Dusting off the Government Shutdown Playbook: Questions Government Contractors Should Consider as a Lapse in Federal Appropriations Approaches

Updated November 9, 2023

The federal government is again facing another looming government shutdown unless Congress enacts an annual appropriations act or continuing resolution by November 17.

While House Speaker Mike Johnson (R-LA) has mentioned several stopgap funding options, it is unclear whether Congress will be able to pass a funding measure by November 17. For example, Speaker Johnson has floated the idea of funding the federal government through January 15, but he has also suggested the funding levels may be lower than current funding. It is unclear whether the Senate would agree to these cuts. Another approach Speaker Johnson floated would extend individual appropriations bills for different periods of time, which would create several different funding deadlines and could result in a partial government shutdown. Even if Speaker Johnson is able to pass a short-term funding bill in time to avert a shutdown, Congress will likely face the same issues in January.

As the end of the federal government’s fiscal year rapidly approaches, so does the uncertainty that comes with Congress’ inability to enact annual appropriations acts or an interim continuing resolution before the new fiscal year. In the event of a funding gap on November 17, the federal government will begin a “shutdown” of affected activities. If such a temporary yet indefinite lapse in appropriations comes to pass, the shutdown will affect many government contractors both directly, through the limits on available appropriations to fund new work, and indirectly, through the unavailability of government personnel, facilities, and other resources. We know this from experience, as these types of shutdowns are no longer novel, and based on that experience, we know that there are actions contractors can take to best position themselves to survive this interregnum and the disputes that are bound to follow.

This Advisory addresses several of the most pressing questions contractors will face in the event of a shutdown. It covers, among other topics, when contractors are required to continue performing and when they are not; steps contractors can consider to mitigate the impacts of the shutdown and minimize the inherent risks related to performing during a funding gap; and the employment law considerations relevant to managing a contractor’s workforce through this unpredictable period. This Advisory offers general guidelines that federal contractors may find useful as they navigate their businesses through a shutdown. It is not intended to provide legal advice and is not a substitute for the company-specific and in many cases contract-specific analysis that will be necessary to decide how each individual contractor should respond to the shutdown.

Contractors should monitor each of their customer agencies' websites for shutdown guidance. Many agencies, including the Department of Defense (DoD), State Department, Department of Energy (DoE), and others, issued such guidance in August.¹ Contractors should stay apprised of developments with their specific customers, as different agencies and program offices may take their own approaches to the shutdown.

A. Are contractors required to continue performing through the shutdown?

The most immediate question for a contractor to consider with a shutdown is usually whether to stop work or continue performing. A government shutdown, standing alone, does not change a company's contractual obligations to perform as promised or the government's obligation to pay for that performance.²In determining whether performance is required, a contractor should assess whether it is subject to a valid stop work order and, if not, whether its performance is authorized and funded.

If an authorized contracting officer issues a stop work order, the contractor is bound to comply with the order. Where a contractor is asked to stop work, the contractor should seek a stop work order or other formal direction from an authorized contracting officer. Contractors should be mindful that direction from other government employees, including program managers and contracing officer technical representatives, may not bind the government. Due to the possibility that government personnel will be unavailable or more difficult to communicate with during the shutdown, contractors should seek clarity on whether their contracts will be subject to stop work orders as soon as practicable.

If a contractor does not receive a stop work order and the contactor's contract (or at least the relevant scope of work) is fully funded, the contractor generally should continue to perform unless and until the contracting officer directs otherwise. The DoD Guidance states: "[a] contractor performing under a contract (or contract option) that was awarded prior to the expiration of appropriations may continue to provide contract services, whether in support of excepted activities or not, up to the limit of the funds obligated on the contract prior to the lapse in appropriations."³Other agencies have issued similar guidance.⁴

Notably, some federal contracts do not depend on appropriated funds, and consequently are not directly threatened by a gap in appropriations. For example, contracts with Non-Appropriated Fund Instrumentalities (NAFIs) may be funded with the revenue those entities generate. Likewise, concession contracts and similar contracts, including, for instance, those that involve selling surplus government property, may not be directly impacted by a lack of agency funding. No-cost and complimentary service contracts also tend not to be subject to available appropriations in the same way.⁵Even contracts that do not depend on appropriations still could be subject to stop work orders and other practical effects from the shutdown, but they should not be directly susceptible in the same way to the funding issues.

