CARES Act Provides Potential Avenue of Recovery for Federal Contractors When Employees Cannot Work Due to COVID-19

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The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which became law on March 27, 2020, offers potential relief for federal contractors whose employees (1) cannot perform work on a site that has been approved by the federal government during the COVID-19 pandemic due to facility closures or other restrictions and (2) are unable to telework because their job duties cannot be performed remotely. Section 3610 of the CARES Act authorizes agencies to use any available funds to modify the terms and conditions of covered contracts, without consideration, to reimburse, any paid leave, including sick leave, a contractor provides to keep its employees or subcontractors in a ready state, including to protect the life and safety of government and contractor personnel. The authorized reimbursements are not to exceed an average of 40 hours per week, “at the minimum applicable contract billing rates.” With the statutory language consisting of three sentences, many questions arise as to the mechanics and application of the law.

Who is covered?

Covered employees are those employees working under federal contracts who are (1) unable to perform work at their regular place of performance due to facility closures or other restrictions related to COVID-19, and (2) who are be unable to telework because their job duties cannot be performed remotely. A contractor’s regular “place of performance” is typically certified by the contractor, and approved by the government, pursuant to FAR 52.215-6. Qualifying contractors must demonstrate that their facility has been closed due to COVID-19, or “other restrictions”—such as federal, state and local stay-at-home orders—which prevent covered employees from accessing facilities that are otherwise accessible. In addition, qualifying contractors must also demonstrate that its covered employees cannot telework based on the nature of their work. For instance, a covered employee could consist of a manufacturing or professional employee whose facility was closed due to COVID-19 and is unable to telework due to security restrictions, or any employee who is under quarantine due to COVID-19 exposure and is unable to telework. Another possibility is where an employee stationed at a government facility has been denied access to the facility by the government.

What gets reimbursed?

The purpose of Section 3610 is to reimburse contractors for the costs of keeping employees and subcontractors to keep them in a “ready state”—i.e. retain to return to work and restart performance consistent with the life and safety of contractor and government personnel. The statute does not specify or define the types of costs for which contractors may be reimbursed, but it can presumed to be referring to payroll employees, i.e. compensation paid to employees to keep them in a ready state. This compensation is limited to the "minimum established contract billing rates" which is capped at 40 hours per week. Importantly, contract billing rates—as distinct from employee wage rates—likely include a contractors fully burdened labor rates, which will include payroll taxes, health insurance, and any other costs related to labor. The law is limited to leave granted through September 30, 2020, and the maximum reimbursement must be reduced, by the amount of any credit the contractor is allowed pursuant to Division G (“Tax Credits for Paid Sick and Paid Family and Medical Leave”) of the recently enacted Families First Coronavirus Response Act, and by any other applicable credits that the contractor is allowed under the CARES Act.

How do contractors seek reimbursement?

It is important to note that the decision to reimburse a contractor is discretionary—the law permits, but does not require, an agency to grant such contractual relief. Furthermore, it applies “without consideration”, so that the contractor does not need to concede something of value in exchange for the reimbursement. Contractors working under cost-type and other flexibly prices contracts are permitted to submit invoices based on paid leave (including sick leave) paid to covered employees. To the extent the agency agrees to pay these costs, they should be paid in the ordinary course of business. Contractors working under fixed-price contracts have more work to do and likely a longer wait, as those contractors must seek equitable adjustments of those contracts to compensate the contractor for maintaining a “ready” workforce of covered employees. Given that fixed-price contracts are generally for lump sum amounts, and do not contain “billing rates” as contemplated by the statute, those contractors would need to establish and document evidence of its fully burdened labor rates in its request for equitable adjustment. To the extent the agency agrees to pay these costs, the contracting officer would issue a contract modification to reflect the negotiated adjustment in contract price associated with costs of paying those covered employees.

Contractors should be proactive in addressing these reimbursements. Contractors under cost reimbursable contracts can request that the contracting officer confirm that he/she will pay allowable costs incurred in accordance with the Act. Similarly, contractors under fixed price contracts can request that the contracting officer confirm that he/she will issue a modification to pay the contractor the costs.  At the same time, the contractor can seek an agreement with the contracting officer as to what that “minimum billing rate” is that the contracting officer will pay. This would come in the form of an advance agreement pursuant to FAR 31.109.

Further guidance will be forthcoming

Shortly after passage of the CARES Act, the Acting Principal Director, Defense Pricing and Contracting (DPC) of the Office of the Under Secretary of Defense issued a memorandum entitled “Managing Defense Contracts Impacts of the Novel Coronavirus.” The memorandum acknowledges the effects of COVID-19 will affect the cost, schedule, and performance of many Department of Defense contracts, and states that “[b]oth during and after the COVID-19 emergency, contracting officers must work closely with our industry partners to ensure continuity of operations and mission effectiveness, while protecting the continuing vitality of the defense industrial base (DIB) that is so critical to our national security.”

Although the memorandum both acknowledges and attaches Section 3610 of the CARES Act as a discretionary tool for the agency to modify the terms and conditions of the contract to reimburse paid leave in certain situations, it states that DPC will provide implementing guidance for this section as soon as practicable.

Seyfarth will continue to monitor additional guidance from DPC regarding implantation of the CARES Act. Until further guidance is issued, contractors looking to potentially recover under Section 3610 should be taking specific measures to maximize their chances of recovery, including:

• Document facility closures, including a federally-owned or leased facilities, due to COVID-19.
• Document which employees are impacted by facility closures.
• Document which employees are impacted by any “other restrictions,” such as self-quarantine due to COVID-19 exposure or illness.
• For employees impacted by facility closures or other restrictions, document the basis for why telework is not an option. This includes any mitigation efforts for employees who are able to telework.
• Segregate costs paid to covered employees to keep them in a ready state consistent with the contract type, i.e. cost reimbursable and fixed priced.
• Consider seeking an advance agreement with the contracting officer as to what that “minimum billing rate” is that the contracting officer will pay.