, installation access points, and buildings may close during a shutdown.

  • If contractor personnel are deemed “essential” to continuing work during a shutdown, seek to have this determination made in writing by the contracting officer, identifying specific employees by name or by labor category, where possible.
  • Some contractor employees may be permitted to work during a shutdown from alternate locations, such as from a contractor-owned facility. Whether an employee can continue to be productive, can work with little or no supervision, and has the necessary equipment to perform necessary tasks may be a case-by-case determination that should be discussed with the contracting officer or the contracting officer technical representative (COTR).
  • Contractors with employees working on-site at U.S. government facilities should coordinate with contracting officers and COTRs to determine whether contractor personnel will be permitted to access the facilities (and whether government property and equipment will be available for use). Additionally, contractors should determine whether government personnel will be available for tasks such as supervising, approving, or testing contractor work.

Other Contract Considerations

Because many government employees will be furloughed and will be prohibited from conducting normal business during a federal shutdown, contractors should anticipate that contract options will not be exercised, no new contract modifications will be issued (including funding modifications), pending or new invoices will not be paid, and ongoing procurement activities (competitive and sole source) will be delayed.

Contractors should analyze their contracts to estimate a “burn rate” and determine when and if obligated funding will run out. Contractors should also (a) pay close attention to any obligations to notify the federal government of the status of funds remaining on individual contracts, and (b) send “75% letters” even if a contractor does not believe that the recipient of such notices will be working.

If funding on a given contract is exhausted during a shutdown, it will be up to the contractor to determine whether to stop work (or to continue working at-risk, in anticipation of receiving reimbursement after a shutdown is concluded).


Keep in mind that many of the issues described above will also apply to subcontractors. For example, if prime contractor employees are not permitted to work on certain federal government sites during a shutdown, then subcontractors may not be granted site access either. Prime contractors should also be prepared to receive requests from subcontractors for authority-to-proceed commitments and for various forms of risk authorization.

The WARN Act

If a federal shutdown forces contractors to lay off or significantly cut scheduled hours for employees assigned to such work (or otherwise), the federal Worker Adjustment and Retraining Notification (WARN) Act or one of many equivalent state statutes may require advance notification to employees affected by a facility closing or layoff event, depending on factors such as the number of affected employees.

The WARN Act generally 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, a 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. Further, 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 did not issue a similar announcement concerning the Jan. 20, 2018 shutdown. Even so, there is no guarantee that courts will give deference to any 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, contractors should be mindful that many states have “mini-WARN” statutes that are equivalent to the WARN Act, but which carry additional requirements.

Furloughs and Reduced Hours

As a way to control labor costs during a federal government shutdown, many contractors may consider adopting furloughs or mandatory reduced hours. Employers utilizing either approach should 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, furloughs and reduced hours can, in some circumstances, trigger state unemployment benefit eligibility.

The Fair Labor Standards Act and State Wage and Hour Law

Potential furloughs involving “exempt” employees present a complicated set of problems for employers. For example, in implementing furloughs for exempt workers, 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. 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 (i.e., “hours worked”). 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.

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).


Lastly, when making decisions on which employees will be subject to layoff, furlough or reduction in hours, contractors should also ensure that these decisions are based on consistent and articulable business reasons. Otherwise, employers could expose themselves to claims of unlawful discrimination and retaliation if the individuals impacted by these decisions belong to a protected classification.

The anticipated passage of another continuing resolution funding government operations through Feb. 8 gives government contractors and employers time to plan to confront these legal issues in the event that a long-term solution is not reached by that time. Thoughtful planning will help to mitigate the legal risk and business disruption of a future shutdown.

For further information or questions about the information contained in this legal alert, please contact the authors, your McGuireWoods contact, or a member of the firm’s government contracts, affirmative action, or labor and employment teams.