Government Shutdown: What Does It Mean for Employers?

By: Jenna Bishop on September 30th, 2025

Government Shutdown: What Does It Mean for Employers?

As of September 30, 2025, federal contractors once again face the uncertainty of a possible government shutdown. If Congress does not reach a budget agreement, agencies will shut down operations that are not deemed “excepted,” which immediately impacts thousands of contractors nationwide.

For businesses that rely on federal contracts, shutdowns are disruptive and stressful, raising questions about employee pay, benefits, contract performance, and overall business continuity. While no organization can control the political process, HR and business leaders can control how they respond. This article outlines the critical steps to take in the event of a government shutdown, helping to protect both your workforce and your business.

HR and Business Considerations for Federal Contractors Navigating a Government Shutdown

1. Immediate Workforce Actions

Clarify Employment Status and Pay

Exempt Employees: Under the Fair Labor Standards Act (FLSA), exempt employees are entitled to receive full pay for their entire workweeks. If a shutdown occurs mid-week, be mindful not to dock pay for partial weeks, as this could jeopardize exemption status.
Non-Exempt Employees: Non-exempt staff who cannot work during a shutdown may be placed on leave without pay (LWOP) if no alternative work is available.
Use of PTO: Many employers require employees to exhaust available paid time off before going on LWOP. Clarify whether your policies permit exceptions or allow for negative leave balances.
Holiday Pay: If the shutdown overlaps with a federal holiday, review whether employees on LWOP will receive holiday pay, and communicate this decision consistently.

Set Clear Communication Protocols

Require employees to update voicemail and email with approved out-of-office messages citing the shutdown.
Collect personal email addresses to maintain communication, since employees cannot check work email or systems during unpaid status.
Use “non-excepted” instead of “non-essential” when referring to impacted employees to avoid morale issues.
Remind Employees: No Government Work Allowed: Employees on unpaid status may not perform any government work, including answering emails, taking phone calls, or logging into systems, until the contracting officer provides official return-to-work authorization.

Common Question: Should Employers Send Individual Letters to Staff?

Most contractors use a tiered approach:

Organization-wide or team notices to explain potential impacts.

Group/team communications to affected contracts once the shutdown is official.

Individual letters only when pay, PTO, or benefits will be directly impacted (e.g., transition to LWOP).

This layered method ensures consistency, minimizes confusion, and provides the right level of detail at the right time.

Address Benefits and Retirement Implications

Health Insurance: Employees typically remain covered for 30, 60, or 90 days, depending on plan rules. Beyond that, COBRA continuation applies. Work with your benefits broker in advance to ensure you can effectively explain timelines to employees.
401(k): Contributions and employer match will stop while employees are not being paid. Consider whether plan provisions allow hardship loans or in-service withdrawals.
Unemployment Benefits: Many employees may qualify for state unemployment after the one-week waiting period (varies by state). Share state-specific guidance with employees.

2. Business Continuity During the Shutdown

Stay in Close Contact with Contracting Officers

Even if the news announces an agreement, employees may not return to work until your contracting officer issues formal notification.
Assign a single point of contact in your organization to stay engaged with contracting officers and ensure consistent messaging to leadership and employees.

Manage Contract Awards and Hiring

New contract awards are often delayed during a shutdown. If extending offers, include contingency language: "This offer is contingent upon the availability of government funding and contract performance timelines.”

Protect Cash Flow

Government payments may be delayed, which impacts accounts receivable. Model your cash flow under different shutdown durations and proactively reach out to lenders if needed.
Explore Internal or Overhead Work: Where possible, redeploy employees to internal projects, professional development initiatives, or other non-billable work. This can help sustain pay for impacted employees, maintain engagement, and advance organizational priorities during the downtime.

3. Supporting Employees Through Uncertainty

Shutdowns take an emotional and financial toll on employees. HR leaders can play a pivotal role in maintaining trust and engagement.

Communicate Frequently: Even if there are no updates, share that you’re monitoring developments. Silence can breed anxiety.
Offer Resources: Provide information on state unemployment processes, COBRA elections, and financial wellness resources.
Acknowledge the Stress: Managers should be encouraged to recognize employee concerns openly. Using empathetic, transparent communication helps maintain morale.
Language Matters: Avoid terms like “furlough” (a government-specific term) when describing unpaid leave. Instead, use “temporary layoff” or “non-excepted leave".

4. Compliance and Legal Considerations

Timesheets: Employees on unpaid status should not submit timesheets. Ensure payroll and accounting teams have updated instructions.
Access Management: Disable work access (emails, VPN, laptops) for employees on unpaid leave to ensure compliance with “no work” requirements.
State-Specific Rules: Some states have unique requirements for the prompt payment of accrued leave to employees. Review these to avoid compliance issues.

5. Leadership Checklist

If the shutdown is announced, HR and business leaders should immediately:

Communicate: Issue a clear, company-wide message with status, next steps, and expectations for employees.
Activate Out-of-Office Protocols: Ensure voicemail and email messages are set according to policy.
Confirm Employee Status: Clarify which employees are impacted and how leave/PTO will be handled.
Secure Benefits Guidance: Coordinate with your broker on health coverage continuation and COBRA timelines.
Assess Financial Exposure: Review receivables and lines of credit to sustain operations if payments are delayed.
Stay Connected: Keep contracting officers updated and document all communications.
Support Employees: Provide FAQs, unemployment guidance, and regular morale check-ins.

Government shutdowns create significant uncertainty for federal contractors; however, preparation and proactive leadership can help minimize disruptions. By focusing on clear communication, employee support, compliance, and financial stability, HR and business leaders can navigate the shutdown with resilience.

Even if the shutdown is short-lived, these practices strengthen your readiness for future disruptions and reassure your employees that you are leading with clarity and care.