A Brief Primer on the Impact of a Federal Government Shutdown

I. Introduction

A U.S. federal government shutdown creates a number of direct and indirect consequences that impact U.S. companies, individuals and virtually every aspect of the U.S. economy.  Although the federal government has experienced previous lapses in funding that have led to shutdowns of all or part of the federal government, the current funding impasse and impending shutdown raise a number of unique and unprecedented questions for government workers, government contractors and businesses, and the public at large.

A U.S. federal government shutdown can have serious consequences because of the size of federal spending and its impact on the U.S. economy.  The U.S. government spent $6.27 trillion dollars in fiscal year 2022 which amounted to approximately 25% of total gross domestic product. The federal government funds over 2,200 federal assistance programs for the public.  There are over 2.2 million federal employees who will be directly impacted in some way by a federal government shutdown with the majority facing a furlough of an undetermined length.  There are over 11 million U.S. federal government contracts signed every year and they may be impacted by a shutdown. Finally, the federal government spends approximately $1.2 trillion dollars every year, or about 19% of all federal spending, on programs that fund or are related to the states.

The purpose of this Client Alert is to explain the consequences of a government shutdown in general, why this one may be different, and to also offer insights to the regulated industries, government contractors and others on what to expect this time around.  Our team is ready and available to help advise companies through this shutdown process.

II. What Is a Government Shutdown?

Shutdowns typically occur when Congress has not passed appropriations for a federal government new fiscal year which begins on October 1.  Congress’ power of the purse means that it decides whether (or not) to appropriate funds for a particular program or activity, and Congress decides the amount of that funding.  These appropriations permit the federal government to make promises to pay in the future (i.e. “incur obligations”) consistent with the amounts and restrictions Congress has provided in annual appropriations and authorization bills for those appropriations.  Appropriated funding has a time limitation, and at the end of the federal government’s fiscal year every September 30, that fiscal year’s appropriated funds expire. 

Both the Constitution and a federal statute, the Anti-Deficiency Act (31 U.S.C. §1341), prohibit the federal government from incurring obligations to pay for government operations without appropriations from Congress. Simply put, without an appropriations law passed by Congress and signed by the President, the government generally has to stop spending money.  That means the government must shut down operations, close offices, and send workers home.

III. What is the Impact on Federal Agencies?

If there is a lapse in annual appropriations, the Anti-Deficiency Act generally requires agencies to stop spending or obligating funds, unless an exception applies; however, government employees can continue to perform activities involving the safety of human life or the protection of property, and to carry out constitutional functions. Activities funded through other means, such as user fees, working capital, or unexpired prior-year appropriations, also may continue.  However, employees who work for programs that lack funding and are not covered by an exception may be subject to furlough and will be barred from working until the funding gap is resolved.

Federal agencies are required to post on their websites contingency plans that provide a high-level overview of the number of employees and activities that may be affected by a lapse in appropriations.  Some agencies have indicated that they have current funding reserves or alternative sources of funding, such as advance appropriations or funds appropriated by the Infrastructure Investment and Jobs Act, that will allow them to continue some level of operations after the new fiscal year begins October 1.  Programs funded through these sources should be relatively unscathed during the impending shutdown.

How agencies implement their contingency plans may vary.  For example, the U.S. Department of Transportation’s contingency plan indicates that more than 36,000 out of 55,000 employees would continue to work during a lapse in annual appropriations because their work is either funded through other means or related to the protection of life and property. However, the Office of Management and Budget recently advised the U.S. Treasury Department that funding provided to the Internal Revenue Service under the Inflation Reduction Act would not be available to make up for a lapse in appropriations and funding gaps across the agency, which will result in the IRS having to furlough about 66 % of its workforce.

Congress and the Judicial Branch are not immune from the effects of a lapse in appropriations. Congressional offices will undergo a similar process of determining which functions and employees are considered exempt because they support a constitutional function, such as a member of Congress’ legislative and oversight activities, or are performing work related to the protection of life or property that is excepted from furlough requirements. While Congressional member and committee offices are expected to remain open, but with less staff, support offices including the Capitol Visitors Center will be closed.

