Department of Homeland Security Human Resources Management System

DEPARTMENT OF HOMELAND SECURITY

OFFICE OF PERSONNEL MANAGEMENT

5 CFR Chapter XCVII and Part 9701

RIN 3206-AK31 and 1601-AA-19

Department of Homeland Security Human Resources Management System

AGENCY:

Department of Homeland Security; Office of Personnel Management.

ACTION:

Final rule.

SUMMARY:

The Department of Homeland Security (DHS or the Department) and the Office of Personnel Management (OPM) are issuing final regulations to establish a new human resources management system within DHS, as authorized by the Homeland Security Act of 2002. The affected subsystems include those governing basic pay, classification, performance management, labor relations, adverse actions, and employee appeals. These changes are designed to ensure that the Department's human resources management system aligns with its critical mission requirements without compromising the statutorily protected civil service rights of its employees.

DATES:

Effective Date:

March 3, 2005.

FOR FURTHER INFORMATION CONTACT:

At OPM: Ronald P. Sanders, 202-606-9150; at DHS: Kay Frances Dolan, 202-357-8200.

SUPPLEMENTARY INFORMATION:

Table of Abbreviations

AFGE—American Federation of Government Employees

ALJ—Administrative Law Judge

Compensation Committee—Homeland Security Compensation Committee

DHS—Department of Homeland Security

FLRA—Federal Labor Relations Authority

FMCS—Federal Mediation and Conciliation Service

FSIP—Federal Service Impasses Panel

GAO—Government Accountability Office (former General Accounting Office)

GS—General Schedule

HR—Human Resources

HSLRB—Homeland Security Labor Relations Board

MRO—Mandatory Removal Offense

MRP—Mandatory Removal Panel

MSPB—Merit Systems Protection Board

NAAE—National Association of Agriculture Employees

NFFE—National Federation of Federal Employees

NTEU—National Treasury Employees Union

OPM—Office of Personnel Management

SES—Senior Executive Service

SL—Senior Level

SRC—DHS Human Resource Management Senior Review Committee

ST—Scientific or Professional Positions

TSA—Transportation Security Administration

Table of Contents

This supplementary information section is organized as follows:

• Introduction

• The Case for Action

Pay and Classification

Performance Management

Labor-Management Relations

Adverse Actions and Appeals

• Summary of the Design Process

• The Meet and Confer Process

• Major Issues

Specificity of the Regulations

Pay for Performance

Management Rights/Scope and Duty to Bargain

Adverse Actions and Appeals

Mandatory Removal Offenses

• Response to Specific Comments and Detailed Explanation of Regulations

Subpart A—General Provisions

Section 9701.101—Purpose

Section 9701.102—Eligibility and Coverage

Summary of Coverage Eligibility Chart

Section 9701.103—Definitions

Section 9701.105—Continuing Collaboration

Section 9701.106—Relationship to Other Provisions

Section 9701.107—Program Evaluation

Subpart B—Classification

General Comments

Section 9701.201—Purpose

Section 9701.203—Waivers

Section 9701.204—Definitions

Section 9701.211—Occupational Clusters

Section 9701.212—Bands

Section 9701.222—Reconsideration of Classification Decisions

Section 9701.232—Special Transition Rules for Federal Air Marshal Service

Subpart C—Pay and Pay Administration

General Comments

Section 9701.301—Purpose

Section 9701.303—Waivers

Section 9701.304—Definitions

Section 9701.311—Major Features

Section 9701.312—Maximum Rates

Section 9701.314—Department of Homeland Security Responsibilities

Section 9701.321—Structure of Bands

Section 9701.322—Setting and Adjusting Rate Ranges

Section 9701.323—Eligibility for Pay Increase Associated with a Rate Range Adjustment

Section 9701.331—General

Section 9701.332—Locality Rate Supplements

Section 9701.333—Special Rate Supplements

Section 9701.334—Setting and Adjusting Locality and Special Rate Supplements

Section 9701.335—Eligibility for Pay Increase Associated with a Supplement Adjustment

Section 9701.342—Performance Pay Increases

Section 9701.343—Within Band Reductions

Section 9701.344—Special Within Band Increases for Certain Employees

Section 9701.345—Developmental Pay Adjustments

Section 9701.346—Pay Progression for New Supervisors

Section 9701.353—Setting Pay Upon Promotion

Section 9701.356—Pay Retention

Section 9701.361—Special Skills Payment

Section 9701.362—Special Assignment Payments; and 9701.363 Special Staffing Payments

Summary of Special Rate Supplements and Special Payments Provisions

Section 9701.373—Conversion of Employees to the DHS Pay System

Section 9701.374—Special Transition Rules for the Federal Air Marshal Service

Subpart D—Performance Management

General Comments

Section 9701.401—Purpose

Section 9701.403—Waivers

Section 9701.404—Definitions

Section 9701.405—Performance Management Systems

Section 9701.406—Setting and Communicating Performance Expectations

Section 9701.407—Monitoring Performance

Section 9701.408—Developing Performance

Section 9701.409—Rating Performance

Section 9701.410—Rewarding Performance

Section 9701.412—Performance Review Boards

Subpart E—Labor-Management Relations

General Comments

Section 9701.501—Purpose

Section 9701.502—Rules of Construction

Section 9701.503—Waivers

Section 9701.504—Definitions

Section 9701.505—Coverage

Section 9701.506—Impact on Existing Agreements

Section 9701.508—Homeland Security Labor Relations Board

Section 9701.509—Powers and Duties of the HSLRB and 9701.510—Powers and Duties of the Federal Relations Authority

Section 9701.511—Management Rights

Section 9701.512—Obligation to Confer

Section 9701.513—Exclusive Recognition of Labor Organizations

Section 9701.515—Representation Rights and Duties

Section 9701.516—Allotments to Representatives

Section 9701.517—Unfair Labor Practices

Section 9701.518—Duty to Bargain, Confer, and Consult in Good Faith

Section 9701.519—Negotiation Impasses

Section 9701.521—Grievance Procedures

Section 9701.522—Exceptions to Arbitration Awards

Section 9701.527—Savings Provision

Subpart F—Adverse Actions

General Comments

Section 9701.601—Purpose

Section 9701.602—Waivers

Section 9701.603—Definitions

Section 9701.604—Coverage

Section 9701.605—Standard for Action

Section 9701.606—Mandatory Removal Offenses

Section 9701.608—Departmental Record

Section 9701.609—Suspension and Removal

Section 9701.614—Savings Provision

Subpart G—Appeals

Section 9701.701—Purpose

Section 9701.702—Waivers

Section 9701.704—Coverage

Section 9701.705—Alternative Dispute Resolution

Section 9701.706—MSPB Appellate Procedures

Section 9701.707—Appeals of Mandatory Removal Action

Section 9701.709—Savings Provision

• Next Steps

• Moving Forward

• Regulatory Requirements

E.O. 12866—Regulatory Review

Regulatory Flexibility Act

E.O. 12988—Civil Justice Reform

E.O. 13132—Federalism

Introduction

The Secretary of Homeland Security, Tom Ridge, and the Director of the Office of Personnel Management, Kay Coles James, jointly prescribe this final regulation to establish a flexible and contemporary system for managing the Department's human resources (HR). This system has been developed pursuant to a process based on principles articulated by OPM and affirmed by DHS that called for extensive and continuing collaboration with employees and employee representatives. In addition, DHS and OPM have engaged in unprecedented outreach to the public as well as to the Congress and other key stakeholders. As provided by Public Law 107-296 (the Homeland Security Act, signed into law by President George W. Bush on November 25, 2002), the system preserves all core civil service protections, including merit system principles, veterans' preference, and due process. It also protects against discrimination, retaliation against whistleblowers, and other prohibited personnel practices, and ensures that employees may organize and bargain collectively (when not otherwise prohibited by law, including these regulations, applicable Executive orders, and any other legal authority).

This Supplementary Information addresses the following areas:

• The Case for Action

• Summary of the Design Process

• The Meet-and-Confer Process

• Major Issues

• Response to Specific Comments and Detailed Explanation of Regulations

• Next Steps

• Moving Forward

The Case for Action

Since September 11, 2001, this Nation has come together with a unity of purpose that has not been seen or felt since the attack at Pearl Harbor in 1941. Out of that national tragedy emerged a consensus for a comprehensive global war on terrorism. That consensus resulted in the enactment of legislation creating the Department of Homeland Security, and with it, the authority to create a system for managing its human resources that would be flexible and mission-focused without compromising the principles of merit and fitness. Indeed, the Department's mission is to “lead the

unified

national effort to secure America” (emphasis added), and its new HR system is aimed at that same result. In order for the Department to sustain that unity of effort, its HR system must also provide for the meaningful participation of employees in its creation, and they must be treated with dignity and respect in its implementation.

