DOD Clarifies Use of Section 3610 of the CARES Act to Reimburse Federal Contractors For Keeping Employees in a Ready State

Section 3610 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020, permits federal agencies to reimburse contractors, through contract modifications and other means, for any paid leave they have provided to employees or subcontractors in order to maintain a “ready state” either because the employee is out sick or locked out of their usual worksite as a result of the COVID-19 pandemic and unable to telework because their job duties cannot be performed remotely.

The Act authorizes agencies “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.” The reimbursement period runs from January 31, 2020 to September 30, 2020.

The Department of Defense (DoD) recently issued implementation guidance – including a class deviation establishing a new DFARS section 231.205-79 addressing allowability of the relevant costs, an implementation memo, and related FAQs – that clarifies some, but not all aspects of how contractors should go about seeking reimbursement of qualifying expenses. Caveats abound.

First, the reimbursement is discretionary – subject to available funds and the approval of the contracting officer. The DoD’s class deviation implementing Section 3610 underscores the importance of supporting affected contractors while recognizing “[i]t is also important that our contracting officers are good stewards of taxpayer funds while supporting contractor resiliency.” Contractors are encouraged to reach out to their cognizant contracting officer at the earliest to discuss whether and how the standby costs might be reimbursed under the contract.

Second, the employees’ Government worksite must be closed and telework must be unavailable. The authorization only applies “to a contractor whose employees or subcontractors cannot perform work on a site that has been approved by the Federal Government, including a federally-owned or leased facility or site, due to facility closures or other restrictions, and who cannot telework because their job duties cannot be performed remotely.” Interestingly, however, the FAQs accompanying the implementation guidance suggest that contractor employees who cannot report to an open work site due to child care issues due to school closures, those caring for sick individuals, or those under quarantine may also qualify under appropriate circumstances. In all cases, contractors should discuss particular situations with the contracting officer and be prepared to provide supporting documentation.

Third, double-dipping is prohibited. The Act expressly states that the maximum reimbursement allowed under Section 3610 “shall be reduced by the amount of credit a contractor is allowed” as a result of the tax credits for paid sick and paid family and medical leave under the Families First Coronavirus Response Act as well as any applicable credits a contractor is allowed under the CARES Act (such as a loan under the Paycheck Protection Program). Contractors must necessarily thus strategize the best avenue for prioritizing relief to ensure cash flow for employee expenses. If the contractor is pursuing Section 3610 reimbursement while simultaneously applying for a PPP loan, the contractor should disclose this to the contracting officer and seek guidance as to how to address a situation where both are approved.

The DoD’s implementation guidance provides additional insight and emphasizes the need to communicate with the contracting officer. At a minimum, the contracting officer must issue a written determination that the contractor is an “affected contractor” to receive reimbursement, but the approach to reimbursement will differ depending on the type of contract. For firm fixed-price contracts, the contractor may need to seek an equitable adjustment and the contract will need to be modified with a fixed-price line item for covered costs. For cost reimbursement contracts, costs should be charged to a separate account such as “Other Direct Cost – COVID 19,” billing in accordance with the contracting officer’s directives.

Appropriately documenting claimed costs is also a necessity. At a minimum, the contractor will need to identify the employees that were provided paid leave for which the contractor is seeking reimbursement, the contract(s) the employees are performing under, and the amount and dates of the paid leave provided to the relevant employees. The contractor should also be able to support that the costs in question meet the requirements of the Act (i.e. Government worksite closed, telework unavailable, paid leave at rates contractor would have paid but for the pandemic) and that the contractor is not receiving payment, credits, or funding for the same costs from another source.