B. What if a contractor exhausts funding during the shutdown?

Situations inevitably will arise where a contractor is required to perform at the outset of the shutdown but exhausts the obligated funding before the shutdown ends. This is principally a concern for contracts that are incrementally funded and subject to the Availability of Funds, Limitation of Funds, Limitation of Cost, and similar clauses.⁶ While there is variation among the clauses, they all generally provide that the government has no obligation to pay for work performed or costs incurred unless and until funds are properly allocated and obligated to the contract. They also generally require contractors to provide notice when costs incurred exceed a certain threshold (normally a percentage of total costs), and failure to provide such notice can further limit the government's liability. If a contractor exhausts obligated funding during a shutdown, the contractor may face the threat of performing "at risk," meaning the government will have no legal obligation to pay for the work performed or costs incurred. This could be the case if a contractor is unable to provide the contracting officer with the required notice related to the exhaustion of funding. The government’s failure to either add funding or terminate a contract may serve to waive a funding limit in some situations, but contractors should not assume that is the case, especially if there is a communication breakdown with the contracting officer.

C. What if a contractor decides to perform without funding or a commitment of future funding?

Any work performed under unfunded contract line items (CLINs) or after exhaustion of funding is performed “at risk,” and the government often has no obligation to pay for it retroactively. As a general rule, the government is not liable to compensate contractors for work performed and costs incurred “at risk,” even during a shutdown. Agencies generally are not prohibited from retroactively compensating contractors for such work, but they are not required to do so, which gives the government discretion and leverage. Further, while history shows that Congress often mitigates some of the impacts of these shutdowns by passing laws after the fact to provide retroactive payment to furloughed federal employees and military and civilian personnel who work through the shutdown,⁷contractors should not expect the same relief.

Due to this uncertainty, contractors should seek to avoid performing work at risk where possible. If a contractor decides it is prudent to perform work at risk (or that could potentially be perceived to be at risk), the contractor should document its decision to do so, as well as the costs incurred, and communicate with the contracting officer as soon as possible to determine whether the government will pay for the work performed. In a scenario where slowing or stopping operations would be significantly more expensive and disruptive than continuing performance, a contracting officer may be willing to commit to paying for work performed at risk, and that commitment may be binding. Naturally, any such commitment should be reduced to writing if at all possible. Depending on the circumstances, a contractor may also need to submit a formal request for equitable adjustment.

While a contractor is normally entitled to recover increased costs associated with a stop work order, including “marching army” and other costs incurred to maintain idled capacity, the same is not necessarily true of a de facto stop work order that results where funding is exhausted and the government does not direct the contractor to continue performing. Contractors facing the latter situation may need to take the same types of decisions as contractors with a formal stop work order, as discussed below, but without the same ability to rely on the negotiated contract terms to assert entitlement to relief. Even that contractual relief is subject to appropriated funding absent a government waiver.

D. Can the Government authorize or fund additional work during the shutdown?

The lapse in appropriations will affect the ability of agencies to obligate funds to award new contracts and add funding to existing contracts. Contractors should expect contracting officers to abide by the restrictions that apply during the shutdown. The Anti-Deficiency Act makes it a criminal offense for any individual to obligate the United States to spend funds that Congress has not previously appropriated.⁸Importantly, however, agencies will be able to enter into new obligations under certain special circumstances. There are four narrow exceptions to Anti-Deficiency Act spending rules for activities without appropriations:

