As the federal government shutdown continues into its second week, many government contractors are considering, or have already begun to implement, cost-savings measures with respect to their employees to mitigate the loss of revenue from government contracts during the shutdown. Although the Department of Defense has recalled furloughed federal employees, which has alleviated some of the cash flow pressures on government contractors who perform defense-based projects, many federal agencies remain shuttered, and contractors are left unable to perform contracts due to stop-work orders on contracts with funding lapses, closed government facilities, and/or unavailability of government inspectors required for performance. Further, the House’s passage of a bill to pay retroactively all furloughed federal employees once the government reopens does not require back pay for contractor employees.1 Employers must ensure that any cost-savings mechanisms they implement comply with the Fair Labor Standards Act (FLSA) and the Department of Labor’s regulations regarding employee furloughs and pay reductions. This Advisory outlines several types of cost-savings measures that a government contractor can legally take with respect to personnel during a loss of revenue. Additionally, contractors can also expect delays in payment for any authorized work that does proceed during the shutdown.

Potential cost-savings mechanisms

Faced with the prospect of loss of revenue while having to pay employees for work they are unable to perform because of the shutdown, government contractors have several cost-saving options: implement furloughs, temporarily reduce employee pay, temporarily reassign employees to other areas, and/or require employees to use their leave. In implementing these measures, contractors must pay close attention when dealing with “exempt” employees under the FLSA and the Department of Labor’s regulations so as to not jeopardize those employees’ exempt status. Generally, “exempt” employees, because of their positional duties and responsibilities and level of decision making authority, are exempt from the overtime provisions of the FLSA, while non-exempt employees are eligible for overtime and are typically paid on an hourly basis.

  • Furloughs of exempt employees: For exempt employees, employers must implement furloughs in full week increments. Employers are permitted to reduce the predetermined salary amount to be paid regularly to an exempt employee during a business or economic slowdown, provided that the reduction is prospective in nature, bona fide, and not intended to evade the salary requirements.2 The Department of Labor regulations do not permit an employee to retain his or her exempt status if deductions are occasioned by day-to-day or weekto- week determinations of the operating requirements of the business. Accordingly, employers should avoid partial-day and single-day furloughs and instead furlough exempt employees in full one-week increments. It is imperative that employees are prohibited from performing any work during the furloughed period, because employers are required to pay an exempt employee the full predetermined salary amount free and clear for any week in which the employee performs any work without regard to the number of days or hours worked. Furloughed employees may be eligible for unemployment benefits for the time they are unpaid, but such eligibility is determined by state law.
  • „„Voluntary Leave without pay: If an employer seeks volunteers to take time off due to insufficient work and exempt employees volunteer to take time off of work without pay for personal reasons other than sickness or disability, salary reductions may be made for one or more full days of missed work without risking the employee’s exempt status. The employee’s decision must be completely voluntary and we suggest having the employee sign a voluntary leave without pay agreement.
  • Furloughs of non-exempt employees: Employers can furlough non-exempt employees on a partial-day or single-day basis. The FSLA does not preclude an employer from reducing the number of hours that an hourly-employee is scheduled to work, and employers are not required to pay non-exempt employees for hours that they did not work.
  • „„Reductions in rate of pay: Subject to any employment agreements that provide otherwise, rather than furlough employees, employers can prospectively reduce salaries or the rate of pay for both exempt and nonexempt employees. For example, an employer could implement an across the board 25% reduction in pay. The pay rate for hourly employees can be reduced provided that the rate paid is at least the minimum wage. With respect to exempt employees, reductions in salary are permissible provided that the employee is paid at least US$455 per week on a salary basis.
  • „„Temporary reassignment of employees: To the extent feasible, government contractors should consider mitigating loss of revenue by temporarily reassigning employees to other billable work that is not affected by the shutdown.
  • „„Required use of leave: Employers can also require employees to use any accrued paid-leave. Although this measure may delay the need for furloughs, it is not actually a cost-saving measure, as employers will still be paying employees for time that is not generating revenue.

Should the shutdown last long enough that employers find it necessary to lay-off personnel, they must comply with the Worker Adjustment And Retraining Notice (WARN) Act, 29 U.S.C. §§ 2101-2109. Where applicable, the WARN Act requires covered employers to provide written notice to affected employees at least 60 calendar days in advance of covered mass layoffs. Government contractors may, however, be able to invoke the exception to the 60-day notice requirement by arguing that the shutdown falls under the “unforeseen business circumstances” exception. (For more information on the WARN Act and the unforeseen business circumstances exception, please refer to our prior Advisory: documents/ADV313WhenToWarnEmployees%20 AboutTheEffectsOfSequestration.pdf.)

Even where the funding lapse may not preclude government contractors from being paid during the shutdown (such as under fully funded contracts), thus enabling employers to potentially avoid personnel-related cost-saving measures, contractors should expect delays in payment once the government reopens. It is unclear whether contractors will be able to recover interest under the Prompt Payment Act (PPA) for payments delayed by the shutdown. Under the PPA, interest begins to accrue 30 days after the required payment due date. For contracts that do not specify a payment due date, the required payment date is 30 days after the government’s receipt of a “proper invoice.” 31 U.S.C. § 3903(a)(1). The statute defines “proper invoice” as “an invoice containing or accompanied by substantiating documentation the Director of the Office of Management and Budget may require by regulation and the head of the appropriate agency may require by regulation or contract.” 31 U.S.C. § 3901(a)(3). An agency is deemed to have received such an invoice upon actual receipt at the place or by the person designated by the contract or on the 7th day after the date on which the property is actually delivered or the performance is actually completed, as the case may be. 31 U.S.C. § 3901(a)(4). Accordingly, the shutdown may prevent an agency from receiving a proper invoice, which could deprive a contractor of an interest penalty for the delayed payment.

In summary, government contractors affected by the shutdown should consult with employment counsel if necessary, before implementing any employee furloughs or reductions in salary to ensure compliance with FLSA and Department of Labor regulations. Contractors should also maintain meticulous records of actions taken to mitigate loss of revenue, communications with contracting officials regarding performance, the availability of government facilities and government personnel needed to perform work under fully funded contracts, and any costs incurred as a result of the shutdown.