What Employers Should Know If the U.S. Government Defaults

By Maggie Roddy posted 05-18-2023 02:53 PM


Congressional Republicans and Democratic President Joe Biden are negotiating the national debt ceiling. A lack of resolution could have catastrophic impacts on the global economy, federal and state employers, and federal contractors. Without action, it is possible that the United States could default on its debt as soon as June 1, 2023, according to Treasury Secretary Janet Yellen.

The following are answers to some of the most important questions surrounding the debt ceiling.

What is the debt ceiling?  

The debt ceiling is the limit placed by Congress on the amount of debt the U.S. government can accrue to pay for policies enacted by both political parties. While Congress passes spending bills and tax laws, the amount of revenue raised is often not enough to fully fund enacted policies. When that happens, the U.S. Treasury borrows money from banks, investors, foreign countries, etc., to make up the difference. Both political parties accrue debt, and both parties have needed to negotiate to raise the debt ceiling. For the last 10 years, the nation’s debt has been over $20 trillion. 

Notably, Denmark and the U.S are the only democratic countries with debt ceilings. However, Denmark purposefully positions their debt ceiling incredibly high to avoid a constant debate. In the U.S., however, politicians often use the debt ceiling as leverage in budget negotiations when the government is split between Republicans and Democrats. In fact, the debt ceiling has been raised 20 times in the last 23 years.   

The U.S. has never knowingly breached the debt ceiling before. Once breached, the federal government would be unable to pay its bills, including Social Security checks, payroll for employees, or Medicare reimbursements. Interest payments may also go unpaid, and as a result, the U.S. government would default on its debts. The U.S. would almost certainly enter a recession, which would impact the global economy.  

What is the impact on federal employees if the debt ceiling is breached?  

If the debt ceiling is breached, the federal government will be unable to pay employees, including military members and federal employees. However, unlike in a government shutdown where most employees are sent home, federal employees would likely continue working because federal agencies would still have legal authority, provided by Congress, to obligate funds. Thus, national parks and other government agencies are likely to remain open even if federal workers’ paychecks are delayed. However, employees may search for other jobs that can pay, which would impact the services available.  

What about federal contractors?  

Federal contractors are especially vulnerable if a breach occurs. Even though agencies may remain open, contractors may experience stop-work orders, canceled contracts, and frozen, delayed, or reduced contract payments.  

As a result, federal contractors with low cash reserves may have trouble paying employees. Federal contractors are subject to state laws, including wage laws. Therefore, employees must be paid for time worked promptly, or employers may face fines and penalties. Furloughs or layoffs may be an option, though a contractor may experience increased unemployment claims or lawsuits if individual employment contracts are violated. Likewise, contractors may have difficulty hiring employees back once the situation resolves.  

Are state workers vulnerable too?  

Like federal employees or contractors, some state employers rely on federal grants or other funding to compensate employees. In the event of a debt ceiling breach, that money may be delayed or only come intermittently. As a result, some employees may not be paid. While state laws related to the timeliness of wages may not apply, unpaid employees may file for unemployment or file other claims to receive payment of wages.  

Employers Council is monitoring the debt ceiling and will provide updates when available.   

1 comment



05-22-2023 01:00 PM

I just read and I heard on the news that Social Security, Medicare and Medicaid would not be affected if the government defaults because these programs have their own funding source and are not apart of the current argument.