Key Considerations for Navigating Workforce Furloughs and Reductions During Government Cutting and Shutdowns

The Trump administration has taken various measures aimed at cutting government agencies, departments, spending, and contracts. The ripple effects of these actions have already had far-reaching impacts on many federal contractors and subcontractors, and this administration seems poised to continue downsizing the federal government. With a looming federal budget proposal and uncertainty of whether a deal can be reached to keep the government funded, contractors must also prepare for a potential government shutdown. 

Given the current risks of government cuts and shutdowns, contractors should consider the following key considerations and action plans to prepare for potential employee furloughs and workforce reductions in force (RIFs).  

1. Gather the Right Team and Create Confidentiality/Privilege Protocols

Executing a furlough or RIF often requires significant planning and input from key stakeholders. As an initial step, it is important to identify and engage the right team to help plan any such actions. The team usually involves members of legal (in-house and outside counsel), HR, and senior management. Contractors should also ensure proper confidentiality and privilege protocols are in place. Leaks about upcoming layoffs, furloughs, or restructurings can be particularly damaging and lead to unnecessary rumors, lower productivity, or even departures of key performers. Additionally, contractors should ensure they have proper privilege documentation and protocols to avoid having to turn over privileged communications, work product, or risk assessments about the RIFs or furloughs in any subsequent litigation that might occur.

2. Determine Whether WARN Is Triggered

Depending on the size of the contractor’s workforce and the number of impacted employees, a RIF or furlough may trigger notice obligations under the federal WARN or related state mini‑WARN laws. Although the triggers and notice periods vary, these laws generally require contractors to provide 60 days’ advance notice (and, in some states, 90 days’ advance notice) before layoffs occur. Failure to comply with these laws can lead to significant class actions and liabilities, including damages, penalties, and attorney’s fees.

The federal WARN, for example, requires companies with 100 plus employees to provide 60 days’ advance notice when there is an “employment loss,” which occurs under either of the following circumstances:

• A plant closing resulting in a permanent or temporary shutdown of a facility and an employment loss for at least 50 full-time employees during a 30-day period; or
• A mass layoff resulting in an employment loss at a single site of employment during any 30-day period of either: (a) 50 full-time employees who comprise at least 33% of active employees; or (b) at least 500 full-time employees.

Federal WARN also requires employers to aggregate the number of impacted employees if there are separate employment losses occurring within the 90-day period before and the 90-day period after a plant closing or mass layoff. So, even if a single workforce reduction viewed alone may not trigger federal WARN, it could if there have been or are expected to be rolling layoffs that, in the aggregate, would trigger federal WARN.

The federal WARN’s notice obligations are generally not triggered for temporary furloughs lasting six months or less. However, if such furlough is extended beyond six months (or results in a permanent layoff), the company must comply with federal WARN notice obligations.

The federal WARN recognizes limited exceptions to the 60-day advance notice requirement, including unforeseeable business circumstances, faltering companies, natural disasters, and liquidating companies. These exceptions are often litigated, and courts narrowly construe them. Even where contractors qualify for an exception, they must still provide the WARN notices as far in advance as possible.

For federal contractors whose contract is terminated or temporarily paused due to a government shutdown, the unforeseeable business circumstance exception might apply. For this exemption to apply, courts typically look at the employer’s commercially reasonable business judgment. An important indicator of an unforeseeable business circumstance “is that the circumstance is caused by some sudden, dramatic, and unexpected action or condition outside the employer’s control.” A customer’s sudden and unexpected termination of a government contract or the contractor’s receipt of a stop work order could be considered a business circumstance that is not reasonably foreseeable. Contractors, however, bear the burden of proving their specific circumstances fall under this exception, and each claim of foreseeability is assessed on a case-by-case basis. So, contractors should review the circumstances of their layoffs closely to determine how comfortable they feel qualifying for this exception.  