• Obligations not impacted by annual appropriations, for example, multi-year appropriations, indefinite (“no-year”) appropriations, or obligations authorized outside of annual appropriations bills. The most commonly-cited indefinite appropriation is Social Security.
• Obligations authorized by statutes that expressly permit obligations in advance of appropriations. For example, DoD and the Department of Homeland Security have statutory authority under the Civil War-era “Feed and Forage Act” to contract for necessary clothing, subsistence, forage, fuel, quarters, transportation, and medical or hospital supplies without an appropriation.⁹
• Activities authorized by “necessary implication” based on the duties of a given agency. Such activities include, for example, writing and distributing Social Security checks, contracting for emergency services, and ensuring an orderly closing of government functions impacted by the shutdown.
• Obligations necessary to discharge the constitutional duties of the executive and legislative branch, including certain foreign relations and national security functions.¹⁰

Further, agencies can rely on a narrow exception to the Anti-Deficiency Act that permits the employment of personal services exceeding those authorized by law "for emergencies involving the safety of human life or the protection of property."¹¹

The DoD Shutdown Guidance provides detailed information about which DoD activities are "excepted" and can therefore continue during the shutdown.¹²If DoD deems a contract necessary to support an excepted activity, the contracting officer may commit to providing additional funding to award new contracts and add work to existing contracts. The DoD Shutdown Guidance states: "The Department may continue to enter into new contracts, or place task orders under existing contracts, to obtain supplies and services necessary to carry out or support excepted activities even though there are no available appropriations."¹³Other agencies have likewise indicated that they may continue to issue new awards in limited circumstances.¹⁴

E. What if the government shutdown impedes the contractor's ability to perform?

Even if a contractor is required and expected to perform (as discussed above), there is still the practical question of whether the contractor will have access to critical government personnel, facilities, and resources needed to continue performing. Just because a contract is fully funded or does not depend on appropriated funds does not mean performance can or will continue as usual. A shutdown will force agencies to close federal facilities and furlough employees and these government actions will have ripple effects on contractors. For instance, no government personnel may be available to accept contract deliverables or to participate in contractor demonstrations and testing. If a contract involves performing services for government employees and those employees are furloughed or otherwise unavailable, the performance may be frustrated. If inspection or approval from federal personnel is required for work to continue, a shutdown probably does not suspend those requirements, even if work must stop pending the resumption of work by federal inspectors.

A key to managing these and similar scenarios is engaging with the contracting officer as promptly and as extensively as possible. Due to the Anti-Deficiency Act, the Office of Management and Budget, or individual agencies, may prevent many federal employees from even remotely checking their e-mail accounts while furloughed. During a shutdown, contractors generally should not expect or assume that any communication with a federal employee has been received, read, or acted upon. If the shutdown prevents a contracting officer from performing necessary contract administration functions, the contractor should consider affirmatively requesting direction and perhaps a formal stop work order. Contractors may also consult the Office of Management and Budget's guidance for shutdown furloughs¹⁵ and the customer agency's shutdown contingency plan, which may state in advance what services will be open and which employees fall into the Anti-Deficiency Act's exceptions.¹⁶

The shutdown also may result in delays in processing of payments to contractors. As a general rule, such delays will not excuse a contractor from performing. To be clear, contractors should be careful not to conflate a delay in payment under a funded contract with the government failure to adequately fund a contract. In most cases, the government’s failure to provide adequate funding is an excuse to stop performing, and in fact, if the contractor performs despite the lack of funding, it may do so at risk.

F. What if a stop work order or other government action or inaction increases a contractor’s cost or delays its performance?

The terms of each contract affected by the shutdown will dictate whether stop work orders are authorized and the parameters of such orders. For most contracts, the standard clause at FAR 52.242-15 will govern, but contractors should check the specific terms of their contracts. As relevant here, the clause addresses two different obligations — the contractor's obligation to stop work and minimize costs, and the government's obligation to provide for equitable adjustment once the order is lifted.

Paragraph (a) of the standard clause provides that: "Upon receipt of the order, the Contractor shall immediately comply with its terms and take all reasonable steps to minimize incurrence of costs allocable to the work covered by the order during the period of work stoppage." Minimizing the cost impact can be difficult where all of a contractor's work may be stopped at once. If a portion of a single contract is subject to a stop work order, it may be feasible to shift personnel and resources to other projects. But where a suspension is more widespread, it is inherently more difficult to shift costs within the company.

