Thursday, October 10, 2013


The negative impacts of the federal government shutdown on government employees and government contractor employees have received a great deal of attention.  However, the dramatic impact of the shutdown on private government contractor employers has received less press.  This article will discuss some of these impacts and provide some mitigating ideas.

Impact on Employers (FLSA Issue)

Based upon prior shutdowns, private sector employers can expect that they will be not be paid for services provided by “non-essential” employees on government contracts.  This will have a crushing effect on employers that supply predominately non-essential personnel, and in particular, firms employing fewer than 100 employees.  Most of these employers will not be able to afford to pay or to retain their employees due to reduced cash flow, and may be forced to terminate large numbers of their workforces as the shutdown drags on.  While the Congress is the principle culprit, the problem is dramatically compounded by The Fair Labor Standards Act (FLSA) (29 USC §201 et seq.; 29 CFR Parts 510 to 794).

The FLSA establishes standards for minimum wages and overtime pay for virtually all employers in the United States.  Under the FLSA, certain categories of employees are classified as “exempt” from the minimum wage and overtime requirements of the FLSA.  Many employees of small government contracting firms, including certain skilled computer professionals, are classified as exempt (salaried) and, therefore, are not entitled to overtime wages (time and one-half).  Whether such classification is appropriate is the subject of another article, although it is worth noting that many employers mistakenly misclassify employees as exempt, and can incur significant liability in back-pay, liquidated damages and attorney’s fees by making this mistake.  

Exempt Employees Should Not Work Partial Weeks

Under the FLSA, exempt employees must receive their full salaries for any week in which they perform any work at all.  29 C.F.R. §541.602(a).   If an employer fails to pay such full weekly salary to its employees, the employees can lose their exempt status and can be eligible for  overtime pay during the time period in which they were not paid their full salaries correctly, if they worked any overtime during that period.  29 C.F.R. § 541.603(b).  Indeed, if only some employees are not paid their full salaries correctly, then all employees in the same job classification working for the same managers who made the decision to pay some employees incorrectly lose their exempt status for the same period of time, and can be eligible for overtime.  Id.  In more normal business circumstances, this “group” loss of exempt status for mistakenly docking one employee’s pay for a partial-day absence, for example, can be an enormous problem for any business.  However, in the context of a government shut-down, when few employees are likely to work enough hours to be eligible for overtime (more than 40 hours per week), the problem may be less serious.

The flip-side of the “full-salary-for-any-work-during-a-work-week” issue is that FLSA does not require an employer to pay exempt employees at all during weeks in which the employees do no work at all.  However, even a few hours of work can trigger a full week’s pay.   Thus, diligent employees, who work from home on a company laptop or personal computer  to keep up with their workloads, answer a few emails, or  make a few business calls, will  trigger the full week’s pay requirement, whether they meant to or not.   This is a requirement that cannot be waived, no matter how voluntarily the employee may perform the work, and no matter what the employee says or signs.  Rights under the Fair Labor Standards Act cannot be waived except with approval by a court or the US Department of Labor.   Therefore, some employers are requiring their employees to turn in their laptops, cellphones, electronic devices and any work documents.  They are instructing their employees not to perform any work without written authorization. 

In contrast to salaried (exempt) employees, hourly (non-exempt) employees must be paid for all the hours they work, but do not have to be paid anything more than that.  During a shut-down, this makes it easier for companies to permit hourly employees to do small amounts of work that may be important to the business without incurring the cost of a full-week’s wages for the tasks  performed.  For morale purposes and to treat employees consistently across the board, however, some employers are instituting a no-work policy for all employees, since there will likely be no reimbursement from the government for services provided. 

The timing of the shutdown is problematic for employers, as exempt employees who worked on Monday, September 30, 2013, but not the remainder of the week, are still entitled to receive their full weekly salaries for the week of 9/30 to 10/4.  Furthermore, if the shutdown concludes mid-week and employees return to work, employers will be required to pay exempt employees their full weekly salaries for that week, as well. 