These final regulations represent a major step in that historic transformation. They establish a new HR system for the Department of Homeland Security (DHS) that assures its ability to attract, retain, and reward a workforce that is able to meet the critical mission entrusted to it by the American people. As provided by the regulations published here, that system must and does provide for greater flexibility and accountability in the way employees are paid, developed, evaluated, afforded due process, and represented by labor organizations. These regulations respond to comments on a notice of proposed rulemaking published in the

Federal Register

of February 20, 2004 (69 FR 8030). The next step, following the publication of these enabling regulations, is to implement this new system, in continuing collaboration with employee representatives.

The mission of the Department demands that employees and supervisors work together as never before. Managers, supervisors, and employees of the Department must be unified in both purpose and effort if they are to accomplish that mission. And perhaps the most important way to bring about that unity is through an integrated HR system for the Department—a system that assures maximum flexibility and accountability. That system must value, reward, and reinforce high performance, teamwork, commitment to learning and excellence, and selfless service. It must also facilitate communication and collaboration at all levels of the Department. The Secretary and the Director are committed to ensuring that these goals are met.

The mission statement of the Department goes on to state that “[w]e will prevent and deter terrorist attacks and protect against and respond to threats and hazards to the nation. We will ensure safe and secure borders, welcome lawful immigrants and visitors, and promote the free-flow of commerce.” No Federal agency has ever had a mission that is so broad, complex, dynamic, and vital. That mission demands unprecedented organizational agility to stay ahead of determined, dangerous, and sophisticated adversaries. The importance of the Department's HR system to achieving that goal has been underscored by the President and the Congress. In signing the Homeland Security Act into law, President Bush emphasized the Department's critical need to “put the right people in the right place at the right time in the defense of our country” while ensuring that the rights of the Department's employees “[a]s federal workers * * * will be fully protected * * *.” Senator Susan Collins, Chairman of the Senate Committee on Governmental Affairs, said, “[w]e need to grant the new Secretary appropriate but not unlimited authority to create a flexible, unified new personnel system that meets the Department's unique demands.”

This was the fundamental challenge faced by Secretary Ridge and Director James in designing this new system—to strike a balance between mission-essential flexibility and protection of core civil service principles. Summarized here and discussed at length in the pages that follow are the changes that we believe strike that balance. Many of those changes are significant, and we have highlighted them in the following pages. We believe they respond to the fundamental concerns of the American public, as well as our employees. Where there is a substantial departure from the status quo in this final plan, it is in furtherance of the Department's statutory mission, with the attendant need for a significant investment in communication and understanding on the part of all parties in order to successfully implement those changes.

Pay and Classification.

One of the most fundamental changes in the regulations is the creation of a pay-for-performance system for Department employees that will replace the General Schedule. Under this new system, pay increases will be based solely on performance—not time in grade. It also provides for the establishment of a series of occupational clusters and bands in place of the current General Schedule grades and authorizes DHS to

set and adjust the minimum and maximum rates of pay for each band associated with a cluster. In addition, the system establishes locality rate supplements to address local market conditions, as well as special rate supplements to address special recruitment or retention needs. Only those DHS employees whose performance meets or exceeds expectations will be eligible for a performance- and/or market-based pay increase.

Performance Management.

The new performance management system for DHS will complement and support the Department's new pay and classification system by ensuring greater accountability for individual performance expectations and organizational results. The regulations simplify performance management, removing many administrative burdens associated with the current system. For example, “performance expectations” need no longer be in writing and may take the form of individual, team, and/or work unit goals or objectives, as well as such things as standard operating procedures or manuals, internal rules and directives, and other generally available instructions applicable to an employee's job. However, performance expectations, including those that may affect the employee's retention, must still be communicated to the employee prior to holding the employee accountable for them.

Labor-Management Relations.

To ensure that the Department has the flexibility to carry out its vital mission, the regulations, among other things, revise management's rights and its duty to bargain to ensure that the Department can act as and when necessary. Such critical matters as work assignments and deployments are no longer subject to collective bargaining. However, exclusive representatives will still be able to negotiate over significant and substantial changes, as well as appropriate arrangements for employees adversely affected by those changes, under certain specified conditions. Additionally, the regulations create the Homeland Security Labor Relations Board (HSLRB) to address those issues that are most important to accomplishing the DHS mission, with other matters retained by the Federal Labor Relations Authority (FLRA). The revisions strike the right balance between the mission needs of DHS and the meaningful involvement of employees and their representatives.

Adverse Actions and Appeals.

Consistent with the Homeland Security Act, the regulations streamline and simplify adverse action and appeals procedures, but without compromising due process for DHS employees. Employees will still receive notice of a proposed adverse action, the right to reply, and the right to appeal to the Merit Systems Protection Board (MSPB). We have also revised the proposed regulations to raise the burden of proof in adverse actions from “substantial” to “preponderance,” and to permit arbitration of adverse actions as an option for bargaining unit employees. In addition, the regulations now allow MSPB (and arbitrators) to mitigate penalties, but only under certain specified conditions. The final regulations also retain authority for the Secretary to establish a number of mandatory removal offenses (MROs) that have a direct and substantial effect on homeland security and an independent Panel (selected from a list that will include nominees from DHS exclusive representatives and other sources) to hear MRO appeals.

Summary of the Design Process

As the Congress made clear, “collaborative effort will help secure our homeland.” DHS and OPM have been committed to a collaborative approach from the beginning. The General Accounting (now Government Accountability) Office (GAO) recognized this in a report last year, stating that “DHS's and OPM's efforts to design a new human capital system are collaborative and facilitate participation of employees from all levels of the department.” In a follow-up report issued in June 2004, GAO observed that “to date, DHS's actions in designing its human capital management system and its stated plans for future work on the system are positioning the department for successful implementation.” Those actions included an extensive process of deliberation, discussion, and collaboration with employees, representatives of labor organizations, supervisors, managers, and other stakeholders in order to identify ideas and concerns.

This collaborative process was rooted in conversations Director James held with employee representatives even prior to the passage of the Homeland Security Act to propose a fair and principled process for the design of the HR system. The process itself actually began in April 2003, when the Secretary and the Director established a DHS/OPM Design Team composed of Department managers and employees, HR experts from DHS and OPM, and professional staff from the Department's three largest labor organizations: The American Federation of Government Employees, the National Treasury Employees Union, and the National Association of Agriculture Employees.

The 48 members of the Design Team conducted significant research in the areas of pay, performance, classification, labor relations, adverse actions, and appeals reform. The team gathered data from public and private sector organizations; examined and evaluated successful and promising human capital practices; interviewed leading human resources experts, DHS employees and managers; and consulted a Field Team of employees and managers who provided a front-line perspective. Together, as a team, DHS and OPM also held dozens of focus groups, including visits to Norfolk, Atlanta, Detroit, New York, Miami, El Paso, Los Angeles, Seattle, Baltimore, and Washington, DC. Thus, DHS and OPM heard the concerns of thousands of the Department's employees.

The Design Team developed 52 options for the various elements of the Department's HR system. These were presented to a DHS Human Resource Management Senior Review Committee (SRC) on October 20-23, 2003. The SRC, co-chaired by senior DHS and OPM officials, included the presidents of the Department's three largest labor organizations, as well as the heads of some of its largest and most critical line operations. In addition, five non-Federal experts in public administration were designated as technical advisors to the SRC. During the course of two public meetings, the SRC reviewed the various Design Team options, and thereafter its members reported their views to the Secretary and the Director for consideration. In reaching final decisions regarding the new HR system, the Secretary and the Director relied on the SRC's advice and counsel, as well as the public comments received during the SRC proceedings and the wealth of material developed through the Design Team's research.

These extensive and collaborative design efforts all preceded the formal process for developing the new HR system, and went far beyond that required by the Congress in the Homeland Security Act. The Act established a formal process in this regard, officially beginning when the Secretary and the Director published proposed regulations to establish the new DHS HR system in the

Federal Register

on February 20, 2004. That first formal step provided a 30-day period for the public, employees, and employee representatives to review and submit formal comments on the proposed system. More than 3,800 public comments were received and analyzed by DHS and OPM staff. At the specific

request of the Secretary and the Director, the formal comments of labor organizations were given particular attention and consideration. Commenting jointly, the three largest labor organizations rejected the proposed regulations in their entirety. Public, employee, and labor organization comments are summarized in detail in a subsequent section of this Supplementary Information.

The Meet-and-Confer Process

The public comment period was followed by the second step in the formal development process—an additional 30-day period during which representatives of the Department and its major employee organizations were to “meet and confer” in order to resolve differences over the proposed regulations wherever possible. That meet-and-confer process began officially on June 14, 2004. On that date, the Secretary and the Director notified Congress in writing that they had not accepted the labor organizations' recommendation to reject the proposed regulations in their entirety. This notification was required by the Homeland Security Act of 2002 (5 U.S.C. 9701(e)(1)(B)(i)). Even before the meet-and-confer process began, however—and in keeping with our determination to work collaboratively with DHS employee representatives—staff from DHS and OPM met informally for several days with representatives of the three largest labor organizations representing DHS employees to discuss the proposed regulations. Our discussions helped us better understand each other's positions and led to several clarifications regarding the proposed regulations.