Contractors should also keep in mind that some jurisdictions have their own mini-WARN laws that may have different requirements than federal WARN, including lower coverage thresholds, different triggering events, and additional notice requirements. Some of the jurisdictions with mini-WARN laws include California, Connecticut, Delaware, Georgia, Hawaii, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New York, North Dakota, Oregon, Tennessee, Vermont, and Wisconsin. Contractors should consider working closely with experienced counsel to determine WARN coverage and create proper WARN notices and strategies for compliance if those laws are triggered.

3. Conduct Disparate Impact Analysis and Other Risk Assessments for Impacted Workers

Once initial selections for the RIFs or furloughs are made, contractors should consider conducting disparity analyses and other risk assessments under attorney-client privilege with experienced counsel to determine whether there is a heightened risk of claims or other risks related to those individuals. 

• Create and Document Selection Criteria: Contractors should create consistent and, to the extent possible, objective criteria for selecting employees for layoff or temporary furlough. Criteria might include, for example, employees working on certain contracts, tenure, elimination of certain functions or roles, consolidation of functions to reduce redundancies, performance, and other business factors. The more objective the criteria, the easier it is to defend in any subsequent litigation. Many RIFs and furloughs, however, involve some subjective criteria, such as performance. Regardless of the criteria, employers can mitigate risk by creating ranking systems for managers to select employees based on the selection criteria. Creating and documenting a ranking system that uses consistent criteria for employees that are similarly situated in terms of roles, levels, departments, and other considerations will be helpful if an employer has to defend claims that the employer applied the criteria in a discriminatory or retaliatory manner or fabricated the criteria to mask unlawful selections. After the criteria is in place, contractors should decide which managers or company officials will make layoff or furlough selections based on the approved criteria and ranking systems. After selections are made, employers should review those selections to ensure they are consistent with the RIF or furlough criteria. 

• Disparate Impact: Contractors can be liable under federal and state antidiscrimination laws if the process for selecting employees has a disparate impact on members of protected class (e.g., race/ethnicity, gender, sex, age), even if there is no evidence of intentional discrimination. Contractors should work closely with counsel and potentially labor economists or statisticians to conduct privileged disparity analyses. Depending on the size of the RIF or furlough, contractors may need to conduct various statistical analyses to determine if there might be statistical evidence of disparate impact. In smaller reductions or furloughs, contractors can conduct privileged cohort, rank-sum, or other types of analyses to determine whether there might be risk of disparity claims. If an employer identifies potential disparity risks, it is important that the employer does not remove certain employees from the list based on their protected class, because by doing so the employer could be making impermissible decisions based on a protected class that could create risk of reverse-discrimination claims. Instead, contractors in that situation should generally consider updating or revising the criteria for the RIF or furlough given the potential disparity risk.

• Protected Activities: Contractors should also review whether employees selected for the RIF or furlough might have recently engaged in any protected activities that could result in potential retaliation or whistleblower claims. For example, contractors should confirm whether such employees have recently complained of any unlawful or unethical conduct at the company (e.g., complaints of hostile work environment or financial fraud) or taken a protected leave of absence (e.g., leave under the Family and Medical Leave Act (FMLA) or military leave under the Uniformed Services Employment and Reemployment Rights Act (USERRA)). Terminating or furloughing employees who have engaged in such protected activities creates potential risk that those employees may claim the change to their employment status is retaliation for their protected activities.

• Union: If any of the employees selected for layoff or furlough are represented by a union, contractors should carefully review any applicable collective bargaining agreements (CBA) and past practices to see whether they are obligated to follow any certain procedures for selecting employees for layoff or furlough and whether there might be certain severance or other entitlements when laying off employees. In addition, contractors will likely have a duty to bargain with the union about the layoffs or furloughs if the union requests bargaining, particularly if the CBA is silent about layoffs and furloughs.

• Existing Entitlements/Agreements: Contractors should also review any applicable employment agreements or offer letters for employees selected for layoff or furloughs. Most U.S. employees are employed on an at-will basis, meaning the employer can terminate or furlough them at any time and for any reason, as long as the reason is not unlawful. Some employees, particularly more senior employees, may have contractual entitlements that limit the company’s right to terminate or furlough those employees or may require the employer to provide certain notices, severance, equity, or other entitlements before those employees can be terminated or furloughed. So, it is important to have a solid understanding of all of the contractual obligations for impacted employees before moving forward with layoffs or furloughs to avoid inadvertently creating breach of contract claims.

