Department of Defense Implements Section 3610 of the CARES Act

The ongoing coronavirus (COVID-19) pandemic has significantly altered the ability of some government contractors to perform their contracts with the federal government. Government restrictions, including the closure or restriction to federal or contractor worksites, has disrupted performance and threatens to curtail contract payments to contractors. As a result, contractors are faced with the potential need to furlough or lay off employees or require them to use unpaid leave. On April 8, the U.S. Department of Defense (DoD) issued important guidance to its contracting officers as to how they can work with contractors to ensure their employees remain employed and in a ready state to return to work when the crisis eases.

Congress Enacts the CARES Act

As we noted in a previous blog post, the recently-passed Coronavirus Aid, Relief, and Economic Security (CARES) Act contains a provision that potentially allows contractors to be paid by the government for compensating workers to be kept in a ready state if they are unable to work due to the pandemic.

Section 3610 of the CARES Act provides, in part, that government funds:

may be used by such agency to modify the terms and conditions of a contract, or other agreement, without consideration, to reimburse at the minimum applicable contract billing rates not to exceed an average of 40 hours per week 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.

While this provision is helpful, it does contain some limitations. First, it expires on Sept. 30, 2020. Second, it only applies to situations where contractor (and subcontractor) employees cannot perform work due to restrictions at a site and cannot convert to telework. Third, it is not mandatory and is subject to the availability of funds.

The provision also presents several implicit questions, particularly as to how it relates to other types of relief available under the CARES Act. In particular, it speaks to how receiving Paycheck Protection Program (PPP) small business loans impacts the availability of relief under Section 3610.

DoD Issues a Class Deviation Implementing the CARES Act

On April 8 – less than two weeks after the passage of the CARES Act – the DoD released a class deviation implementing Section 3610 of the CARES Act, including a new clause in the Defense Federal Acquisition Regulation Supplement (DFARS; § 231.205-79). The class deviation largely mirrors the language in Section 3610, including its limitations.

While the class deviation acknowledges that Section 3610 relief is not mandatory, the DoD emphasizes the importance that DoD contractor workforces be kept intact so they can be activated once the pandemic sufficiently passes. DoD underscores this point: "[i]t is imperative that we support affected contractors, using the acquisition tools available to us, to ensure that, together, we remain a healthy, resilient, and responsive total force." Further, DoD also asks contracting officers to consider the immediacy of the harm to contractors when prioritizing requests:

For example, the impact of COVID-19 on a contractor providing labor services will differ from the impact on a contractor that develops information systems. Some contractors may be unable to conduct any business during the COVID-19 pandemic. As a result, such contractors would generate no new revenue, and may have difficulties making payroll, retaining employees, and meeting other financial obligations. In contrast, other contractors may still have incoming revenue, and be able to conduct work remotely. While impacts will certainly be experienced by many contractors, some will have a more immediate need for relief than others.

The relative harm aside, (like the CARES Act) the class deviation permits the cost of paid leave (including sick leave): 1) to be allowable for "up to an average of 40 hours per week" and 2) be charged as a direct cost notwithstanding contrary Federal Acquisition Regulation (FAR) and DFARS clauses. Though not explicitly stated, it appears that payments to contractors can include the fully burdened rates typically charged. DFARS § 231.205-79(b)(1) provides that "costs of paid leave (including sick leave), are allowable at the appropriate rates under the contract."

There are restrictions, however, to this relief.

• Such costs can only be recoverable under this class deviation if it is for the purpose of keeping contractor and subcontractor employees in a ready state or "protecting the life and safety of Government and contractor personnel against risks arising from the COVID-19 public health emergency."
• Costs for paid leave must be incurred as a result of the COVID-19 national emergency and would not have otherwise been incurred by the contractor.
• The COVID-19-related costs must be segregated by the contractor so that compliance "can be reasonably ascertained." DoD does not suggest any particular method and, in fact, states that "any reasonable method [is acceptable] as long as the results provide a sufficient audit trail."
• The paid leave must be provided to workers who would have otherwise been on a government-approved site but the work cannot be performed because "such facilities have been closed or made practically inaccessible or inoperable, or other restrictions prevent performance of work at the facility or site as a result of the COVID-19 national emergency" and they are unable to telework. Though not explicitly stated in the DFARS clause, the class deviation elsewhere alludes to the fact that those compensable restrictions may also be due to recommended social distancing.
• The contractor cannot also receive compensation under any other relief bill passed by Congress that would cover the payroll expenses provided for by the class deviation (more on this below).

Importantly, federal worksites, as well as contractor, contractor-leased and federally approved worksites that are inaccessible because of laws or temporary restrictions imposed by federal, state or local governments, are included.

The class deviation contains important direction as to how contracting officers should factor in other relief a contractor receives under the CARES Act, including PPP small business forgivable loans. The purpose of these provisions and Section 3610 are fundamentally the same: to continue the flow of funds through business concerns to cover employees payroll and related costs. As we've expected would be the case, the class deviation states that a contractor cannot double-dip by receiving a PPP loan to cover payroll costs for a contract employee and then seek reimbursement for those costs through its contract under Section 3610. Other CARES Act relief, including tax credits, will also have to be factored in when calculating Section 3610 payments. In negotiating relief under Section 3610, contractors should proactively assess and account for such costs.

The differing avenues of relief also present a potentially important strategic decision for contractors. The PPP program contains significant restrictions on permissible uses of funds provided, including capping compensation reimbursement to an annualized salary of $100,000. Relief under Section 3610 may be more generous. Similarly, as noted above, Section 3610 relief would appear to be at fully burdened labor rates, whereas PPP payments are limited to "payroll costs."

With these points in mind, the class deviation appears to suggest that it is the forgiveness of a PPP loan that would render assistance under Section 3610 unavailable. This suggests that a contractor could simply elect not to seek forgiveness of the loan (and repay it at the 1 percent interest rate) and receive Section 3610 relief instead.

DoD also details the new flexibilities offered to contracting officers when implementing the class deviation. They may:

• "[u]se any 'funds made available to the agency' by Congress to reimburse contractors;" this appears to include funds already obligated to the contract or program in question
• compensate contractors for lost time due to "quarantining, social distancing, or other COVID-19 related interruptions, as discussed in Office of Management and Budget Memorandum M-20-18"
• modify any contract to allow for reimbursement without additional consideration from the contractor
• do so without regard to contract type

Finally, as noted above and in the CARES Act, reimbursement is contingent on the availability of funds.

Some things still remain unclear. For instance, the class deviation does not explicitly state the method by which a contractor would seek compensation under this class deviation or whether a contractor could seek funds because of reduced staffing due to required social distancing at a worksite. That said, Section 3610 and aspects of the class deviation suggest that a modification to the contract should be issued to facilitate an adjustment in the contract price.

Now, it is more important than ever for contractors to maintain communication with their contracting officers or higher-level subcontractors. Contractors seeking compensation under this class deviation and DFARS § 231.205-79 would be wise to do so quickly, since it is not mandatory and subject to the availability of funds. Further, any request for compensation should be supported by unambiguous records.

We will continue to monitor this and other COVID-19 related developments.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the authors of this blog for timely advice.