The appropriations process also provides funding for the Judicial Branch. Although the lapse in appropriations will impact the judiciary, the Judicial Conference announced that the courts will be able to continue to operate for two weeks through fees and other sources of funding.  Some litigation involving the government will nevertheless be paused—the U.S. Department of Justice is expected to file notices with the courts that there is a lapse in funding and to seek abeyance of court filing and briefing deadlines during the lapse in funding.

Since the last shutdown, Congress has enacted the Government Employee Fair Treatment Act (P.L. 116-1) to ensure federal employees will receive backpay following the shutdown. 

IV. What is the Impact on Federal Government Contracting?

The issues that contractors would face under a government shutdown may vary with the circumstances of individual contracts, but there are a number of common considerations.  Based on our experience under prior Federal government shutdowns, these include:

• • • What is the Contracting Agency’s Plan? Agencies across the government are issuing operating plans in the event of a lapse in appropriations.  The plans restate general rules that contractors should continue performing under contracts awarded and funded prior to the shutdown, but that agencies may not award new contracts or options, unless they are related to “excepted” activities.  The plans also reflect the probability of furloughs of large numbers of government personnel.  Contractors should review their contracting agency’s guidance to understand any agency-specific plans. 
    • What Happens if Performance is Delayed or Disrupted? Due to the unavailability of appropriated funds, contractors may be unable to access closed government facilities or obtain timely approvals, directions or support from the government.  For example, a contractor that performs services in a federal facility may find that the facility is closed, so the contractor's employees do not have access to their workplace. In that situation, contractors will need to consider employment law implications of their actions, discussed more below.  Contractors should track and document the cost and schedule impact of both the disrupted work and the contractor’s employee relations actions to ensure that any increases in the contract work associated with the shutdown are appropriately reflected in a contract modification.
    • Can My Contract Workload Increase? Some contractors may actually be approached by their government customer seeking to off-load, at least temporarily, work that cannot be performed by the government during the shutdown period. If the contract funding is available, the government may want to increase the scope of the contract in order to ensure that certain work is not disrupted or delayed. Contractors should track and document any changes in workload to ensure that any increases in scope and associated cost or price adjustments are appropriately reflected in a contract modification.
    • Can I Stop Performance? In extreme circumstances, contractors may face questions of whether to continue performance in the face of potentially material government failures to pay.  A unilateral cessation of work involves considerable risk for a contractor, particularly considering the duty to proceed imposed by the FAR “Disputes” clause.  FAR 52.233-1 requires that “[t]he Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract.”  The “Alt. I” version of the Disputes clause extends that duty further to issues “relating to” the contract, which is generally understood to include government breach.  Failure to comply with the duty to proceed can be an independent basis for the government to terminate a contractor for default.  Contractors considering unilateral cessation of performance should first seek legal guidance based upon a detailed analysis of the relevant facts and law. 
    • Where is the Money? For incrementally funded contracts, contractors will need to consider the implications of the various standard clauses (Limitation of Costs, Limitation of Funds, Limitation of Government Obligations) that may affect the government’s obligation to pay costs in excess of the amounts already obligated to their contracts.  Of particular concern will be the standard provisions in those clauses that may limit the government’s liability for termination costs in the event that the contracts are eventually terminated without new funding.  But for contracts that are fully funded or that have incremental funding sufficient to cover all anticipated costs, including termination costs, a shutdown would not normally create new funding risks.
    • When Will I Be Paid? There may be delays in payment. As noted above, the government's ultimate legal liability for payments due on contracts that are already funded at the time of the shutdown is unlikely to be at issue, but if the government employees who process contractor invoices and make contractor payments are not at work, there will obviously be no payments made. For large contractors with substantial bills that may involve payments of millions of dollars on a daily basis, the consequences of even a short delay in payment could be economically significant, although probably not an existential threat to the company. For contractors without readily available cash or credit lines, the consequences of more than a brief delay in payment could be more consequential.
    • What Remedies Are Available? Contract type and the availability of a remedy from the government for the consequences of a shutdown will also be important in the decision-making process. For contractors with cost-reimbursement contracts, the reasonable costs of coping with a shutdown should be recoverable, although there may be issues about the allocability and allowability of specific items of cost. On fixed-price contracts, any recovery from the government will likely depend on whether the contractor is entitled to an equitable adjustment. And, on T&M contracts, there are likely to be contract-specific issues about whether the contractor is entitled to be paid under the contract for idle time or would need to make a claim for an equitable adjustment. Again, every situation should be assessed separately, based on specific facts. In general, however, contractors should take steps to ensure that any increased costs associated with the shutdown are collected in a way that will support a claim or a request for equitable adjustment if the contractor ultimately decides to pursue one.
    • Can I Still Protest a Solicitation or Award During a Shutdown? While agencies are unlikely to issue new solicitations or award new contracts during the shutdown, contractors may still have timely protest issues at the start of the shutdown period. Contractors considering protest should note that the Government Accountability Office (“GAO”) will be closed during the shutdown.  Historically, GAO has considered protests filed on days when the office is closed to be filed at 8:30 a.m. on the first day that GAO reopens.  If that is the case, protests filed during the shutdown may be considered untimely, but that untimeliness may be excused.  Protests in the Court of Federal Claims may continue until the judiciary’s funds expire, as noted above, although delays are possible given that Department of Justice attorneys may be furloughed.