As authorized by 5 U.S.C. 9701(e)(1)(B)(iii), and in order to facilitate the meet-and-confer process, the Secretary and the Director issued procedures governing the conduct of this process. The procedures provided for five employee organizations to participate in the meet-and-confer process, including one management association; however, the management association declined to participate. The Secretary, in consultation with the Director, also requested the services of the Federal Mediation and Conciliation Service. Under those procedures, officials of the Department and OPM met with employee representatives from June 14 through August 6, 2004, a period well in excess of the statutory requirement. (Including informal sessions that preceded the meet-and-confer process, DHS, OPM, and labor organization representatives met for a total of more than 36 days—this, of course, is in addition to the 6 months that DHS and OPM representatives spent with employee representatives, full-time, during the HR system design process.) The following principals participated in the actual meet-and-confer process:

• One representative from each of the four largest DHS labor organizations: the American Federation of Government Employees (AFGE), the National Treasury Employees Union (NTEU), the National Association of Agriculture Employees (NAAE), and the National Federation of Federal Employees (NFFE);

• Four representatives from DHS, including the Chief Human Capital Officer, an executive from his staff, and two senior line managers from DHS operational components; and

• Two senior executives from the Office of Personnel Management (OPM).

Finally, at the conclusion of the meet-and-confer process, the Secretary and the Director met with the national presidents of the Department's two largest labor organizations (AFGE and NTEU) on September 10, 2004, to provide them with an opportunity to present their issues and concerns directly to the principals. Their presentation led to further revisions to these regulations as described in this

SUPPLEMENTARY INFORMATION

.

As discussed and described in great detail in subsequent sections of this Supplementary Information, we have made substantial revisions to the proposed regulations in response to the many recommendations made by employees, labor organizations, and others during the public comment period. In addition, we listened to the concerns of the employee representatives and adopted many of the proposals made by labor organization representatives during the extensive meet-and-confer process. A careful comparison of the final regulations to those proposed several months ago will show that we have kept our commitment to an open, inclusive, and participatory process that respected and accommodated employee and labor organization perspectives and concerns.

These extensive revisions notwithstanding, substantial disagreements remain over such fundamental issues as performance vs. tenure as a basis for individual pay increases, and the scope and duty to bargain vs. operational flexibility in the assignment and deployment of front-line personnel. These disagreements were underscored during the meet-and-confer process, and despite the exhaustive, good faith efforts by labor organization and management representatives during that process, the parties were simply not able to resolve them. In point of fact, these issues reach to the core of a flexible, contemporary HR system for the Department, and they represent the sort of transformational change envisioned by the Congress and the President when the Homeland Security Act was enacted into law. And because they are so fundamental, no one should be alarmed by these disagreements, take them as a sign of bad faith on the part of any party, or view them as an indication that the meet-and-confer process failed. Reasonable and honorable people may disagree, especially over such issues as these, but we believe the extensive involvement of employees and employee representatives over the course of the last 18 months added tremendous value—and that the process worked.

While the regulatory process precluded us from agreeing on final regulatory language during the meet-and-confer process, we believe we did reach agreement with the participating labor organizations on numerous substantive issues. Because we could not “sign off” on these agreements, as we would in a traditional collective bargaining process, we have tried to exercise caution in characterizing the results. We believe this understates the extent of the conceptual agreements and understandings reached during the process, which we have tried to reflect in the Supplementary Information section of this notice. Thus, where we make the statement “we agreed” in the text of this Supplementary Information, we are referring to agreements reached by OPM and DHS in the regulatory process, rather than to agreements reached between management and labor organization representatives during the meet-and-confer process.

Major Issues

Our analysis of the more than 3,800 comments received during the public comment period, as well as the many issues extensively discussed during the subsequent meet-and-confer process, revealed a set of major issues that elicited the most (or most substantive) comments, especially from key stakeholders. They are (1) specificity of the regulations, (2) pay for performance, (3) management rights/scope and duty to bargain, (4) adverse actions and appeals, and (5) mandatory removal offenses. Because these issues are critical to understanding the objectives of the Department's new HR system, we have given them particular attention in the following pages.

1. Specificity of the Regulations

One of the most significant issues raised by employees, labor organizations, and some Members of Congress had to do with the basic structure of the regulations. As jointly prescribed by DHS and OPM, parts of the final regulations establish broad policy parameters for the Department's HR system but leave many of the details of that system to DHS implementing directives. Many of the commenters, especially labor organizations, expressed concern about this fact, arguing that the proposed regulations lacked sufficient detail, and they recommended that the regulations include far greater specificity.

These comments and concerns focused almost exclusively on three of the subparts in the proposed regulations—those dealing with classification, pay, and performance management (subparts B, C, and D, respectively). Those subparts were (and remain) relatively general in nature, and they expressly provide for the Department to develop and issue directives implementing their precepts subsequent to the promulgation of these regulations. In contrast, the subparts dealing with labor relations, adverse actions, and appeals (subparts E, F, and G, respectively) are quite detailed, requiring little in the way of implementing directives.

In response to these comments, and as a result of the meet-and-confer process, we have added greater detail to the subparts at issue—particularly subpart C. However, even with added detail, all three of the subparts at issue retain their original structure in the final regulations, establishing a general policy framework to be supplemented by detailed Departmental implementing directives. Comments notwithstanding, we believe that this is the appropriate approach. In these final regulations which have the full force and effect of law, we have intentionally adopted a structure that mirrors the very statutes that they replace. Moreover, this structure provides the Department the flexibility it requires in implementing an HR system of this scope and complexity.

In this regard, the provisions of title 5, U.S. Code, governing classification, pay, and performance management establish general policies and authorities, with the details left to OPM to regulate. For example, 5 U.S.C. chapter 51 establishes the General Schedule (GS) classification system but leaves to OPM the definition of occupational series and families and the development and promulgation of detailed job grading standards and qualification requirements—presently encompassing hundreds of detailed classification standards and qualifications requirements (note that those standards and requirements are not subject to public notice and comment under the Administrative Procedure Act). Subpart B of these regulations, which now replaces 5 U.S.C. chapter 51, follows suit, establishing the basic “architecture” of the Department's job classification system—that is, its core elements and parameters—but it leaves the specific definition of occupational clusters and bands and the development of job grading standards to Departmental implementing directives (all subject to OPM review and coordination). Chapters 53 and 43 of title 5, U.S. Code, follow the same pattern and so too do the subparts that replace them—subparts C and D, respectively.

While commenters did not express concern about the structure of subparts E, F, and G, dealing with labor relations, adverse actions, and appeals, respectively, they too reflect their statutory underpinnings. Like their “legacy” chapters in title 5 (chapters 71, 75, and 77, respectively), they are extremely detailed and, except for procedures for the operation of the two adjudicating bodies that they establish, they require little in the way of implementing directives.

While the final regulations retain their basic structure as originally proposed, we have added detail in subparts B, C, and D as a result of public comment and the meet-and-confer process. These additions are documented at length in our responses to the detailed comments that follow. However, some of them are worth highlighting. For example, in subpart C, we have included specific policies governing pay adjustments upon promotion from a lower pay band to a higher one; pay progression for employees in entry/developmental pay bands; limits on reductions in basic pay for performance or conduct reasons; pay adjustments for employees on pay retention; and the impact of an “unacceptable” performance rating on an individual's pay. Similarly, subpart D now includes additional detail regarding requirements for setting and communicating performance expectations (especially those that may affect an employee's retention) and policies dealing with rating and rewarding performance.

According to labor organization feedback during the final stages of the meet-and-confer process, these additions still fall short of the detail they recommend. Labor organization comments in this regard focus primarily on process, asserting that by including greater detail in the proposed regulations, they would have been given an opportunity to participate and provide input to the final regulations via the statutory meet-and-confer process set forth in 5 U.S.C. 9701(e). Among other things, that statutory process requires the Department and OPM to provide employee organizations with an opportunity to comment on proposed regulations and thereafter, meet with DHS and OPM officials (under the auspices of the Federal Mediation and Conciliation Service, if necessary) in an attempt to resolve any concerns and disagreements. As the labor organizations and other commenters have correctly pointed out, the proposed regulations did not provide for an analogous opportunity with respect to the issuance of implementing directives. This became a major topic of discussion during the meet-and-confer process, with labor organizations insisting that DHS and OPM either include all implementing details in these final regulations, or subject Department implementing directives to collective bargaining.

