What Happens If Workers Are Laid Off Because We Hit the ‘Fiscal Cliff’?

What will happen to workers who are laid off from government contractors because of financial cutbacks that would be required by the “fiscal cliff” takes effect? Of course, we don’t know whether this process, known as sequestration, will actually occur, since we don’t know whether Congress and President Obama will agree on spending cuts and tax reform that would avert a reduction of nearly $1.2 trillion in the federal budget over several years.

Recently, some major defense contractors have announced that they plan to send notices of possible job losses to their employees 60 days before sequestration – in other words, in early November – in order to comply with the Worker Adjustment and Retraining Notification Act (WARN Act), which requires such advance notice.

The White House has just moved to discourage that type of activity. The Office of Management and Budget issued a “guidance” late last month, stating that a contracting agency, such as the Department of Defense, would cover any potential litigation costs or employee compensation costs resulting from such a layoff. This is a legitimate contract charge to the government under the Federal Acquisition Regulations (FAR), the OMB ruled.

“Agencies may treat as allowable other costs potentially associated with sequestration, including WARN Act-related costs arising under circumstances not specified in this guidance, based on the usual cost principles of allocability, allowability, and reasonableness as set forth in the FAR,” the OMB also said.

The idea is to prevent economic panic that might result if major contractors like Lockheed Martin issue mass layoff notices under the WARN Act.

However, it’s not clear that the OMB has the power to permit agencies to pay such costs under their existing contracts. For any contract, the value of the contract is the most that can be paid under a termination-for-convenience clause, and the contract price can only be increased by a formal change order that affects the time and cost of performance as well as the price.

For further information, see this National Journal article.

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