In recent articles, we’ve addressed many of the questions and complexities surrounding emergency paid leave and how freshly implemented employment policies, introduced by the Department of Labor (DOL) to provide relief during the coronavirus pandemic, affect regulations such as the Fair Labor Standards Act (FLSA). The government has made valiant attempts to protect the physical and economic health of U.S. workers and businesses with the rapid introduction of legislation designed to combat the fallout of COVID-19. Rounding out the big three, we arrive at the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The bill, as stated in its preamble, was enacted to “provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.” To federal contractors, the CARES Act has become a particularly important, and much debated, element in these relief measures. Fortunately, a few government agencies and legal experts have offered clear guidance on interpreting the act. Let’s take a look.

How the CARES Act Strives to Care for America’s Economy

The president signed the CARES Act into law on March 27, 2020. The Treasury Department describes it as a stimulus and assistance package that “provides fast and direct economic assistance for American workers, families, and small businesses, and preserve [sic] jobs for our American industries.” At its core, the act identifies four areas of assistance:

• assistance for American workers and families;
• assistance for small businesses;
• preserving jobs for American industry; and
• assistance for state, local, and tribal governments.

CARES for Families and Workers

The most publicized element of the CARES Act involves the economic stimulus checks that we’ve read about in the news or already received. The Treasury Department issued a series of one-time, fixed financial incentives to working families.

The CARES Act provides for Economic Impact Payments to American households of up to $1,200 per adult for individuals whose income was less than $99,000 ( or $198,000 for joint filers) and $500 per child under 17 years old – or up to $3,400 for a family of four.

The IRS also used information from Social Security and retired railroad employee benefits statements, such as Form SSA-1099 and RRB-1099, to generate $1,200 payments to qualifying individuals. Recipients will receive these payments as a direct deposit or by paper check, just as they would normally receive their benefits.

CARES for Small Businesses

The prominent aspect of the act’s support for small businesses is the Paycheck Protection Program, a reserve of funds available to qualifying employers who applied for these loans. 

The Paycheck Protection Program established by the CARES Act, is implemented by the Small Business Administration with support from the Department of the Treasury.  This program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities.

Eligible small businesses include nonprofit organizations, Veterans organizations, some Tribal businesses, self-employed workers, and independent contractors who meet the program’s size standards.

CARES for Job Preservation

The CARES Act comes with a series of provisions intended to preserve jobs in industries adversely impacted by the COVID-19 outbreak. 

• Employee Retention Credit: Employers of all sizes face closure orders or suffer economic hardship due to COVID-19. The credit encourages them to keep employees on the payroll through a 50% credit on up to $10,000 of wages paid or incurred from March 13, 2020 through December 31, 2020.
• Payroll Tax Deferral: Employers and self-employed individuals can defer payment of the employer share of their Social Security tax. The deferred amount can be paid over the next two years, with half of the required tax to be paid by December 31, 2021 and the other half by December 31, 2022.
• Payroll Support: The Treasury Department has published a list of resources to assist eligible businesses in applying for payroll support to prevent disruption to employee wages, salaries, and benefits.

CARES for State, Local, and Tribal Governments

The CARES Act established a $150 billion relief fund for small governments impacted by COVID-19. 

Treasury will make payments from the Fund to States and eligible units of local government; the District of Columbia and U.S. Territories (the Commonwealth of Puerto Rico, the United States Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands); and Tribal governments (collectively “governments”).

There’s a fairly extensive list of covered expenses and restrictions.

CARES Section 3610 and Relief for Federal Contractors

Given all the debate and conversation in federal contracting circles surrounding Section 3610 of the CARES Act, it’s apparent that this topic has sparked a decent amount of confusion. Jayna Marie Rust is an associate with Thompson Coburn LLP, a legal firm specializing in helping federal contractors. As she explained in her article for the company, the act “includes a section that could allow contractors to obtain their customer’s assistance in paying employees or subcontractors that cannot perform due to facility closures or other restrictions. In short, the section permits an agency to modify a contract to reimburse the contractor for any paid leave to keep employees or subcontractors in a ready state, subject to certain situations and limits.”

