How To Prepare For The Next Government Shutdown (Should It Occur)

Monday, October 21, 2013 - 16:24

Editors’ Note: While the government shutdown and default on our national debt were postponed by Congressional action the evening of October 17, this interview was conducted with a view to another possible shutdown and debt default and the dire consequences that would prevail were the same brinksmanship to occur in approximately three months time when the debt limit may again be reached.

The Editor interviews Connie N. Bertram, Partner and Chair of Proskauer’s DC Labor & Employment practice and Co-Head of the Whistleblowing & Retaliation and Government Regulatory Compliance and Relations Groups.

Editor: Please describe your practice, particularly that part of your practice that involves advising federal government contractors and subcontractors on the many unique employment issues.

Bertram: I head the DC labor and employment practice and co-chair the government contractor practice at Proskauer. We represent government contractors in all industries, assisting them with both compliance issues and enforcement proceedings and investigations by federal agencies. There are a number of unique employment laws that apply to government contractors, particularly those administered by the Office of Federal Contract Compliance Programs (OFCCP). They require affirmative action plans, various analytics by government contractors and impose non-discrimination obligations on them as well.  Basically, there is a whole additional bundle of obligations that are employment-related that overlay government contractors’ traditional federal, state and local compliance obligations.

Editor: Why have government contractors as a group been particularly hurt by the recent shutdown? Why do you consider the shutdown to be of a lesser hardship than the impact of the sequester?

Bertram: With respect to the shutdown, government contractors have been receiving work-stoppage orders, beginning on October 1, and they have been forced into a position of having to lay-off or furlough a large numbers of employees. I work with a number of contractors who have laid off thousands of employees as a consequence of the shutdown. These employees’ situations are different from the federal employees who have been subject to the sequester because they generally will not be compensated for their furloughs.

The shutdown was a very difficult and troubling situation for contractors: having in many cases a large group of employees who were waiting for Congress and the President to resolve the shutdown issues, knowing that there were contracts for them to work on and work that needed to be done, but which they were not permitted to do.

The shutdown, while no less of a hardship than the sequester, has had a different impact than the sequester. When we went through the sequestration process, agencies were required to cut a certain percentage of their contracts. Consequently, they  reviewed their various programs and contracts, cutting entire programs or reducing them by a certain percentage. The government contractors did not have much prior notice of which programs were going to be eliminated or reduced, so they had to terminate the employees, as opposed to putting them on furlough. That implicated different employment law issues than the shutdown. With the sequester, we had a lot of discussions with clients about the implications of the WARN Act, and giving the employees prior notice of the termination.

Editor: The threat of a near-complete government shutdown owing to the failure of the government to pay its debts on October 17 was expected to have even more draconian effects than the October 1 failure to pass a budget. How were employers planning for their possible inability to tap into their credit lines to meet their payments to employees and other creditors?

Bertram: It has been my observation that, as a consequence of the general economic situation and the ongoing threat of shutdowns, companies have been holding onto their cash and not making investments – in human capital and expansion opportunities – that they would ordinarily be making. That is why we have been seeing less merger and acquisition and financing activity. While I have not seen situations, at least with my clients, where companies have been concerned about their ability to pay employees, there has definitely been some belt-tightening. Many employers have been putting things on “pause” in terms of hiring, expansion and acquisitions.

Editor: Government contractors faced with furloughed employees have to deal with both non-exempt and exempt employees under the wage and hour laws. Please explain their dilemma under the Fair Labor Standards Act (FLSA), particularly for pay owing in a partial week.

Bertram: For exempt employees to qualify under most of the FLSA exemptions, they have to be paid on a salaried basis. To meet the salary basis standard, an employer must pay an exempt employee a specified salary for each work week during which they perform any work. We really have two issues here.  First, many of the contractors were notified of the work stoppage on a Tuesday (October 1).  Therefore, if they ceased paying exempt employees at that point, they would only be paying them for a partial work week.  The employees would be able to argue that they were not paying their employees on a salaried basis.  Many contractors addressed that issue by filling in with vacation days or unpaid leave for the remainder of the week. There are various approaches that contractors might take to address that problem. Now that the work week will recommence on October 17, a Thursday, they will have a similar issue.

