Last week, the House of Representatives voted to approve back pay for all furloughed government employees (see here), a measure expected to be passed by the Senate and approved by the President eventually. That’s great news for the approximately 800,000 federal workers who have been impacted by the government shutdown (many of whom are still sitting at home). But what about the unknown number of federal service contractors who are sitting at home because their employers have received stop-work orders? A number of folks have considered the issue of back pay for federal service contractors (see here and here for example), but outside of some defense contractors who directly support the armed services, the analysis doesn’t look good.

But is “back pay” the only way for contractors to receive compensation? Not necessarily.

Many prime contractors have received stop-work orders as a result of the current Government shutdown. However, the stop-work order requires only that the contractor stop performing work under its contract with the government, not that it furlough its employees. It is up to contractor whether to keep its people on overhead (with pay), direct their work to other contracts (with pay), allow them to use paid leave in lieu of a furlough, or furlough them temporarily (without pay) with the expectation that they would be brought back when work resumes. For the larger federal service contractors, they have flexibility in what to do with their employees, and to their credit most of these companies are keeping the bulk of their people on payroll. Lockheed made news when it announced it would furlough 3,000 employees (see here), which it later reduced to 2,400 (see here), but that’s only 2-3% of Lockheed’s workforce. Yesterday, I was talking to a small federal service contractor who was forced to furlough 2/3rds of its nearly 200 employees due to stop-work orders from the government. There is no way smaller federal service contractors can afford to keep such a large portion of their employees on payroll if they aren’t actively billing the Government.

There may be another way for federal service contractors to protect their employees at least to a limited extent. When a contractor has been issued a stop work order, the contractor may be entitled to submit a claim for costs incurred in the stop work order, including any costs for increased overhead payment, severance payments to workers, or other costs associated with protecting workers and property during the shutdown. Following the 1995-96 shutdowns, some contractors did pursue claims for these costs and some did prevail in litigation (see here for example). It is important that every contractor separately track all costs attributable to the shutdown, so that they can be in a position to seek a cost recovery from the Government. Keep in mind though that every contractor must be careful to mitigate costs where it can. If a contractor decides to keep people on overhead, it is considered reasonable only to do this for a short period (but no defined period). Paying all employees for the entire period of the shutdown may not be reasonable if the contractor can lay off some while maintaining a readiness to return. There is no set formula here and no guarantee, if a contractor decides to pursue costs, that all or most of those costs will be recoverable, but it’s something all federal service contractors should be aware of.