Accrued Leave Benefits, Unpaid Leave or Termination

Many employers are requiring exempt employees to use up any accrued leave during the shutdown, which is permitted by law.  This does not help a company’s current cash flow problem, since money is still being paid out to employees when no revenue is coming in.  However, at least it holds the promise of greater attendance (and therefore, greater productivity), when the shut-down ends and there is plenty of work again.  Even so, as the shutdown continues, many employees will exhaust their accrued leave.  In that event, the employees must still be paid their full salaries for any week in which they perform any work.  Some employers have leave policies that permit employees to carry a negative leave balance, and this can help during the shut-down, since it extends the time the employee can be required to be at work and forego vacations when the shut-down is over.   In more normal circumstances, of course, such policies can pose problems, since employers are unlikely to be able to recoup the unearned leave they paid out, if the employee terminates before he or she has “earned back” the time.  At the very least, it is wise for negative leave policies to restrict the circumstances under which employees can incur negative leave balances, as well as provisions for how employees will repay the money if they resign before they have earned back the leave.  Some employers are allowing employees to donate and pool accrued leave to help fellow employees.  This can help even out large leave balances across a spectrum of employees and produce greater productivity when the shut-down ends, but still leaves the employer with the same cash flow problem that the shut-down created in the first place. 

Employers with benefits policies may also be required to continue paying the costs of the employee benefits (including health care), depending on the terms of their plans.  Employers should check their plan’s definition of an “eligible employee.”  Often this depends on how many hours the employee works.  If the employees’ hours drop below the plan’s minimum, this may be a triggering event under COBRA.  In that case, the employer may not have to continue paying employee premiums; however, the cost of continuing coverage would be shifted to the employees just at a time when they could least afford to pay their premiums.   There may be no good answer here.   At the very least, leave policies should be amended to accrue leave based on hours actually worked, not more general definitions of “service.” 

Employers who have “at will” employees have the option of terminating such employees, but that may trigger payment of accrued leave in a lump sum (causing even greater cash flow problems), as well as shifting the cost of benefits premiums to the employees under COBRA.   Furthermore, the employer may lose the goodwill of the employee, and may have more difficulty re-staffing its contract when the shutdown ends. 

Employees who are terminated for lack of work will be eligible for unemployment benefits if they remain unemployed for more than a week or two.  This may cause the employer’s unemployment insurance tax to rise.  However, employees who suffer a dramatic cut in hours can also be eligible for benefits after a few weeks, so the advantages of termination compared to lay-off or furlough may be little to none.

Reclassify Employees as Non-Exempt

What is the solution for dealing with exempt employees?  One creative option that is being recommended to employers is to prospectively (not retroactively!) convert its “exempt” employees to “non-exempt” (hourly) employees for the duration of the shutdown and until the first full week of work thereafter.  The employer will have to notify the employees of the conversion, specify each employee’s hourly rate, and pay overtime to any employees that work more than 40 hours in a given week in the interim.  Upon the resumption of the first full week of work after the shutdown ends, the employer can re-convert its employees to exempt status and return them to their previous salaries. 

This option is not without some risk and should be implemented in close consultation with an attorney to ensure that it is appropriate for the employer, that state laws do not prevent this solution, that proper notices are given, and that overtime wages are paid.  Employees who do any work at all must be required to keep accurate track of their hours, and must be paid overtime if they work more than 40 hours in a given week.  Employers should also make sure that their handbooks contain provisions required by the US Department of Labor regarding paycheck deductions in order to minimize any possible liability in the event of inadvertent errors in pay processing.

Other Shutdown Issues

This article does not cover all of the problems currently being experienced by government contractors.  Employers must understand that each state has its own laws regarding hours and wages, and the FLSA does not solely control how employers should pay their employees during the shutdown.  Some larger employers may be subject to the federal WARN Act, which creates an entirely new set of rights and responsibilities for employers affected by the shutdown.  Furthermore, employers must take into consideration the fact that employees may not agree with or appreciate the solutions that work for the employer (for example, the mandatory use of vacation benefits), and there may be other unintended consequences of the employer’s actions.   

This article was prepared by Gross & Romanick, P.C, in consultation with Beth Wolffe, Esq., of The Wolffe Law Firm.    

2013 © Gross & Romanick, P.C.