• Restrictive Covenants and Ongoing Cooperation: Contractors might also consider whether employees selected for layoff might present competitive risks or whether those individuals might be needed by the company after separation, including to assist with transitioning certain duties or tasks or to assist with an ongoing litigation or government investigation. If there are competitive risks, the company might want to assess what restrictive covenants are currently in place, such as nondisclosure, non-compete, non‑solicits, and non-disparagement, and whether those covenants provide appropriate protections after the employee is separated. If such restrictions are lacking or have enforceability issues, contractors should consider how best to mitigate those risks.

4. Additional Considerations Specific to Furloughs

Furloughs raise unique legal and compliance issues for contractors to consider.

• Wage and Hour Issues:
• Non-Exempt: Contractors must ensure that non-exempt (hourly) employees are paid for any time worked during furloughs. Contractors must compensate non-exempt employees for all hours worked, regardless of whether such work is authorized. If non-exempt employees do not work, they do not need to be paid. 
•  Exempt: Exempt employees must generally be paid on a salary basis in accordance with applicable federal and state law. With limited exceptions, exempt employees must be paid the full salary for the entire workweek if they perform any work during that workweek. If an exempt employee does not perform any work at all during a workweek, regardless of whether the absence is voluntary or involuntary, the contractor need not pay the exempt employee his or her salary for the week. Thus, if employees are furloughed for full workweeks, there should be no issue. The problem arises when the furlough starts or stops in the middle of a workweek. If an exempt employee checks emails, participates in work calls, or generally works in any capacity (even if only a few hours), then he or she must be paid the full salary for that entire week. If an employer fails to pay full salary for a workweek during which an exempt employee performed work, then the employee’s exempt status as well as other employees working in that same job classification may be jeopardized.
• Wage Reductions: Contractors may implement prospective reductions in wages and work hours for non-exempt employees, as long as those reductions keep employees’ wages above the applicable minimum wage requirements. However, contractors should ensure wage and work hour reductions are made across the board for similarly situated employees in the same positions to avoid potential discrimination issues. In addition, certain state and local laws may require advance notice before reducing wages or work hours. 
  
  For exempt employees, reductions to the weekly salary are generally not permissible because they must be paid the same minimum weekly salary for any workweek in which they perform work, regardless of the number of hours worked that workweek. There is a limited exception where contractors can prospectively reduce an exempt employee’s future salary and working hours due to a bona fide reduction in the amount of work. However, this practice must be occasional and related to long-term business needs or economic slowdown. What constitutes “occasional” remains an open question. 
• PTO Use: Under federal law, contractors generally can require employers to use paid time off or other vacation banks during furloughs unless it is prohibited by the contractor’s policies or by a collective bargaining agreement. Mandating use of PTO under state law, however, may be problematic in states that consider PTO to be a wage.  Contractors should consult applicable state law before mandating use of PTO during furloughs.
• Visas: Furloughed employees holding H-1B, H-2B, and E3 visas must generally continue to be paid during the furlough in accordance with their Labor Condition Application (LCA). Although contractors can try to amend the LCA in certain instances, this will prove difficult if there is a government shutdown.  Contractors can face liabilities for back pay and/or civil fines for failing to pay the wage indicated on the LCA or for terminating employees on visas.
• E-Verify: During government shutdowns, E-Verify is usually unavailable. Contractors must continue to complete I-9s for new hires. Contractors should not take any adverse action because of E-Verify interim case status without consulting with counsel.
• Benefits Continuation: Although furloughed employees are usually unpaid, such employees may have continued eligibility for certain benefits, including, but not limited to, group health insurance benefits (e.g., medical, dental, and vision), life insurance benefits, disability benefits, retirement benefits (e.g., 401(k) and 403(b) plan participation), and paid time off. As an initial step, contractors should analyze which (if any) benefits continue during the furlough period. If a company’s employee health benefits cease during the furlough period, such employees may be eligible for continued coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), which contractors may elect to subsidize, in whole or in part. Contractors may also consider amending their benefit plans and policies to reduce or eliminate certain benefits during the furlough period, as permitted by applicable law. Further, certain state and local laws may limit a company’s ability to withhold paid time off benefits.
• Unemployment: Employees on furlough may be eligible for unemployment benefits depending on the state in which they are based. Some states allow employees to collect unemployment for periods where they are furloughed or have reduced hours. Contractors should review state law to determine eligibility and other requirements for furloughed employees. 