A second issue for both exempt and non-exempt employees under the FLSA is that while employees were on furlough, the contractors had to make certain that they were not performing any work. If they performed work, they had to be paid for the entire work week if they were on a salary basis; if they were non-exempt, they had to be paid for all the hours that they had worked. Some contractors removed access to employees’ email and confiscated devices such as Blackberrys to make certain they did not work while on furlough.

One more point I would like to address is that under certain state laws there may be limitations on an employer’s ability to require an employee to take paid time-off or vacation leave for that portion of the week they did not work. In North Carolina, for instance, you can require an employee to take their accrued leave as long as you have a clear policy that reserves your right to do so. Employers need to be mindful of state limitations on the use and payment of paid leave, which is considered wages in many jurisdictions and is regulated.

Editor: Is there a possibility that contractors who require exempt employees to take their paid vacation weeks as furlough time are in violation of their employment agreements and/or state laws? Why is this a problem when applied to foreign workers?

Bertram: It potentially could be, depending on state law and the company’s policy. In most states and under most policies, it is not going to be a problem; however, there are a number of jurisdictions that place restrictions on employer’s rights to require employees to take paid leave. In that situation, they will have to either get the employees’ consent, or undertake the steps necessary to comply with the applicable state law.

Foreign workers present a unique challenge.  For certain work visas, the employee must be continuously working and be paid.  When they go into a furlough status, they jeopardize their ability to work within the United States. This is a very sensitive issue for employees on certain types of visas.

Editor: What other benefit plans such as COBRA, retirement and health plans are likely to be affected by a prolonged shutdown?

Bertram: My understanding is that federally funded benefits are continuing to be fully funded and administered. However, there may be private benefits that are impacted by a shutdown, depending on the plan and the policy language of the individual contract. For instance, a contractor’s benefit plan may require that an employee be employed at least 32 hours a week for the preceding 20 weeks to qualify for coverage.  If the shutdown continues, you may have a situation where employees lose their qualification for participation in the benefit plan. In that situation, the contractor would want to give COBRA notification to the employee so that they can elect benefit continuation.

Editor: Is it likely that the WARN Act will also come into force in the event of a prolonged closure of government operations? What would be the consequences of its application?

Bertram: For the federal WARN Act, the shutdown would have to continue for a fairly long period or the shutdown would have to turn into a sequestration type situation where there were permanent program cuts. Let’s say for example, an employee is only going to be furloughed for a short period of time, such as three to six weeks. Generally, the WARN Act does not come into play. However, if employees are going to be suffering a lay-off for more than six months, they need to receive the WARN notification at least 60 days prior to their termination. In addition, if contractors terminate large groups of employees as a consequence of the shutdown or any associated contract modifications or terminations, then they are going to need to think about the implications of the WARN Act as well.

Editor: Are there state laws that are even stricter than WARN in terms of layoffs? How many states have these laws?

Bertram: California immediately comes to mind. Its notification obligation is broader and it does not have some of the exceptions of the federal WARN Act. A number of other states have mini-WARN Acts provisions that should be considered. Employers with employees in several different states need to be aware of each state’s possible restrictions.

Editor: Federal government contractors are required to use the Internet-based E-verify system to confirm the citizenship status of all new hires. However, the E-verify system is maintained by the Department of Homeland Security, which will not be available during the shutdown. What should employers do to ascertain the eligibility of new hires?

Bertram: While E-verify is unavailable, employers should continue to use the standard I-9 process, thoroughly checking the required documentation of new employees. If an employer gets a notification indicating that there is a potential question about the documentation of an employee (that would typically be resolved through the E-verification process), the contractor needs to afford the employee additional time to resolve the issue. E-verify applies to all government contractors and in certain states.

Editor: With the continuing uncertainty regarding this and future shutdowns, should companies and government contractors adopt enterprise risk management plans that outline their responses in the event of a major shutdown?

Bertram: Because of the sequestration and the just recently concluded shutdown, it is important for contractors to undertake enterprise risk management planning. These incidents have brought home to contractors the importance of making certain that they are prepared to handle economic “disasters,” such as government shutdowns, contract non-renewals, the termination of major contracts, and the closure of facilities. While contractors have handled this situation extremely well, it is important for government contractors to develop contingency plans for just the kinds of situations we have recently faced.  They should understand which department is responsible each step of the response and develop a flow chart that identifies all of the different legal and business issues that are implicated when you have a major contract non-renewal and/or a government shutdown. It is difficult for contractors to consider all of the legal and business implications of such a situation when they are under the stress of a shutdown.


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