We did not adopt either alternative. Including such detail in these regulations would be inconsistent with the “legacy” statutes that they replace and contrary to our best judgment—based on years of experience administering those statutes. Moreover, such detail would result in untenable rigidity in a Department whose mission requires just the opposite. In authorizing these regulations, Congress mandated that we develop a human resources system that is “flexible” (

see

5 U.S.C. 9701(b)(1)); indeed, of all of the various objectives set by Congress for this system in the Homeland Security Act, flexibility was the very first it enumerated, and unnecessary and excessive detail in subparts B, C, and D would undermine that objective.

Collective bargaining is also inappropriate for the development of implementing directives. First, Congress could have provided for collective bargaining to develop directives, but did not. Instead, it expressly provided for a meet-and-confer process as a way of providing for labor organization involvement, and there is no evidence whatsoever that it intended that Departmental implementing directives be collectively bargained; rather, Congress clearly provided for “continuing collaboration” (but implicitly, not collective bargaining or “meet and confer”) in this regard. Moreover, we note that no labor organization enjoys exclusive

recognition at the Department level—indeed, labor organizations represent fewer than 40 percent of the Department's eligible civilian workforce; granting labor organizations the right to collectively bargain implementing directives that cover all of the Department's employees would be inappropriate.

However, from the beginning DHS and OPM have recognized the value of involving employees and their representatives in the design of this system and included this as one of our guiding principles. Moreover, as noted previously, 5 U.S.C. 9701(e)(1)(D) requires the Department and OPM to provide a means for ensuring “continuing collaboration” with employee representatives in implementing these regulations. In keeping with those objectives, we have included a “continuing collaboration” process at § 9701.105. This is consistent with the statutory provision which states that the Secretary and Director “shall * * * develop a method for each employee representative to participate in any further planning or development (of the personnel system) which might become necessary.” The new section now assures employee representative involvement in the development of the Department's implementing directives. Named after the section in the law that requires it, this section provides employee representatives with an opportunity to discuss their views and concerns on implementation and design concepts with DHS officials and/or to review and provide written comments on proposed final draft implementing directives in advance.

In summary, three of the subparts in these final regulations remain relatively general in nature, providing broad policy parameters but leaving much of the details to implementing directives, while three others are specific. We believe that this structure, patterned after the chapters in title 5 that they replace, is appropriate. By providing for detailed implementing directives, the subparts dealing with classification, pay, and performance management provide the Department with the flexibility mandated by Congress, and they do so without compromising the Department's commitment to substantive employee representative involvement in the development of those directives.

2. Pay for Performance

The pay system we described in the proposed regulations was designed to fundamentally change the way we pay employees in the Department of Homeland Security. Instead of a pay system based primarily on tenure and time-in-grade, we proposed a system that bases all individual pay increases on performance. This proposal honors major points that were debated by the Congress and agreed upon with the passage of the Homeland Security Act. In addition, the proposed pay system would be far more market-sensitive than the current pay system. The proposed changes relating to classification, pay, and performance management were designed to achieve these two primary goals.

A number of commenters agreed with the proposal to create a more occupation-specific and market- and performance-based classification and pay system. However, most commenters strongly recommended that we maintain the

status quo

; that is, that DHS continue to rely on the General Schedule (GS) classification and pay system. Many commenters thought that the proposed pay-for-performance system would lower employee morale, increase competition among employees, and undermine teamwork and cooperation. Some also questioned the ability of the Department to successfully implement the proposed system, or of DHS managers to establish and apply performance standards fairly and consistently to pay decisions.

We have retained the system described in the proposed regulations. We believe Congress and the American people expect their public employees to be paid according to how well they perform, rather than how long they have been on the job. They also expect the Department to do everything it can to recruit and retain the most talented individuals it can find to carry out its critical mission. These expectations are difficult, if not impossible, to achieve under the current system. The General Schedule does not provide the opportunity to appropriately reward top performers or to pay them according to their true value in the labor market. Under the General Schedule, performance is rewarded as an exception rather than the rule, and market is defined as “one size fits all.”

The GS pay system is primarily a longevity-based system—that is, pay increases are linked primarily to the passage of time. While time-in-grade determines eligibility for a GS step increase, it is true that a finding that the employee is performing at an acceptable level of competence is also required. However, this minimal requirement is met by roughly 99 percent of all GS employees. Thus, at any given grade level, the vast majority of employees can expect to automatically receive base pay increases of up to 30 percent over time—in addition to the annual across-the-board pay increases—so long as their performance is “acceptable.” Even employees whose performance is unacceptable receive annual across-the-board pay increases that range from 3 to 5 percent, and special rates that are even higher. Over time, even minimally productive employees will progress steadily to the top of the GS pay range, and may end up being paid significantly more than higher performing employees with less time in grade. Such a system cannot be fairly characterized as providing performance-based pay.

The DHS pay-for-performance system, by contrast, is designed to recognize and reward performance in two key ways. First, it establishes the fundamental principle that no employee may receive a base pay or locality rate increase if his or her performance does not at least meet expectations. Unlike the GS system, employees rated unacceptable will not get an annual adjustment. Second, the DHS system provides for individual base pay increases based on an employee's performance, whether by demonstrating requisite competencies at the entry/developmental level or by meeting or exceeding stringent performance expectations at the full performance level. Unlike the GS system, tenure and time-in-grade have no bearing. An employee will progress through the pay range based solely on how well he or she performs.

This concept may be simply summarized: The higher the performance, the higher the pay. This, too, is a fundamental principle of the new system, and we choose the order of these words deliberately. This system does not assume that individuals are motivated by pay, but rather that we have an obligation as an employer to reward the highest performers with additional compensation—however they may be motivated to achieve excellence. The Department has a special responsibility in this regard. Thus, the system we have designed is not a “performance-for-pay” system, but a “pay-for-performance” system. Nevertheless, we believe it will inspire DHS employees to perform at their best. This is in contrast to the GS system, where it is possible for a high-performing employee to be paid the same, or even less, than a lower performing co-worker.

The 50-plus-year-old GS pay system also is not sufficiently market-sensitive, potentially under-valuing the talents of the Department's most critical employees. Under the GS pay system, all employees in a given geographic location receive the same annual pay adjustment without regard to their

occupation or the level of duties and responsibilities they are expected to perform. This one-size-fits-all approach treats all occupations alike, across the board as well as in particular locations, regardless of market value and competition. Thus, we inevitably end up underpaying employees in some occupations and overpaying others. Even within an occupation, the rigidities of the General Schedule sometimes force us to underpay employees at the entry/developmental grades, with recruiting difficulties and high attrition the result.

The new DHS pay system is designed to be much more market-sensitive. First, it allows DHS, after coordination with OPM, to define occupational clusters and levels of work within each cluster that are tailored to the Department's missions and components. Second, it gives DHS considerable discretion, after coordination with OPM, to set and adjust the minimum and maximum rates of pay for each of those occupational clusters or bands, based on national and local labor market factors and other conditions. Instead of “one size fits all” pay rates and adjustments, the system allows DHS to customize those adjustments and optimize valuable but limited resources. This kind of flexibility, which is lacking under the GS pay system, will enable DHS to allocate payroll dollars to the occupations and locations where they are most needed to carry out the Department's mission of protecting the homeland.

Thus, the goals and principles of the new system are sound, and we have confidence that the Department has the capability to effectively execute them. Pay-for-performance systems like that proposed for DHS are not new. Paybanding has been around in the Federal Government since 1980, and the Federal Government has substantial experience in implementing performance-based pay systems (e.g., in demonstration projects). Research shows that employees' attitudes toward such systems change over time, as they gain experience with them. For example, employee support for the

circa

1980 “China Lake” broadbanding/pay-for-performance demonstration project was only 29 percent before the project began, reached 51 percent by 1985, and was 69 percent by 1988. Employee support was 70 percent when Congress made the project permanent in 1994. Today, thousands of Federal employees already are covered by successful performance-based pay systems.

The system we have devised is also consistent with the findings and recommendations of the National Academy of Public Administration in its May 2004 Report, “Recommending Performance-Based Federal Pay”: “The basis for managing individual salary increases should be pay-for-performance. This recommendation has been a constant theme in discussions for more than two decades and the principle in every demonstration project that tested new pay policies. The evidence from the projects confirms that pay-for-performance can be successful in federal agencies. The switch to a pay-for-performance policy should be managed as an organizational change because it will alter each agency's culture and contribute to improved performance.” Thus, this is not a journey into uncharted waters.

We respect the concerns of employees and agree that it is essential to communicate with employees regarding the changes that DHS is making. Experience has shown that one of the best ways to deal with the concerns associated with change is to involve employees and their representatives in the process. As stated in the Preamble to the proposed regulations, DHS is committed to a high degree of employee involvement in developing the details of the new classification, pay, and performance management system, and by its actions to date, it has lived up to that commitment.

