What President Trump’s Hiring Freeze Means for Government Contractors

The freeze exempts one of the largest federal employee groups - military personnel – and gives latitude to heads of other departments to exempt positions that are essential for national security and public safety. The near term effects may be minimal, but companies should watch carefully for the plan put forward by the OMB and OPM within 90 days to shrink the federal workforce through attrition.

Details about the ‘Freeze’

• Vacant positions as of noon, January 27, 2017 may not be filled and no new positions may be created except in limited circumstances.
• The order excludes military personnel and heads of executive department or agency may exempt positions they deems necessary to meet national security or public safety responsibilities.
• The Office of Personnel Management (OPM) may grant exemptions where necessary.
• Within 90 days (which would be April 26, 2017), the Director of the Office of Management and Budget (OMB) and the Director of OPM shall recommend a long term plan to reduce the size of the federal government workforce through attrition. The hiring freeze will expire upon implementation of that plan.
• Contracting outside the government to circumvent the intent of this memorandum shall not be permitted.
• The memorandum allows reallocation to meet the highest priority needs and to ensure essential services are not interrupted.
• The memorandum excludes political appointments and where the hiring freeze may conflict with federal law.
• It’s worth noting that a hiring freeze is not an unusual measure for an incoming President. President Reagan put in place a hiring freeze back in 1981 when he first came into office (http://www.nytimes.com/1981/02/10/us/reagan-s-contested-hiring-freeze-called-a-success.html). Similarly, George W. Bush put in place a hiring freeze when he came into office.

Snapshot of Federal Civilian Employment

Magnitude of the Freeze

• Federal civilian employment, according to OPM, is 2.067 million as of January, 2017. On an annual basis, federal turnover is 11.1%.
• The memorandum excludes military personnel, which is generally defined as members of the uniformed services. It doesn’t explicitly exclude civilian employment in the Department of Defense, but it is safe to assume that the DOD will determine that a large percentage of their civilian employees are exempt due to national security.
• Further, by allowing agency heads to exclude employees essential for public safety, large portions of the Departments of Justice and Homeland Security are likely to be exempted.
• It is noteworthy that the memorandum does not include public health, which was mentioned as an excluded group in Trump’s pre-election “100 Day Plan”, but there is room for agency heads to extend the “public safety” net to include “public health.”
• With a rough estimate on the number of likely positions vacated and not replaced, it shows that the number of positions likely to turnover over the next 90 days is relatively small (~20,000 FTEs). As a percent of total federal employment, that’s less than 1% and just under 3% of employment for the agencies that are likely to be impacted most. (see below).

Rough Estimate of the Impact of President Trump’s Hiring Freeze

Civilian Employment	Full Time Equivalents (FTEs)	% of Total Federal Employment
Total	2,067,000
Removing Employees Likely to be Excluded
Defense Civilian Employment	759,000	36.7%
Justice and DHS Employment	304,000	14.7%
Veterans Health Administration	331,000	16.0%
Removing Employees Impacted
All Other Agencies	673,000	32.6%
Annual Federal Turnover Rate	11.1% (or 0.925%/month)
Conservative Number of Positions Vacated in the 90 Day Freeze	18,675	0.9%

 

What Does This Means for Government Contractors?

• In the 90 day window of the order, the impact will be minimal even in the agencies most effected.
• However, depending on the longer term plan that OMB and OPM develop to reduce federal headcount, the impact will become more magnified as we get into late this year and next.
• For contractors, this could be good or bad depending on the nature of their business.
  • For firms that sell goods and services tied to federal employment levels, the long term reduction in federal employment will not be a good thing. Examples includes companies that sell commodity IT products (e.g., PCs, laptops and associated software), providers of office furniture and commercial real estate (agencies would likely consolidate office foot print). Agencies tend to buy less of these types of goods when their headcount is flat or declining.
  • For firms that sell professional services that augment the capacity of government employees, such as administrative staff, call center workers or other forms of staff augmentation, this could be an area of opportunity. As federal agencies restrict the ability for managers to hire, it often becomes easier for them to ‘contract out’ to fulfill those services, especially when the staff reductions aren’t accompanied by budget cuts.
• For the near term, the hiring freeze is more symbolic. But the OMB and OPM plan in combination with the President’s budget proposal will provide a much better indicator of the long term magnitude of impact from President Trump’s plan to shrink the federal workforce. All contractors should take heed and be watchful of the budget proposal and the OMB/OPM plan due in the next 90 days.