5. Consider Severance Packages and Offboarding Requirements for RIFs

• Severance: If contractors have severance plans or policies or other contractual severance requirements (e.g., under collective bargaining agreements), then contractors should ensure they provide severance in accordance with those requirements. Absent a prior legal or contractual requirement, contractors generally do not have to provide severance to employees impacted by RIFs. Contractors, however, often offer severance to employees who are impacted by a RIF. There are various reasons for offering severance, but one of the primary reasons is for the employer to get a release of claims in exchange for severance. Obtaining a release not only lowers the likelihood of potential litigation, but it also tends to be viewed favorably by investors and acquirers if the company is looking for strategic investors or buyers in the coming years. Severance also helps to soften the news of termination for impacted workers and might look less heavy-handed to the remaining workforce if they are concerned about being selected in future RIFs. Unless the employer has a severance policy or practice or the employee is entitled to contractual severance, the amounts and types of severance can vary based on the employer’s budgetary constraints, past practice, industry, and level of employees being impacted. Generally, contractors should aim to create severance based on a formula that treats employees fairly and consistently (e.g., 1 week per year of service).
  
  When providing severance, contractors should carefully draft separation agreements to: (a) include a complete release of all claims that can be released under applicable law; and (b) comply with all applicable federal and state requirements for releases, including complying with the growing trend of federal and state laws requiring certain notices and carve-outs for employees to discuss sexual harassment, abuse, and assault claims (and, in some states, claims related to unlawful conduct, discrimination, and retaliation). Contractors should also be mindful of special notice requirements that apply to releases of age discrimination claims for employees 40 years of age and older in a layoff. Under federal law, employers must provide those employees: (i) 45 days to consider the agreement (although employees can opt to sign it sooner); (ii) seven days after signing to revoke their signature, which almost never happens; and (iii) a notice that provides a list of all employees in the impacted employee’s decisional unit, identifying each employee by job title and age in that decisional unit who was and was not selected for layoff, and includes a list of the factors considered when making the termination decision. Because these notices are often challenged in litigation, creating these notices requires consideration of various legal and strategic issues to ensure the form is legally compliant and effectively waives age discrimination claims.
  
  Contractors should also consider whether there are other terms that might be needed as part of the separation agreements, such as transition assistance, ongoing cooperation for litigation or investigations, or non-disparagement clauses. If so, contractors may also want to consider making severance contingent on compliance with any ongoing obligations, such as complying with restrictive covenants.
• Confirm Offboarding Requirements: Contractors will need to be mindful of any applicable state requirements relating to timing for payment of final wages, including paying accrued, unused vacation. For example, some states, like California, require laid off employees to be paid in full on their termination date, while other states, like Texas, allow employers to pay any final wages on the employer’s next regular payroll date. Whether an employer must pay accrued, unused paid time off will vary from state-to-state and will depend on the employer’s policies. Failure to comply with these laws could lead to statutory penalties or potential claims that allow for recovery of liquidated damages and attorneys’ fees.
  
  Contractors should also ensure they have processes in place to comply with any state requirements for providing notices to terminated employees. For example, California requires employers to provide terminated employees with the following notices: (i) Notice to Employee as to Change in Relationship; (ii) pamphlet on California’s programs for the unemployed; (iii) Health Insurance Premium Payment notice; (iv) COBRA and Cal-COBRA notices; and (v) notification of all continuation, disability extension, and conversion coverage options under any employer sponsored coverage for which the employee may remain eligible after employment with that employer terminates.
  
