Navigating the Debt Ceiling: Legal Issues for Federal Contractors

May 26, 2023

With congressional leaders and the Biden administration still in negotiations over raising the nation’s debt ceiling, unless Congress acts quickly, there is a reasonable likelihood the United States could run out of money to meet its financial obligations beginning as soon as early June 2023. This, in turn, will create uncertainty for many federal contractors regarding government contract, labor and employment, and other laws.

Below are some of the critical issues federal contractors should consider to ensure they are well-positioned to respond to any debt ceiling-related default.

Government Contracts

Contractors, as a general matter, are required to continue performance of existing government contracts, even where the federal government delays payment (or has shut down, if the debt ceiling crisis later leads to that). Specifically, as a general rule, an existing federal contract with a remaining period of performance and obligated funding remains in effect and should be performed during debt ceiling-related payment delays or a later partial federal shutdown:

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

Contractors should analyze their contracts to estimate a “burn rate” and determine if and when obligated funding will run out. Contractors should also (a) pay close attention to any contractual obligations to notify the federal government of the status of funds remaining on individual contracts, and (b) send “75% letters” to appropriate contracting officers or contracting officer technical representatives, upon reaching the milestone.

If funding on a given contract is exhausted, it will be up to the contractor to determine whether to stop work (or to continue working at-risk, in anticipation of receiving reimbursement once the debt ceiling is raised). As happened during prior government shutdowns, expect many contracting officers to issue guidance to contractors as the upcoming date gets closer.

McGuireWoods strongly recommends proactive engagement with contracting authorities to the extent that a contractor has any unique considerations arising out of any particular contract. Further, contractors should review their prime contracts and subcontracts for considerations such as (i) prompt payment discounts (FAR 52.232-8), (ii) limitations on funds (FAR 52.232-2), and (iii) pay-when-paid provisions that could be uniquely implicated if the debt ceiling is reached. Moreover, contractors should be alert for and document any delays or other extracontractual costs that arise as a result of debt ceiling-related issues.

Work On-Site at Government Facilities

Technically, a debt ceiling-related default is not the same as a federal shutdown — but it can lead to similar impacts. Government shutdowns occur when Congress fails to agree on additional spending to fund the federal government. A potential debt ceiling-related default arises when Congress fails to agree on additional borrowing so the United States can continue to pay its financial obligations.

If a default later leads to a government shutdown (that is, for some federal agencies, programs or functions), typically 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 working on-site at U.S. government facilities since certain security offices, installation access points and buildings may close during a shutdown.


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

The WARN Act

If payment delays caused by failure to raise the federal debt ceiling force 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 written notification to employees affected by a facility closing or layoff event, depending on various factors.

The WARN Act generally requires employers of 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% 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 federal debt ceiling-related default (or later 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. However, DOL did not issue a similar announcement concerning the 2018 shutdown. Further, 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. In addition, contractors should be mindful that several states have “mini-WARN” statutes that are equivalent to the WARN Act, but which carry additional requirements.

Furloughs and Reduced Hours

To control labor costs during a delay in federal payments, 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 FLSA 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 federal payment delays (or a later government shutdown) result 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 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 caused by federal payment delays (or a later 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 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.

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