The need for employee involvement, however, will not cease with the publication of these regulations. That is why the final regulations provide for the continuing involvement of employee representatives in the development of the detailed directives that will implement this system and in the evaluation of the system. (See §§ 9701.105 and 9701.107.) That is also why the final regulations provide for the establishment of a new Homeland Security Compensation Committee (Compensation Committee) that will involve representatives from the major DHS labor organizations in addressing strategic compensation matters, such as Departmental compensation policies and principles. The Compensation Committee will consider factors such as turnover, recruitment, and local labor market conditions in providing options and recommendations for consideration by the Secretary. (See § 9701.313.) This involvement will enhance the credibility and acceptance of the system.

The new pay system will require numerous decisions to be made on an annual basis, and the Compensation Committee will play a key role. For example, DHS must determine how available budgetary resources should be allocated between market-based adjustments—such as rate range adjustments and adjustments in locality and special rate supplements—and performance pay increases. DHS must determine the overall amount that will be authorized for rate range adjustments in response to changes in the national labor market for specific occupational clusters and bands and the amounts that will be authorized for more targeted market-based adjustments in specific locality pay areas. The Compensation Committee will provide options and/or recommendations for consideration by the Secretary, who will make final decisions.

The Compensation Committee will include a total of 14 members, with 4 “seats” reserved for DHS labor organizations granted national consultation rights. OPM will also serve as an

ex officio

member. It will be chaired by DHS's Undersecretary for Management, who will select a facilitator from a list of nominees developed jointly by representatives of the Department and the labor organizations. In addition to making recommendations to the Secretary on strategic compensation matters, the Compensation Committee also will review summary data regarding annual performance payouts authorized under the new system (§ 9701.342). The Compensation Committee is modeled after the Federal Salary Council, which advises the President's Pay Agent (the Secretary of Labor and the Directors of the Office of Management and Budget and the Office of Personnel Management) on the ongoing administration of the locality pay program for GS employees. It is designed to give DHS employees, through the labor organizations that represent them, a real voice in the ongoing administration of the DHS pay-for-performance system.

In summary, we believe the Department's pay-for-performance system is an imperative, essential to DHS's ability to attract, retain, and reward a workforce that is able to meet the high expectations set for it by the American people—the security of our homeland. Its successful implementation is well within the capability of the Department's leadership.

3. Management Rights/Scope and Duty To Bargain

The ability to act quickly is central to the Department's mission—not just in emergency situations but, more importantly, in order to prepare for or prevent emergencies. This principle was critical to President Bush and the Congress throughout the formation of

the legislation and the congressional debate that followed its introduction. This ability to act quickly is necessary even in meeting day-to-day operational demands. The Department must be able to assign and deploy employees, and to introduce the latest security technologies without delay. Congress clearly stated that the Department's HR system must provide the flexibility DHS needs to respond to a variety of vital operational challenges and to carry out its wide-ranging mission.

To achieve this mandate, the proposed regulations revised the management rights and duty to bargain provisions found in 5 U.S.C. chapter 71. We expanded the list of management rights that are prohibited from negotiation to include numbers, types, and grades of employees or positions assigned to any organizational subdivision, work project, or tour of duty; and the technology, methods, and means of performing work—those rights that deal directly with the Department's homeland security operations. We also excluded from mandatory negotiations the procedures that the Department would follow in exercising these expanded management rights. And we proposed changes to allow the Department to take action in any of these areas without advance notice to labor organizations and without pre-implementation bargaining.

Without exception, comments received from labor organizations objected to the proposed regulations, arguing that altering the scope of bargaining in any way was contrary to the Homeland Security Act. Further, labor organizations asserted that these changes were not necessary, and that current law already provided the Department with sufficient flexibility to deal with emergencies. Labor organizations did acknowledge the Department's need to take certain actions without pre-implementation bargaining, and during the meet-and-confer process, they proposed a process for accelerated post-implementation bargaining and third-party impasse resolution. Additionally, their proposal would have allowed the Department to temporarily suspend procedural provisions of collective bargaining agreements in situations where there is a direct or substantive connection to protecting homeland security. However, even under those stringent conditions, they insisted that employees automatically be “made whole” for any adverse consequences stemming from the suspension, as if management had violated the agreement.

We recognize the good faith effort made by these labor organizations to meet the Department's operational needs. However, their proposals were fundamentally flawed in several respects. We have, therefore, retained the management rights/scope of bargaining provisions in the proposed regulations with some modifications.

With respect to procedures, the proposals offered by the labor organizations do not go far enough. They would still require the Department to bargain, as a mandatory matter, over the procedures it would be required to follow in exercising management rights, especially those that deal directly with its operations. Those procedures can and do constrain such critical actions as the assignment of work, the deployment of personnel, and the staffing of tours of duty. These procedures are negotiable under 5 U.S.C. chapter 71. Labor organizations would have the Department continue that obligation, but with an “escape clause” that would allow the Department to suspend those procedures and act under exceptional circumstances.

This is too high a bar. In today's operational environment, the exceptional has become the rule. During the meet-and-confer process, we provided numerous and frequently alarming examples where such negotiated procedures have hindered day-to-day operations—for example, in redeploying personnel from a seaport to an airport to meet an unexpected operational need, port directors today must draw from a pre-established pool of volunteers even if in so doing they would under-staff other critical line functions. Department managers, supervisors, and employees are on the frontlines of the war on terrorism and the efforts to preserve homeland security. The Department must be able to rely on the judgment and ability of these managers and supervisors to make day-to-day decisions—even if this means deviating from established or negotiated procedures. The reality in the Department today is that such deviations would be constant, thereby rendering any negotiated procedures meaningless. Moreover, the Department's managers and supervisors must be able to make split-second decisions to deal with operational realities free of arbitrarily imposed standards.

With respect to post-implementation bargaining, the proposals offered by labor organizations are similarly flawed. While they would allow for management to implement without bargaining in advance over impact and appropriate arrangements for employees adversely affected by the exercise of a management right, they would still require immediate post-implementation negotiations and third-party impasse resolution over such matters. However, the reality of DHS's operational environment today is that change is constant, and as a consequence, so too would be post-implementation negotiations, with the prospect of continuous third-party involvement. These negotiations would be required even in cases where the change has come and gone and/or where its impact was insignificant or insubstantial. The demand on DHS's frontline managers and supervisors to engage in constant post-implementation negotiations would divert them, and other critical resources, from accomplishing the mission. This is unacceptable and inconsistent with the vision for the Department.

Further, under 5 U.S.C. chapter 71, negotiated agreements over appropriate arrangements are binding, under the assumption that those agreements have anticipated future changes. Once again, today's operational environment belies that assumption. Not only are changes necessitated by operational demands constant, but they are also of almost infinite variety. Our frontline managers and supervisors must not be bound by past agreements when they must face current and future exigencies.

Nevertheless, in recognition of the concerns articulated by the participating labor organizations and other commenters, and as a result of the September 10 meeting with the national presidents of AFGE and NTEU, the Secretary and the Director directed that the proposed regulations be revised to ensure the involvement of labor organizations in such matters. First, the regulations provide for management, at the level of recognition, (1) to confer with an appropriate exclusive representative to consider its views and recommendations with regard to procedures that managers and supervisors will follow in the exercise of those management rights that deal directly with operational matters; (2) to meet for up to 30 days in an attempt to reach agreement on such procedures, with the possibility of extensions and third-party assistance; and (3) to deviate from those procedures as necessary. We believe this strikes the right balance between the Department's need for maximum flexibility and speed and the value of labor organization involvement.

Second, as a result of the September 10 meeting with the national presidents of AFGE and NTEU, the Secretary and the Director also directed that the proposed regulations be revised to require post-implementation negotiations over impact and

appropriate arrangements for employees adversely affected by the exercise of a management right. They have also been revised to allow for pre-implementation notice and bargaining on arrangements when operational circumstances permit.

However, to ensure that those negotiations do not distract or divert managers and supervisors from their operational mission, those negotiations are required only when the action or event has a “significant and substantial” impact on the bargaining unit as a whole, or on those employees in that part of the bargaining unit affected by the management action. For example, a management action that impacted employees from various locations could trigger negotiations at the level of recognition under this provision, as would a management action that impacted employees in a single district or port covered by a nationwide bargaining unit. Those negotiations must be consistent with the Department's general duty to bargain over conditions of employment, as established by these final regulations. In such instances, bargaining is not required unless the act or event is expected to exceed or has exceeded 60 days, in order to ensure that managers are not bargaining over short-term changes that may become moot before negotiations can even begin. While management is not required to negotiate when the impact is on a single employee, Department managers will be encouraged to address individual employee hardships that result from a management action, whether or not that management action triggers an obligation to bargain. In addition, the revised regulations provide for reimbursement for reasonable, actual, and non-routine expenses incurred as a result of such actions or events.