This may place contractors in the undesirable situation of choosing between maintaining full capacity, or taking extreme measures to cut costs. Shutting down operations temporarily, which could involve releasing employees, may be the only way to truly "minimize incurrence of cost allocable to the work," but may also cause delays and serious performance problems once the stop work order is lifted. On the other hand, maintaining full capacity may make resuming work easy, but creates some risk that the agency may dispute whether the contractor sufficiently complied with the duty to minimize costs.

The best way to approach this issue is to document all critical decisions thoroughly and maintain communication with the contracting officer, to the extent feasible, in light of furloughs and others practical realities. In order to obtain relief, such as an adjustment in delivery schedule or price, it is important that contractors document all costs incurred, delays suffered, and actions taken when the stop work order is in place, and assert entitlement to relief per the applicable contract terms in a timely way. The contracting officer will assess the reasonableness of the contractor’s action; a contractor dissatisfied with the determination may file a claim asserting that it made the most efficient decision under the circumstances.The cost and schedule effects will not be limited to contracts subject to a formal stop work order. The practical reality is that many contracts will be effected, resulting in increased costs or schedule delays, all of which should be documented thoroughly, discussed with the cognizant contracting officer, and, depending on the circumstances, submitted in the form of a claim or request for equitable adjustment.

G. Will a shutdown impact litigation and administrative deadlines?

Contractors and their counsel should not assume that any deadline — whether statutory, contractual, court-imposed, administrative, or otherwise — is waived or tolled due to the shutdown. Specifically related to ongoing litigation or court-related activity, the DoD Guidance makes clear that DoD will continue to support "imminent or ongoing legal action."¹⁷Such actions will likely be affected by the operational status of the courts and administrative tribunals, each of which may take a different approach to the shutdown and should be monitored for public announcements. Contractors should consult the guidance of the specific forum and, absent clear guidance to the contrary, assume that all deadlines continue to apply.

H. What employment law implications from personnel decisions might contractors face during the shutdown?

Government contractors will want to consider cost-savings measures with respect to their employees to mitigate the potential loss of revenue from government contracts during the shutdown, particularly in the event of stop work orders on contracts with funding lapses, closed government facilities, and/or unavailability of government inspectors required for performance. Importantly, employers must ensure that any cost-savings mechanisms they implement comply with the Fair Labor Standards Act (FLSA),¹⁸state law, and the Department of Labor's regulations, particularly as they apply to employee furloughs and pay reductions. We outline below several types of cost-savings measures that a government contractor can potentially take with respect to personnel during a shutdown, as well as some employment law issues to take into consideration when considering such measures.

• Furloughs: Employers can furlough non-exempt employees (i.e., employees who are classified as non-exempt and entitled to overtime under the FLSA) on a partial-day, single-day, or extended basis. The FLSA likewise 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 do not work.

• For employees who are classified as exempt under the FLSA, employers should avoid partial- or single-day furloughs and implement furloughs in full week increments. This is because FLSA-exempt employees must be paid their regular weekly salary for any week in which they perform any work, even if it is not a full week. Thus, an employer implementing a furlough that begins mid-week, for example, would have to either pay its exempt employees their entire weekly salary, or require those employees to use vacation or other paid time off to cover the non-working days (as discussed below, provided that such requirement complies with state law). Any attempt to pay a partial salary to exempt employees for a partial work-week would jeopardize those and other employees' exempt status.
  
  To minimize exposure, it is also imperative that employees be prohibited from performing any work during the furloughed period, as the contractor may be obligated to pay for such work without reimbursement from the government. Non-exempt employees must be paid for all hours worked, and exempt employees would be entitled to their full weekly salary, even if they only work a few hours while on furlough.
  