  Contractors might also want to consider the strategy for protecting employees and company property and resources. Measures should be put in place to mitigate the risk of such harms and quickly respond to any negative reactions from workers, including workplace violence or damage to Company property or electronic resources. Contractors should consider the process for obtaining company equipment and confidential information from impacted employees.

6. Develop Communication Strategy

A contractor’s communication strategy before, during, and after a RIF or furlough can make a difference in the level of risk associated with the layoffs or temporary furloughs. Legal claims often arise from how employees perceive their employer handled the layoff or furlough. If employees believe their employer was not transparent, honest, or fair regarding the layoff or furlough decisions or processes, they may be more inclined to consider pursuing legal action.

Creating a good communication strategy requires careful preparation to ensure communications are accurate, consistent, and thoughtful. Before conducting the RIF or furlough, contractors should consider creating talking points and communications for announcing the layoff or furlough, conducting individual discussions with affected employees, and responding to employee questions. These communications should be reviewed by HR, managers, and experienced counsel to ensure the communications not only have the proper messaging but also avoid any statements that could be used against the company in any subsequent litigation.

Contractors may also want to consider creating a good public relations strategy to timely and appropriately respond to potential media inquiries or negative publicity. Publicly traded companies should also work with experienced corporate counsel to determine whether the RIF or furloughs will trigger any government reporting obligations.

7. Finalize Logistics and Provide Written Notice

As a final step, contractors should choreograph the logistics of the layoffs or furloughs before executing them. This involves ensuring that the communications strategy is put in place and appropriate individuals are ready to announce the layoff or furlough, conduct individual meetings with impacted employees, and respond to questions from affected employees, remaining workers, and the media. Contractors may also consider holding a training session with a manager close in time to the RIF or furlough announcement to ensure they have the proper messaging and tools to respond to employee questions. These logistics, and others, take time to coordinate and should be planned as far in advance of the RIF or furlough as possible.

In the event of a furlough, contractors should, at a minimum, communicate the following information in writing:

• Duration and Schedule: Specify the expected duration of the furlough and, if applicable, the amount of reduced hours the employee is authorized to work (if any).
• Statement Concerning Unauthorized Work: Inform employees that they cannot perform unpaid work or work in general during the furlough period without prior authorization from the company.  If employees are not allowed to work during the furlough, consider removing access to company email and systems to mitigate the risk of employees performing work during the furlough that could create risk of unpaid wage claims.
• Modifications to Company Policies: Notify employees of any changes to existing company policies.
• Continuation of Benefits: Describe which, if any, benefits continue through the furlough period and specify the terms and conditions for using any such benefits. Contractors should also address whether employees are eligible for unemployment benefits, and if affected employees may utilize any outstanding paid time off during the furlough period.
• Include a Point of Contact: Provide the contact information for a company representative to answer any questions regarding the furlough.

Once the RIF or furlough has been communicated, contractors should continue to monitor the situation. It can be important to have contingency plans for addressing any threats or claims by impacted employees to pursue legal actions against the company or poor morale among remaining workers that could lead to departures of key talent.

8. Consider International Issues

Contractors considering RIFs or furloughs that could impact employees outside the United States will need to factor into their plans the (often varied and complex) local laws that may apply. Depending on the jurisdiction and the number of employees potentially impacted, this could involve, among other things, the requirement for a detailed—and, at times lengthy—consultation with employees and/or their representatives before carrying out any dismissals or furloughs, negotiating severance packages with unions or works councils, and, in some countries, obtaining the employees’ agreement to the termination of their employment.

The consequences of failing to meet the requirements of local law can be significant and result in protracted and expensive litigation, which could ultimately jeopardize the planned RIF or furlough in certain countries. Contractors considering global RIFs or furloughs should consider obtaining local law advice before moving forward with any such actions.