We have also revised the proposed regulations to require mid-term bargaining over personnel policies, practices, and matters affecting working conditions only insofar that they are “foreseeable, substantial, and significant in terms of impact and duration on the bargaining unit, or on those employees in that part of the bargaining unit affected by the change.” For example, in addition to requiring negotiations over bargaining unit-wide changes in working conditions that are “foreseeable, substantial, and significant,” this provision would also require bargaining if the change in working conditions was limited to a location(s) or organizational unit(s) below the level of recognition (such as a port or district), insofar as the impact of such a change was otherwise “foreseeable, substantial, and significant.” In so doing, we note that this “substantial and significant” test is consistent with current FLRA and private sector case law.

In addition, we have limited mid-term bargaining to 30 days. However, in response to the comments of labor organizations, the Secretary and the Director directed that the proposed regulations be amended to allow for binding resolution of mid-term impasses by the HSLRB. We have also reinstated an exclusive representative's right to be present at formal discussions between Department representatives and employees, except when the purpose is to discuss operational matters. These changes are also in keeping with our attempt to strike the right balance between operational demands and the rights of an exclusive representative.

Taken together, the Secretary and the Director believe these revisions meet the Department's mission needs and are consistent with the Homeland Security Act's promise to preserve collective bargaining rights. While labor organizations have argued that any alteration of the scope of bargaining violates the Act, such an interpretation of the law would have the effect of nullifying the Act itself. The Act authorizes the Secretary and the Director to waive and/or modify 5 U.S.C. chapter 71. Clearly, case law interpreting that chapter may be modified, as well, to carry out the language, intent, and purpose of these regulations. The Act also requires that the Department's HR system be flexible, and these regulations fulfill that statutory requirement.

4. Adverse Actions and Appeals

In authorizing the creation of a new human resources system for the Department, Congress specifically required that employees continue to be afforded the protections of due process. It also prohibited any change in the application of existing statutory provisions involving merit principles, prohibited personnel practices, or protection against whistleblower reprisal or discrimination. Recognizing the critical nature of the Department's mission, Congress also stated in 5 U.S.C. 9701(f)(2) that the new system should provide, “to the maximum extent practicable, for the expeditious handling” of appeals of disciplinary and performance-based actions.

The proposed regulations included a number of changes to adverse actions and appeals procedures. Consistent with the Homeland Security Act, these changes were intended to simplify and streamline those procedures and provide for greater individual accountability, all without compromising guaranteed due process protections. Greater accountability is particularly critical to the Department. By its very nature, the Department's mission requires an exceptionally high level of workplace order and discipline. For example, the fact that many DHS employees have arrest authority and other enforcement powers means that they, and the Department, have a special responsibility to the public.

With that in mind, the proposed regulations provided for shorter notice for adverse actions, an accelerated MSPB adjudication process, a lower burden of proof to sustain the Department's action, and a bar on any mitigation of penalty by MSPB (except in the case of a prohibited personnel practice), as well as a bar on the arbitration of adverse actions. The proposed regulations also gave the Secretary authority to establish a number of mandatory removal offenses (MRO)—that is, offenses that have such a direct and substantial impact on homeland security that they must carry a mandatory removal penalty. The proposed regulations also created a special, independent panel appointed by the Secretary to adjudicate MROs; if that panel found that an MRO had been committed, the proposed regulations provided that only the Secretary could mitigate the removal of an employee. While Congress gave DHS and OPM the authority to establish an adjudicatory body other than MSPB, the Secretary and the Director decided that with the changes outlined above, DHS could achieve the objectives of the legislation while retaining MSPB for employee adverse action appeals, except for MROs.

Commenters, including the labor organizations participating in the meet-and-confer process, generally expressed concern that these changes, separately and together, would vitiate the due process rights of DHS employees. They argued that the changes would substantially diminish (or in the case of arbitrators eliminate) the authority of third parties such as MSPB to fully and fairly review and adjudicate adverse actions. Commenters, as well as some Members of Congress, expressed particular concern over the proposal to adopt a lower “substantial evidence” standard of proof for adverse actions, as well as the proposal to bar MSPB from mitigating the Department's penalty determination in an adverse action, except in the case of a prohibited personnel practice. Labor organizations argued that the right to arbitrate an adverse action was fundamental to collective bargaining, and that by

removing adverse actions from arbitral review, the proposed regulations were inconsistent with statutory guarantees in this regard.

OPM and DHS have carefully considered these comments, including those received from participating labor organizations during the meet-and-confer process. Accordingly, major revisions have been made to the proposed regulations in four areas.

First, while DHS and OPM continue to provide for a shorter, 15-day minimum notice to an employee of a proposed adverse action (compared to a 30-day notice under current law), we have given employees a minimum of 10 days to respond to the charges specified in the notice of proposed adverse action. This reply period runs concurrently with the notice period; it represents an increase over the 5-day reply period initially proposed, as well as the 7-day reply period provided in current law. Employees have a right to be heard before a proposed adverse action is taken against them. This is a fundamental element of due process in adverse actions. This change protects that right while still providing for a more streamlined process. Similarly, in the performance management section of the regulations, we have also ensured that employees are apprised in advance of performance expectations that may affect their retention.

Second, we re-examined the issue of burden of proof and decided to adopt the “preponderance of the evidence” standard for all adverse actions, whether conduct-or performance-based, instead of the “substantial evidence” standard set forth in the proposed regulations. “Preponderance of the evidence” is that degree of relevant evidence that a reasonable person, considering the record as a whole, would accept as sufficient to find that a contested fact is more likely to be true than untrue. This is the standard that currently applies to conduct actions taken under chapter 75 of title 5. This is a higher standard of proof than “substantial evidence,” which currently applies to performance actions taken under chapter 43.

Third, in response to comments from labor organizations and others, the Secretary and the Director decided to provide bargaining unit employees the option of grieving and, subject to the approval of their exclusive representative, arbitrating adverse actions. Thus, consistent with current law, bargaining unit employees may contest an adverse action either by filing an appeal with MSPB or by grieving and arbitrating the matter through any applicable negotiated grievance procedure. However, when adjudicating such adverse actions, arbitrators will be bound by the same rules and standards governing such things as burden of proof and mitigation that these regulations require of MSPB; this has been a matter of law, and the regulations reiterate this requirement to ensure consistent adjudication, regardless of forum. In order to ensure that consistency, the Department's two largest labor organizations at the September 10 meeting recommended the establishment of a mutually acceptable panel of arbitrators who have been trained and qualified to hear adverse action grievances. The Secretary and the Director concurred with this recommendation, and the regulations have been revised accordingly.

Finally, the Secretary and the Director have authorized MSPB (as well as arbitrators) to mitigate penalties in adverse action cases, but only under very limited circumstances. We continue to believe that, because the Department bears full accountability for homeland security, it is in the best position to determine the most appropriate adverse action for poor performance or misconduct. Thus, its judgment in regard to penalty should be given deference.

We are persuaded by the concern expressed by commenters, as well as the national presidents of AFGE and NTEU at the September 10 meeting, that the Department's authority over penalties should not be unlimited. Although there is a presumption that DHS officials will exercise that authority in good faith, the Secretary and the Director concluded that it is appropriate to provide an employee affected by an adverse action with an opportunity to rebut that presumption. In this regard, we are persuaded that providing MSPB (and arbitrators) limited authority to mitigate is an appropriate check regarding the exercise of the Department's imposition of penalties. Accordingly, the final regulations preclude mitigation of the penalty selected by DHS except where, after granting deference to the Department, a determination is made that the penalty is so disproportionate to the basis for the action as to be wholly without justification.

This authority is significantly more limited than MSPB's current mitigation authority under the standard first enunciated in

Douglas

v.

Veterans Administration

(5 M.S.P.R. 280 (1981)). Under that 1981 decision, MSPB stated that it would evaluate agency penalties to determine not only whether they were too harsh or otherwise arbitrary but also whether they were unreasonable under all the circumstances. In practice, this has meant that MSPB has exercised considerable latitude in modifying agency penalties. With this new, substantially more limited standard for MSPB mitigation of penalties selected by DHS, our intent is to explicitly restrict the authority of MSPB to modify those penalties to situations where there is simply no justification for the penalty. MSPB may not modify the penalty imposed by the Department unless such penalty is so disproportionate to the basis for the action as to be wholly without justification. In cases of multiple charges, MSPB or an arbitrator may mitigate a penalty where not all of the charges are sustained. The third party's judgment is based on the justification for the penalty as it relates to the sustained charge(s). The regulations are intended to ensure that when a penalty is mitigated, the maximum justifiable penalty must be applied.

