Department of Defense Issues Class Deviation for Implementation of Section 3610 of the CARES Act

6 min

Section 3610 of the CARES Act authorizes federal government 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," during the public health emergency declared for COVID-19 on January 31, 2020 through September 30, 2020. On April 8, 2020, the Department of Defense issued a class deviation to Federal Acquisition Regulation (FAR) Part 31 and Defense Federal Acquisition Regulation Supplement (DFARS) Part 231 that immediately authorized contracting officers to utilize DFARS 231.205-79, CARES Act Section 3610 Implementation. While recognizing the importance of supporting contractors that have been impacted by the COVID-19 pandemic and cannot address the impact by working remotely, the memorandum also underscores that contracting officers must be "good stewards of taxpayer funds while supporting contractor resiliency." Class Deviation 2020-O0013, at 2.

The memorandum also discusses the interplay between Section 3610 and other sections of the CARES Act, such as the Paycheck Protection Program (PPP), and provides that if a small business utilizes the PPP it should not also pursue reimbursement under Section 3610. To the extent a contractor seeks funds under the new DFARS clause, the memorandum places responsibility on the contractor for providing adequate documentary support for any claimed costs as well as the identification of any credits that "may reduce reimbursement under Section 3610." Id. The memorandum also underscores the importance of communication during this unprecedented time by encouraging contracting officers to discuss with contractors how contractors intend to avail themselves of the protections contained in the COVID-19 relief provisions, while also encouraging them to use available contracting remedies. Notably, the memorandum strongly suggests "that contracting officers secure representations from contractors regarding any other relief claimed or received from COVID-19, including an affirmation that the contractor has not or will not pursue reimbursement for the same costs accounted for under their request, to support their requests for reimbursement under Section 3610." Id. Thus, to the extent a contractor provides a false representation to the contracting officer, that contractor could be at significant risk after the current crisis passes.

The memorandum then summarizes the flexibility afforded contracting officers under the provision and instructs contracting officers to factor in the immediacy of a specific contractor's needs and respond accordingly. The memorandum informs contracting officers that there is a distinction between a company that can do no work because of the pandemic and one that can continue to do some work such that it continues to bring in revenue. Thus, some contractors may be in more dire need of financial relief than others. Stated differently, during the pandemic not all contractors are created equally.

DFARS 231.205-79 CARES Act Section 3610 – Implementation

This new cost principle applies to contractors that a contracting officer has designated in writing to be "an affected contractor." DFARS 231.205-79(a)(1)(i). An affected contractor is one whose employees or subcontractor employees cannot perform work at the contractually mandated facilities (government-owned or -leased facilities or contractor-leased facilities) "due to closures or other restrictions" and cannot perform their work remotely during the COVID-19 pandemic, i.e., telework. Id. at 231.205-79(a)(1)(ii). The DFARS states that the "maximum reimbursement" received

[S]hall be reduced by the amount of credit a contractor is allowed pursuant to division G of the Families First Coronavirus Response Act [FFCRA] (Pub. L 116-127) and any applicable credits a contractor is allowed under the CARES Act (Pub. L. 116-136) or other credit allowed by law that is specifically identifiable with the public health emergency declared on January 31, 2020 for COVID-19.

Id. at 231.205-79(a)(2).

With regard to allowability, the DFARS provides that "costs of paid leave (including sick leave), are allowable at the appropriate rates under the contract up to an average of 40 hours per week, and may be charged as direct charges, if appropriate." Id. at 231.205-79(b)(1). These costs must be for keeping contractor and subcontractor "employees in a ready state…notwithstanding the risks of the public health emergency" or for "[p]rotecting the life and safety of Government and contractor personnel against risks arising from" COVID-19. Id.

Moreover, to be allowable, the paid leave must be "incurred as a consequence…of the COVID-19 national emergency and…would not be incurred in the normal course of the contractor's business." Id. at 231.205-79(b)(2). The contractor must keep adequate records, as these "costs must be segregated and identifiable" to be recovered. Id. In addition, the allowable leave is limited to that taken "by employees who otherwise would be performing work on a site that has been approved for work by the Federal Government," and that facility is closed, inaccessible, or inoperable or otherwise restricted because of COVID-19, and the employee is unable to telework. Id. at 231.205-79(b)(4). Finally, the allowable costs must be incurred between January 31 and September 30, 2020. Id. at 231.205-79(b)(5).

Contractors need to be aware that while allowable costs for paid leave related to COVID-19 under the DFARS are broad, they cannot double-dip with other relief that the government is rolling out (for extensive coverage of these efforts, see Venable's COVID-19 resource center). See id. at 231.205-79(b)(6). For example, it is possible that a contractor could qualify for tax credits for paid sick leave under the FFCRA and a forgivable PPP loan for payroll costs under Title I of the CARES Act, and that some or all of either could also qualify as allowable costs under DFARS 231.205-79. In these types of situations, the contractor must keep careful records and disclose those credits to the contracting officer.

Considerations for Government Contractors

Though this provision will be welcomed by many contractors that cannot perform their contracts remotely, there are a number of things that companies need to do and/or consider:

  • Communicate with your government customer regarding why the individuals constitute key personnel and the affected work cannot be performed remotely;
  • Determine whether these costs for paid leave would have been incurred in the absence of the COVID-19 pandemic;
  • Keep detailed records that segregate and identify the associated leave costs;
  • Coordinate as a company regarding what provisions of the CARES Act are best suited for your company's financial well-being;
  • Document any application of grants to payroll or leave costs (see Venable's recent alert on the OMB's memo regarding grantees) to avoid any allegations of double recovery.

Importantly, this class deviation places the responsibility on the contractor for keeping proper records and adequate communication and disclosure with the contracting officer. Venable has already addressed in depth the implications of the CARES Act for liability under the False Claims Act (FCA). Moreover, there has been a flurry of new legislation and guidance coming from Washington, and there has been ample media coverage about the speed—and difficulty—with which these efforts have been implemented. There is no doubt that, at some point in the future, there will be a shift from implementation to oversight. These are unprecedented times, and contractors must be careful to ensure they do not face unexpected consequences when the current crisis ends.