Although Section 3610 promises welcome relief for many contractors, not every organization may necessarily reap its benefits. This, then, is where a lot of the confusion comes into play. Rust also notes that many agencies are rolling out guidance on implementing Section 3610, and the Department of Defense (DoD) has published some of the most comprehensive insights.

On April 8, 2020, the Under Secretary of Defense (Acquisition and Sustainment), issued a Defense Federal Acquisition Regulation Supplement (DFARS) class deviation, which implements section 3610 of the CARES Act through the creation of DFARS 231.205-79. A supplemental memorandum was also issued on April 9 to impart additional clarification for various topics previously unaddressed by DoD. 

The major points addressed include the following.

• Relief is at the contracting officer’s discretion
• Relief is subject to the availability of funding
• The burden of establishing proof for qualification falls on the contractor
• Contractors must validate their entitlement to relief through contract modifications
• The DoD intends to reduce the amount of relief provided by factoring in the relief the contractor has already obtained through other programs

Eligibility Requirements

As attorneys Michael McGill and Paul E. Pompeo from Arnold and Porter wrote, “DoD's guidance is valuable on what is perhaps the most ambiguous aspect of Section 3610—the requirement that an expense result from the contractor's inability to perform work on a federally approved worksite because of a closure or restriction and its inability to resort to remote work. If interpreted narrowly, that element of section 3610 could prove restrictive. The guidance, however, suggests that DoD does not intend to do so.”

McGill and Pompeo were specifically referring to eligibility requirements and prerequisites to relief. They uncovered some interesting tidbits. 

DOD indicates that approved worksites include any facility “at which contract administration services are performed in support of those contracts . . . .” So, if a contractor or subcontractor’s “approved" worksite is affected, the relief also extends to other facilities that provide administrative support, presumably including the home office.

The language also suggests that a contractor may be able to recover otherwise unallowable employee leave costs even when the facility hasn’t been closed, or has instituted remote working arrangements during closures.

A contractor may be able to recover costs for paid leave that arise not because the contractor’s facility is closed and remote work is infeasible, but because an employee cannot be in the workplace and cannot work remotely due to “public health reasons or family care issues.” 

Segregation of Costs

Whenever the government finds itself in a position to dole out funds, it’s going to be finicky. In order to remain compliant and in the good graces of federal regulators, contractors must segregate any paid leave expenses specifically related to COVID-19. 

The government understands that “contractors may not have an established provision in their compensation plans for granting leave for the specific purposes stated in section 3610 of the CARES Act.” And because the government is easing existing restrictions to help contractors recoup normally unallowable expenses, tracing and reporting those costs separately is essential.

As illustrated in the April 9 memo, these costs should be “identified, segregated, recorded, invoiced, and reimbursed.”

Contract Modifications

The April 9 memo heavily implies that the government anticipates many federal contractors to submit Requests for Equitable Adjustments (REAs) under the terms of fixed-price contracts. The memo also directs contracting officers to establish independent contract line item numbers (CLINs) for Section 3610 payments. The government stated that contractors should be compensated only for costs of providing paid leave, under the rules of Section 3610, to maintain their workforce, as McGill and Pompeo illustrated:

This is intended to enhance traceability and avoid the possibility that these payments could be deemed to constitute acceptance of products or services under other CLINs. The guidance also directs contracting officers to coordinate (generally through the administrative contracting officer (ACO)) where necessary to allocate costs across multiple affected contracts.

Invoices should contain supporting documentation to “identify and explain why claimed hours could not be worked, along with a statement that these costs are not being reimbursed under other authorities.” The contracting officer will validate whether the conditions satisfy the contractor’s entitlement to invoice for paid leave.

Relief Is Not Automatic

Unlike some of the other relief measures passed, Section 3610 of the CARES Act does not automatically ensure financial assistance or reimbursement to federal contractors. Instead, each contractor must submit a request that demonstrates how they qualify under the cost principle. 