With the changes outlined above, we believe we have addressed and resolved the concerns raised by commenters regarding the preservation of due process for DHS employees. Due process is protected under the final regulations. Thus, the adverse actions and appeals procedures set forth in these regulations are “fair, efficient, and expeditious,” consistent with congressional direction.

5. Mandatory Removal Offenses

The proposed regulations authorized the Secretary to identify offenses that, because they have a direct and substantial impact on the ability of the Department to protect homeland security, warrant a mandatory penalty of removal from the Federal service. Only the Secretary could mitigate the removal of an employee determined to have committed such a mandatory removal offense (MRO). Employees alleged to have committed these offenses would have the right to advance notice, an opportunity to respond, and a written decision. They would also be entitled to appeal that decision to an independent DHS panel, which could reverse the action but could not mitigate the removal penalty. This panel would be composed of three members, who would be appointed by the Secretary. Two examples of possible mandatory removal offenses were provided and comments were solicited on the best and most effective way to provide notice to all employees well in advance of their application.

Commenters expressed a number of objections to the concept of MROs. Since only two examples of potential MROs were provided in the proposed regulations, they feared that removal could be too harsh a penalty for as-yet-

unspecified offenses and that local management might misuse MROs to target individual employees. They also were concerned that employees would not be given full and complete notice of such offenses prior to their application. Finally, they expressed an overriding concern about the independence and objectivity of the proposed internal DHS panel.

As proposed, an MRO should have a direct and substantial impact on homeland security such that there is “zero tolerance” for the offense. Accordingly, we have decided to retain MROs and the Mandatory Removal Panel (MRP). However, in response to comments, the Secretary and the Director directed several modifications to the proposed regulations. First, we understand the concern over the lack of specificity with regard to MROs. During the meet-and-confer process, participating labor organizations expressed a similar concern, but we believe we were able to satisfactorily address most of their objections by providing them a preliminary list of potential mandatory removal offenses, as follows:

• Intentionally or willfully aiding or abetting an act, or potential act, of terrorism.

• Intentionally or willfully purchasing, using, selling, and/or transporting weapons of mass destruction or materials related thereto for the purpose of committing or contributing to a terrorist act.

• Intentionally or willfully allowing the improper transportation or importation of illegal weapons (including but not limited to weapons of mass destruction) or materials to be used for the purpose of committing or contributing to a terrorist act.

• Intentionally or willfully allowing the improper entry of an individual to the U.S. who could compromise, or potentially compromise, homeland security.

• Soliciting or intentionally accepting a bribe or other personal benefit that compromises, or could compromise, homeland security, when the employee knew or reasonably should have known of the compromise or potential compromise.

• Intentionally or willfully misusing and/or divulging law enforcement sensitive or confidential information (including, but not limited to, classified material) to unauthorized recipients that compromises, or could compromise, homeland security, when the employee knew or reasonably should have known of the compromise or potential compromise, subject to applicable whistleblower and free speech protections.

• Intentionally or willfully engaging in activities that compromise, or could compromise, the information, economic, or financial infrastructure of the Federal Government, when the employee knew or reasonably should have known of the compromise or potential compromise.

There is no question that employees must be made aware of the final list of MROs when approved by the Secretary. Both the Secretary and the Director believe that this is a basic issue of fairness and a tenet of an organizational culture that establishes clear accountability. The labor organizations participating in the meet-and-confer process were especially concerned about this issue. Accordingly, we agreed to revise the proposed regulations to provide, at a minimum, that MROs will be (1) identified in advance as part of the Department's implementing directives, (2) publicized via notice in the

Federal Register

, and (3) made known to all employees on an annual basis. These offenses should not be a surprise to anyone. The Secretary also intends to consult with the Department of Justice in preparing the list of offenses for publication.

Labor organizations participating in the meet-and-confer process were also apprehensive that managers could misuse MROs. At their specific suggestion, we agreed to add a requirement that every proposed notice of mandatory removal be approved by a Departmental level official before being issued to the employee. This requirement, combined with the Secretary's authority to mitigate the removal penalty, guards against the potential for such abuse and assures consistency of application.

Finally, labor organizations participating in the meet-and-confer process indicated that assurance regarding the independence of the Panel would improve credibility and acceptance, and help resolve any concerns about due process protections. The Secretary and the Director agreed and directed that the proposed regulations be revised to provide that (1) members will be “independent, distinguished citizens * * * who are well known for their integrity, impartiality, and expertise in labor or employee relations and law enforcement/homeland security”; (2) the Secretary will select members from a list that will include nominees submitted by labor organizations and other sources; and (3) decisions of the Panel will be subject to MSPB record review and appropriate judicial review under the same criteria applicable to other MSPB decisions. We believe these changes effectively resolve the major concerns regarding MROs and the Panel.

With these changes, the final regulations provide for the independence demanded by commenters while assuring DHS's ability to remove employees who engage in conduct or performance that has a direct and substantial impact on homeland security. The Secretary is accountable to the President and the American people for safeguarding homeland security. No other agency or department bears this burden. These regulations ensure that the Secretary's authority aligns with that responsibility.

Response to Specific Comments and Detailed Explanation of Regulations

Subpart A—General Provisions

Section 9701.101—Purpose

Section 9701.101 explains the overall purpose of the regulations in 5 CFR part 9701 to implement the DHS human resources (HR) management system authorized by 5 U.S.C. 9701. In the proposed regulations, this section provided the design goals of the DHS HR system.

During the meet-and-confer process, participating labor organizations recommended that the regulations be revised to clarify the DHS HR system design goals. We have amended § 9701.101 by moving the system goals to a new paragraph (b) and by revising the goals to be consistent with the “Guiding Principles” adopted by the Senior Review Committee in 2003 when reviewing options for the DHS HR system.

Section 9701.102—Eligibility and Coverage

Section 9701.102 of the proposed regulations provided the Secretary with the authority to approve the coverage of specific employee categories under one or more provisions in 5 CFR part 9701. During the meet-and-confer process, the participating labor organizations recommended that the regulations clarify the Secretary's authority to cover (and rescind the coverage of) various employee categories under part 9701 and the coverage eligibility of employee categories. Other commenters requested clarification regarding how employees who are not immediately covered by the new HR system (

i.e.

, as the system is phased in) will be treated. In response to these comments, we have revised and reordered § 9701.102 (and made conforming changes elsewhere in the final regulations) to clarify which categories of employees are eligible for coverage under these regulations, and

we have also clarified the Secretary's authority to make coverage determinations and the timing of such determinations, as follows:

• New § 9701.102(a) (formerly § 9701.102(d)) clarifies that all civilian DHS employees

are eligible for coverage

under one or more subparts of these regulations, except those covered by a provision of law outside the chapters of title 5, United States Code, that DHS may waive under 5 U.S.C. 9701.

• New § 9701.102(b) replaces the proposed § 9701.102(a).

• New § 9701.102(b)(1) provides that subpart A becomes applicable to all eligible employees when the regulations take effect—

i.e.

, 30 days after the date of publication of the final regulations in the

Federal Register

.

• New § 9701.102(b)(2) provides that subparts E, F, and G are applicable to all eligible employees on the effective date established by the Secretary or designee, at his or her sole and exclusive discretion and after coordination with OPM; however, the effective date may not be later than 180 days after the date of publication of the final regulations in the

Federal Register

unless otherwise determined by the Secretary and the Director.

• New § 9701.102(b)(3) provides that, with respect to subparts B, C, and D, the Secretary of DHS (or designee), at his or her sole and exclusive discretion and after coordination with OPM, may apply one or more of these subparts to a specific category or categories of eligible employees at any time. The regulations provide that the Secretary may apply some subparts, but not others, to a specific category or categories of eligible employees and that such coverage determinations may be made effective on different dates.

• New § 9701.102(b)(4) contains the requirement (also included in the proposed regulations) that DHS will notify affected employees and labor organizations of all coverage determinations.

• New § 9701.102(c) provides that until the Secretary makes a coverage determination, DHS employees will continue to be covered by the Federal laws and regulations that would apply to them in the absence of the authorities provided by these regulations. For example, GS employees in DHS will continue to be covered by the laws and regulations governing General Schedule classification and pay (

i.e.

, 5 U.S.C. chapter 51 and 5 U.S.C. chapter 53, subchapter III) until the effective date of the Secretary's decision to cover such employees under the classification and pay provisions authorized by 5 CFR part 9701, subparts B and C.

• New § 9701.102(e) (formerly § 9701.102(c)) clarifies that the Secretary or designee may prescribe implementing directives for converting employees to coverage under title 5 if, at his or her sole and exclusive discretion and after coordination with OPM, coverage under one or more subparts of these regulations is rescinded. (

See Section 9701.103—Definitions

and

Section 9701.105—Continuing collaboration

for additional information on the process for developing implementing directives.) We have also clarified that DHS will notify affected employees and labor organizations in advance of a decision to rescind coverage under these regulations.