V. What is the Impact on Workers Supporting Federal Contracts?

Two primary employment issues can arise in the shutdown: (1) jeopardized Fair Labor Standards Act (FLSA) and state-law corollary exemption status for employees who are “exempt” from minimum wage and overtime requirements; and (2) Worker Adjustment and Retraining Notification (WARN) Act obligations.

During a government shutdown, many government contractors implement unpaid furloughs of employees. FLSA exemption issues can arise when unpaid furlough periods reduce   the compensation level of exempt employees below the threshold required for them to maintain their exempt status under federal, state, or local law. For example, an exempt executive, administrative, or professional employee must be paid a salary of at least $684 per week to maintain their exemption under the FLSA and is entitled to be paid in full for any week in which they perform any work. Contractors implementing mid-week furloughs that do not pay exempt employees for the portion of the week they did not work jeopardize those employees’ exempt status by doing so.  These contractors also risk the exempt status of other employees in the same job classification working for the same supervisors.  If employees’ exempt status is lost, employers will be required to pay overtime to those employees who work over 40 hours in a workweek and for such other periods required under applicable state and local laws.

To avoid the loss of employees’ exempt status, contractors should ensure that exempt employees do not perform any work at all during weeks in which they are in an unpaid furlough status. Employers should be aware that work includes checking emails and work-related text messages, for example.  Employers should consider what steps are necessary to ensure that employees who are on unpaid furlough are not performing work.  This may include temporarily blocking access to company networks and clearly communicating expectations to affected workers.  Contractors may also consider requiring exempt employees to use accrued vacation pay or other paid time off during the furlough period to mitigate these risks, provided such a requirement complies with company leave policies and applicable law. 

Furloughs may also trigger federal or state-equivalent WARN requirements. The federal WARN Act and its state-law equivalents generally require that an employer implementing a mass layoff must provide affected employees with 60 days’ notice. While a layoff does not trigger the federal WARN Act until it exceeds six months (which is an unlikely duration for a shutdown), state WARN requirements may apply. For example, in California the state WARN Act does not specify the duration of a qualifying layoff, and at least one court has required California WARN notice for layoffs that lasted only three to five weeks. See Int'l Bhd. of Boilermakers v. Nassco Holdings Inc., 17 Cal.App.5th 1105, 1112 (Cal. Ct. App. 2017).

As a shutdown approaches, contractors should incorporate plans for addressing these employment issues into their contingency plans for a potential shutdown.

