What Would a Government Default Mean For Employers?

By Michael J. Lotito

What was once considered unthinkable is now becoming more of a possibility.

Although the U.S. Senate is reportedly working on a last-minute compromise, the federal government is coming dangerously close to defaulting on its loan obligations, or hitting the “debt ceiling.”

As Politico reports, members of the House of Representatives were close to a deal that would have reopened the federal government – which has been closed since Oct. 1 – until Dec. 15, 2013, and raised the debt ceiling until Feb. 7, 2014.

These measures would have bought Congress more time in which to iron out a more comprehensive budget plan.

Potential impact on employers and the workplace

A provision that would have repealed the Affordable Care Act’s controversial excise tax on medical devices was apparently dropped in an effort to garner support. However, it appears as if House Speaker John Boehner has not been able to muster the votes to advance this proposal, leaving both chambers without an approved deal, and with the government closer to default.

The proverbial debt ceiling will be hit on Thursday, Oct. 17.

If government does default, what are the implications for employers? Because the situation is fluid and virtually unprecedented, all of the effects caused by default cannot be anticipated. Employers can, however, expect the following:

According to a report issued by Macroeconomic Advisers, since late 2009, fiscal policy uncertainty has raised the unemployment rate in 2013 by 0.6 percentage points, equivalent to 900,000 lost jobs. If the impending default is quickly resolved, approximately 2.5 million jobs would be lost; if the default is prolonged another two months, the study predicts that approximately 3.1 million lost jobs will be lost.
At the outset, the news of a government default will certainly cause the credit markets to plummet. Plunging stock prices will adversely impact pension plan investments, which in turn will affect the requisite safe plan funding levels.
For retailers, the plunging stock market will impact consumer confidence and have a negative impact on holiday sales, which, in turn, could affect seasonal hiring and hours allocation.
Expect employees to ask about their 401(k) options as their values decline.
Employees receiving equity-based incentives, such as stock options, will see their compensation base drop precipitously. Employees receiving such benefits will surely value their compensation less, and could become flight risks.
Employees will no doubt inquire about their job security, particularly those working for federal contractors. Employers should be prepared to address these concerns.
Interest rates will likely increase, which will make borrowing more difficult. Employers may consider delaying any capital expenditures as a result.
If the dollar is devalued, overseas operations could become more expensive.
Increased employee stress could lead to more FMLA claims.

While this list is not exhaustive, it does show that what happens in Congress over the next 48 hours will have a significant impact on the business community.

This was originally published on Littler Mendelson’s D.C. Employment Law Update blog. © 2013 Littler Mendelson. All Rights Reserved. Littler®, Employment & Labor Law Solutions Worldwide® and ASAP® are registered trademarks of Littler Mendelson, P.C.