  Employers should be aware that furloughed employees may be eligible for unemployment benefits for the time they are unpaid or on furlough; eligibility is determined by state law. In addition, an extended furlough could affect an employee's eligibility for certain employee benefits, such as health and welfare or retirement plans, depending on the applicable plan or policy, and could trigger COBRA and other rights under those plans.

• Reduction in pay and/or hours: Subject to any employment agreements that provide otherwise, rather than furlough employees, employers can prospectively reduce salaries or the rate of pay for nonexempt employees, and in certain circumstances, exempt employees. For example, an employer could generally implement an across-the-board 25% reduction in pay for all employees. The pay rate for hourly employees can be reduced provided that the new rate paid is at least the minimum wage, and meets any requirements under the government contract or subcontract, as well as relevant laws such as the Service Contract Act. In addition, contractors could reduce the hours worked by non-exempt employees.
  
  With respect to exempt employees, reductions in salary ― either alone or in connection with a reduction in work hours ― can be permissible during a business or economic slowdown provided that the employee is paid at least $684 per week on a salary basis, and provided that the reduction is prospective in nature, bona fide, not sporadic, and not intended to evade the FLSA's salary requirements.¹⁹ For example, employers may not adjust an exempt employee's salary each week depending on how much he or she works, and call the resulting salary "full weekly pay" for partial work. Employers should also keep state laws in mind, including advance notice requirements, before reducing an employee's rate of pay.

• Required use of leave: In most states, and depending on the company's leave policies, employers can require employees to use any accrued paid leave. Although this measure may delay the need for furloughs, it is not actually a significant cost-saving measure, as employers will still be paying employees for time off from work. As discussed above, it may be used in conjunction with a mid-week furlough for exempt employees.

• Voluntary leave without pay: Some employers seek volunteers to take unpaid time off due to insufficient work, and this can potentially be done even with exempt employees. When an exempt employee volunteers to take time off from 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.

• Temporary reassignment of employees: To the extent feasible, government contractors may consider mitigating the loss of revenue by temporarily reassigning employees to other work that is not affected by the shutdown.

• Layoffs: Should the shutdown last long enough that employers find it necessary to lay off a significant number of employees, they must make sure to comply with the Worker Adjustment And Retraining Notice (WARN) Act,²⁰ and similar state laws, where applicable. The WARN Act requires covered employers to provide written notice to employees who suffer an employment loss at least 60 calendar days in advance of covered mass layoffs or plant closures (some states have longer notice requirements).A temporary furlough or reduction in hours is unlikely to be considered an employment loss unless it lasts for six months. In addition, government contractors may be able to invoke the exception to the 60-day notice requirement by arguing that the shutdown falls under the "unforeseen business circumstances" exception.

• Avoid discrimination claims: Treat any layoff or furlough like any other layoff or furlough. Contractors generally should follow internal established and documented employment decision processes to select employees for furlough or layoff. Carefully analyze and consider the consequences of employment decisions to ensure there is no discriminatory intent or disparate impact with respect to any protected category.

• Anticipate and prevent False Claims Act or Whistleblower Statutes issues: Where complicated cost and accounting issues intersect with controversial staffing decisions, False Claims Act or whistleblower allegations may percolate. Contractors generally should ensure they adjust their government billing practices to reflect recent workforce changes. Contractors generally should consider taking a second look at bills and government payments for discrepancies, and promptly remedy discrepancies.

• Expect and prep for security clearance processing delays: In government shutdowns, the government will likely delay or even halt security clearance processing. These delays can adversely affect contract administration and staffing. Develop staffing and management ramp-up plans for when normal government operations resume.

• Process employment verifications: Despite the E-Verify system normally being offline during shutdowns, new hires are still subject to employers verifying their I-9s, and, as soon as possible, employers must process the I-9s on E-Verify.

Conclusion

We encourage all federal contractors to seek guidance from their customers and maintain communication with their contracting officers. As discussed, internal government decisions categorizing activities and personnel, and the availability of government personnel during the shutdown, are critical factors in whether contractors can continue activity, when they must stop, and when they are at risk. As always, contractors must document everything thoroughly, and, of course, obtain legal counsel as needed.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.