VI. What is the Impact on the Healthcare Sector?

With respect to federal health care programs, the shutdown could potentially impact certain government functions depending on the source of funding. Mandatory spending programs—including Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and Affordable Care Act (ACA) health plans—have permanent funding and do not require funding provided by the annual appropriations bills. In addition, federal health agency activities already funded by Congress (e.g., by user fee agreements and emergency funding) would remain largely unaffected in the short term as well.

HHS released an updated FY24 contingency staffing plan last week that details how many employees would be permitted to continue working in the absence of new appropriations and how many would be furloughed. The plan also specifies what excepted functions would continue, even if the staff positions are not funded, stating "HHS will continue any necessary activities in the event of a lapse in appropriation."

Below is a more detailed list of the impact of a shutdown on specific HHS agencies and programs.

A. Summary of HHS Shutdown Plans

The Administration for Strategic Preparedness Response (ASPR) will continue support of COVID-19, hurricane, and other emergency responses.

The Centers for Disease Control and Prevention (CDC) will continue support to protect the health and well-being of U.S. citizens here and abroad through response to outbreaks, maintaining laboratory functions, the President's Emergency Plan for AIDS Relief (PEPFAR), and the agency's 24/7 emergency operations center. CDC would collect data being reported by states, hospitals, and others and report out critical information needed for state and local health authorities and providers to track, prevent, and treat diseases.

The Centers for Medicare & Medicaid Services (CMS) would continue to support the Medicare program, which is a funded activity, will continue to make payments to eligible states for the Children's Health Insurance Program (CHIP), and will continue Affordable Care Act - Federal Exchange activities, such as eligibility verification. The plan also specifies continuation of the Health Care Fraud and Abuse Control and Center for Medicare & Medicaid Innovation (CMMI) activities. The shutdown could slow the implementation of the administration’s Medicare drug price negotiations (set to begin October 1, 2023), and could threaten HHS oversight of the Medicaid "unwinding" process, as states reevaluate the eligibility of enrollees.

Food and Drug Administration (FDA) activities funded by user fees or by COVID-19 supplemental funding will continue, as will vital FDA activities related to imminent threats to the safety of human life. Activities that would continue include the review and approval of new medical products, work on emergency use authorizations to respond to the COVID-19 pandemic, mitigation efforts related to potential drug and medical product shortages and other supply chain disruptions, managing recalls and outbreaks related to foodborne illness and infectious diseases, and other necessary activities to help patients have access to new therapies and important generic and biosimilar treatment options. Some FDA functions, including routine inspections and rulemaking activities, would shut down.

Health Resources and Services Administration (HRSA) staff will continue programs and activities that are funded through carryover funding, or user fees, which include: Ryan White Parts, the President's Emergency Plan for AIDS Relief, the National Practitioner Databank, and the Health Centers Program.

The Indian Health Service (IHS) received advance appropriations for FY24. As such, the majority of IHS-funded programs will remain funded and operational in the event of a shutdown. Advance appropriations, third party collections, and carryover balances, including from supplemental COVID-19 appropriations, will continue to fund the provision of care by IHS, Tribal Health Programs, and Urban Indian Organizations.

The National Institutes of Health (NIH) activities that will continue are centered mainly on the ongoing operations at its biomedical research hospital, the NIH Clinical Center, to maintain the safety and continued care of its patients. Operations at these centers, including clinical trials, will continue, albeit with a limited number of staff behind them. About 22.4% of NIH staff will be retained.

The Office for Civil Rights (OCR), the Office of the National Coordinator for Health IT (ONC), and the Office of Inspector General (OIG) are part of the Office of the Secretary’s plan. OIG’s oversight activities would continue, as would OCR HIPAA investigations. ONC’s activities will not continue during a shutdown.

The Substance Abuse and Mental Health Services Administration (SAMHSA) will continue substance abuse and mental health programs, including services provided by the Disaster Behavioral Health response teams in the event of a natural or human-caused disaster, the 24/7 365 day-a-year Disaster Distress Helpline that provides crisis counseling to people experiencing emotional distress after a disaster, and the 988 Suicide Lifeline.