• The contractor must define all the actions it has taken to continue performing work.
• The contractors must outline the circumstances that influenced the need to grant emergency leave to employees.
• The contractor must describe the conditions that hindered its employees from continuing to perform through telework.
• The contractor must explain how the leave made it possible to keep employees in a “ready state” to mobilize and resume work in a timely manner.

Cost Reimbursement

Another area of ambiguity centers on the issue of charging paid leave as direct or indirect costs. McGill and Pompeo explained:

The memorandum notes that contractors usually treat costs associated with employee leave as indirect costs. In FAQ 9, however, DoD leaves open the possibility that “[t]here may be circumstances in which the cost can be directly identified with particular contracts.” And, in fact, the April 9 Memorandum recommends that contracting officers ask contractors to charge these paid leave costs under a new cost category named “Other Direct Costs (ODC) COVID-19.”

In certain cases, the government views charging through indirect cost pools as more appropriate. By creating a new category of costs, contractors could avoid potential issues with disclosed accounting policies and procedures, cost accounting standards, and disclosure statements. 

Time and Materials

One aspect of Section 3610 that remains somewhat unresolved deals with time-and-materials and labor-hours contracts. The government appears to recommend that they be treated similarly to cost-reimbursement contracts. 

• Contractors should submit interim vouchers for their payment of increased leave costs.
• The contracting officer will review the vouchers. If acceptable, they will be approved on a provisional basis and paid.
• McGill and Pompeo suggest that contractors communicate with their contracting officers to request permission for treating adjustments and CLINs like fixed-price contracts, “with the addition of a fixed-rate CLIN dedicated to compensation for the COVID-19 impact to their workforces.”

Tips for Making the Most of CARES Act Section 3610

In her article, Jayna Marie Rust offers some sage advice on how contractors should approach their efforts to claim relief under the CARES Act.

Communicate

Because relief under Section 3610 is not guaranteed or automatic, federal contractors should be communicating precisely and openly with their contracting officers. 

• Submit an REA or schedule a call with the contracting officer.
• Carefully word statements of non-performance to avoid potential program termination.
• During the request, a contractor should “explain how it meets any agency requirements and the statutory requirements, which will ultimately demand an explanation of an inability to perform due to facility closures or other restrictions.”
  

Keep in mind that if you, as a contractor, state that you can’t perform without relief—or refuse to—the contracting officer may see this as “anticipatory repudiation of the contract,” which could result in termination for a perceived default.

Modification Language

Section 3610 covers only limited costs for labor-related expenses, most prominently those involving emergency paid leave. As Rust noted:

It does not cover all labor-related expenses or non-labor related costs due to COVID-19 related closures or restrictions. It also does not include equitable adjustments for performance timelines. Thus, the contractor should carefully negotiate, review and consider whether the modification language may mean that it is agreeing to forego the ability to exercise other contractual rights or related costs, which could potentially dwarf the Section 3610 relief received. 

In light of this, modification language should be coherent, direct, and specific. Overly broad or vague wording could prevent contractors from receiving other costs or equitable adjustments they would otherwise be able to obtain.

Current Costs and Pricing

As we’ve previously discussed, Section 3610 lays the onus of tracking costs squarely on the shoulders of contractors. They must supply appropriate documentation, identify other credits that could reduce reimbursement, and segregate applicable costs. Because agencies are still waiting on further guidance for how contractors will be compensated, including the consideration of direct or indirect costs, Rust cautions that “contractors seeking and receiving Section 3610 relief must ensure they obtain and stay abreast of guidance applicable to each modification.”

Stay Tuned for More

New and existing employment laws will endure as a crucial part of the government’s overall economic relief package. Throughout this series of posts, we’ll continue to explore the complications and strategies for government contracting in the era of COVID-19. We hope you’ll stay tuned.

Image by Elliot Alderson from Pixabay