When the government shuts down, contractors and their employees pay a steep price

Jan. 10, 2019, 7:35 PM GMT

By Erik Sherman

As the partial government shutdown continues into its third week, the total cost keeps mounting. Any shutdown can easily run into billions of dollars, according to the Congressional Research Service.

One significant source is government payrolls. Hundreds of thousands of federal workers are either furloughed or, considered essential, required to work even if not being paid. Congress has, in past shutdowns, agreed to provide back pay to the workers.

But that doesn’t generally extend to contractors. The result is that many people who work for the government through third-party employers are left without work — or pay. Other workers on government contracts might continue to receive salaries, but their employers run a big risk of never being reimbursed for keeping people at the ready.

And even if they do eventually get a reimbursement check for the expense, it can take six months to a year for it to arrive, putting the companies, particularly if smaller businesses, in financial danger.

Closing shop

Most employees, whether of the federal government or contractors it uses, are furloughed during a shutdown because of the Antideficiency Act originally passed in 1884 and amended since.

The legislation “prohibits agencies from incurring obligations that are in advance of, or that exceed, an appropriation,” as a Jan. 19, 2018 Office of Management and Budget memo explains. Without such legislation, any agency could keep spending money that wasn’t authorized and drive up a deficit without the permission to do so.

Part of incurring expenses is having people continue to work, which means an agency owes them for their labor. There are exceptions, such as people considered to be essential, which can be an opaque and fluid label.

Employees of contractors who must continue work are “guaranteed to get paid,” said Robert Shea, a principal in the public sector practice at consultancy Grant Thornton. “For those who can’t work during the shutdown, the government doesn’t reimburse us, so we keep paying them but we can’t do that indefinitely.”

Keeping people in work

In Shea’s area, consultants can work on the company’s own overhead requirements, such as continued training or internal compliance. The division hopes that the consultants are freed up for the rest of the year to try and make up for the lost income. Some companies may keep people working by moving them to other projects. Or there may be other requirements, like a union contract, that force a business to keep certain people on the job.

Otherwise, as some workers at contractors to the federal government have learned, it may mean a temporary layoff.

“A company already in financial trouble might not be able to survive a few weeks with no revenue,” said Jennifer Sandberg, a labor attorney with Fisher & Phillips. Sending people home may be unavoidable. This is frequently the case for lower-wage hourly workers who may have the fewest financial resources to continue paying their bills.

Getting paid back

But the companies themselves face their own hardships. “Generally, if under our contract we can’t work during a shutdown, we’re not going to get reimbursed for the expenses we incurred, including salaries, for those individuals,” Shea said.

However, government contracts don’t typically provide for time to restart after a shutdown. When the agency reopens its doors, the contractors must begin immediately. So, the companies cannot afford to lay off people and hope they will remain available in a tight labor market where they have more options.

The result is that companies spend when limited revenue is coming in, causing cash flow problems. “With prior shutdowns, we’ve had instances where it’s particularly hard for small businesses who have difficulty dealing with all this and fronting the money,” said Jessica Abrahams, chair of the government contracts practice at law firm Drinker Biddle.

And even if the labor expenses can be claimed as an ongoing cost of doing business, there is the challenge of getting paid. One client of Abrahams had to wait “close to a year before they got paid,” she said.

It can be similar to getting reimbursed by a health insurer. “There are some who would argue that when you submit a health insurance claim, often you’re faced with all of these different people at the insurance company that deny the claim,” Abrahams said. “There’s a certain attrition rate with claims getting denied that some percentage give up. I think there is definitely some of that going on.”