In addition, a number of commenters requested clarification regarding the specific categories of employees that are eligible and ineligible for coverage under various subparts of these regulations. The following chart provides additional information on the categories of employees that are eligible (annotated with “Yes”) and ineligible (annotated with “No”) for coverage under each subpart of these regulations. The chart and its footnotes must be read together for full coverage information. Employee categories that are eligible for coverage under one or more subparts of these regulations will actually be covered by such subparts only upon approval of the Secretary or designee under § 9701.102(b). DHS will provide advance notice to affected employees and labor organizations regarding coverage decisions.

BILLING CODE 6325-39-P; 4410-10-P

ER01FE05.000

ER01FE05.001

ER01FE05.002

BILLING CODE 6325-39-C; 4410-10-C

Section 9701.102(e) of the proposed regulations provided that nothing in 5 CFR part 9701 prevents DHS from using an independent discretionary authority to establish a parallel system that follows some or all of the requirements in these regulations for a category of employees ineligible for coverage under 5 U.S.C. 9701, as described in this chart. Commenters recommended that DHS cover all employees by the same HR system provisions. For example, commenters urged DHS to treat employees appointed under the Robert T. Stafford Disaster Relief and Emergency Assistance Act consistently with other employees who are eligible for coverage under these regulations and to recognize the value of the contributions of intermittent employees in emergency disaster assignments by creating an equivalent parallel system for them and closing the gap in compensation between this cadre and regular DHS employees. Conversely, another commenter recommended that such employees not be subject to the new DHS HR system. Other commenters recommended that DHS cover U.S. Coast Guard academy faculty in a parallel system, while keeping its existing HR system intact. Finally, a commenter felt that the Secretary should not be allowed to use independent discretionary authority to establish a parallel system for categories of employees who are ineligible for coverage and that such authority should be subject to congressional approval.

We have redesignated § 9701.102(e) as § 9701.102(f) and revised it to clarify that the Secretary or other authorized DHS official may exercise an independent legal authority to establish a parallel system that follows some or all of the requirements in these regulations for a category of employees who are not eligible for coverage. DHS may decide to treat each employee category that is ineligible for coverage differently. In all cases, DHS may invoke its independent authority to establish a new or parallel pay system for categories of employees ineligible for coverage under these regulations only to the extent provided under such independent legislation and subject to any procedural protections that such legislation provides. For example, DHS may establish a parallel classification and pay system for Stafford Act employees.

Other commenters requested clarification regarding the coverage of members of the Senior Executive Service (SES) and employees in senior-level (SL) and scientific or professional (ST) positions under the classification, pay, and performance management system in subparts B, C, and D of these regulations in light of the new performance management certification requirements under 5 U.S.C. 5307 and the new pay-for-performance system for SES members under 5 U.S.C. 5383.

Section 1322 of the Homeland Security Act of 2002 amended 5 U.S.C. 5307 to provide a higher limit on the aggregate compensation that SES members and employees in SL/ST positions may receive in a calendar year. In addition, section 1125 of the National Defense Authorization Act of 2003 amended 5 U.S.C. chapter 53, subchapter VIII, to establish a performance-based pay system for SES members.

These final regulations provide DHS with discretionary authority to cover SES members and SL/ST employees under the classification, pay, and performance management provisions of 5 U.S.C. part 9701, subparts B, C, and D. (See §§ 9701.202(b)(3) and (4), 9701.302(b)(3) and (4), and 9701.402(a).) The aggregate pay limitation law and regulations under 5 U.S.C. 5307 and 5 CFR part 530, subpart B, cannot be waived and must continue to apply to SES members and SL/ST employees covered by the DHS pay system under 5 CFR part 9701, subpart C. DHS must obtain certification of its performance appraisal system, as required by 5 CFR part 430, subpart D, in order to apply the higher aggregate cap. (

See

§ 9701.303(f).)

In addition, § 9701.102(d) of these final regulations (§ 9701.102(b) in the proposed regulations) allows DHS to cover its SES members under a classification, pay, and performance management system under these regulations. However, the provisions of such a system must be consistent with the performance-based features and pay caps that apply to employees covered by the new Governmentwide SES pay-for-performance system under 5 U.S.C. chapter 53, subchapter VIII, and OPM implementing regulations. If DHS wishes to establish a system for SES members that differs from the Governmentwide SES pay-for-performance system, DHS and OPM must issue joint regulations consistent with the requirements of 5 U.S.C. 9701. DHS and OPM will involve SES members and other interested parties in the design and implementation of any new pay system for SES members.

Other commenters requested clarification regarding why Transportation Security Administration (TSA) screeners are not covered by the new system. Commenters stated that the applicability of the regulations to TSA is addressed ambiguously and the regulations do not appear to recognize certain statutory impediments to coverage (whether implemented administratively as a “parallel system” or under the coverage of regulation) that differ with respect to screeners and nonscreeners.

Under section 111(d) of the Aviation and Transportation Security Act, TSA screeners are employed outside the provisions of title 5, United States Code. Thus, they cannot be covered by the DHS HR system established under 5 U.S.C. 9701. Similarly, other TSA employees (nonscreeners) are covered by an independent personnel management system established under the authority of 49 U.S.C. 114(n). Under that authority, TSA nonscreeners are covered by the personnel management system established by the Federal Aviation Administration under 49 U.S.C. 40122, subject to any modifications TSA may make. Under 49 U.S.C. 40122(g), TSA employees are not covered by most provisions in title 5, U.S. Code, including the DHS HR system authority in 5 U.S.C. 9701. While TSA employees are excluded from coverage under the HR system established by these regulations, DHS can direct that the TSA personnel systems align administratively with the new DHS HR system except to the extent that aspects of those systems conflict with the statutory authorities applicable to TSA employees.

Commenters also recommended that the regulations be modified to allow DHS to cover administrative law judges (ALJs) and to develop a parallel job evaluation, pay, and performance management system tailored to ALJs consistent with the treatment of DHS SES members and employees in SL/ST positions, including the higher basic pay cap that applies to SES members under § 9701.312(b). The commenters recommended that DHS develop a performance management system that is consistent with the requirements of the Administrative Procedure Act and in line with the guiding principles of the proposed regulations. DHS believes it is desirable to cover its ALJs under the system that applies to other ALJs throughout the Government.

Section 9701.103—Definitions

During the meet-and-confer process, the participating labor organizations requested clarification regarding the exception to the definition of “employee” under § 9701.103 of the proposed regulations. We agree that this exception is confusing and have revised 5 CFR part 9701, subpart E, to eliminate the need for the exception language in

§ 9701.103. (See

Section 9701.505—Coverage.

)

During the meet-and-confer process, the participating labor organizations requested that the definition of “coordination” be revised so that the OPM coordination process involve employees and employee representatives. Alternatively, the labor organizations recommended that the definition of “coordination” be deleted and that all requirements for DHS to coordinate with OPM be replaced with more detailed regulations.

While we understand the desire for the regulations to provide more specificity and assurances on how the HR system will operate, we have not removed the definition of “coordination” from these regulations. The regulations must provide DHS with sufficient flexibility to design a classification, pay, and performance management system that can be tailored to DHS's varied mission requirements, performance priorities, and strategic human capital needs.

However, we agree that the DHS HR system must be designed in a transparent and credible manner that involves employees and employee representatives. For this reason, we have added a definition of “implementing directives” to § 9701.103. The term “implementing directives” is defined as the directives issued by the Secretary or designee at the Department level to carry out any system established under 5 CFR part 9701. Such implementing directives will be developed with the involvement of employee representatives using the continuing collaboration provisions in revised § 9701.105. (

See Section 9701.105—Continuing collaboration.

) In addition, we have made a number of revisions in other sections of these regulations to require DHS to establish implementing directives to carry out the HR authority provided by these regulations.

Section 9701.105—Continuing Collaboration

Section 9701.105 of the proposed regulations provided DHS with the authority to establish internal Departmental directives to further define the design characteristics of any system established under these regulations. During the meet-and-confer process, the participating labor organizations expressed concerns that such directives would be developed without the involvement of employees and employee representatives. The labor organizations recommended that DHS consult with employees and employee representatives before issuing any internal directives.

We agree that the DHS HR system must be designed in a transparent and credible manner and that the development of any internal directives implementing the HR system authorities provided by these regulations involve employees and employee representatives. Although not expressly stated in the proposed regulations, DHS, in the spirit of collaboration used throughout the design process, intends to involve employees and their representatives in the development of the implementing directives. In addition, we have revised and retitled § 9701.105 as “Continuing collaboration.” This section requires DHS to issue implementing directives, as newly defined in § 9701.103, to implement these regulations. As required by 5 U.S.C. 9701, employee representatives will be provided with an opportunity to collaborate in developing and issuing these implementing directives. DHS will determine the number of employee representatives that may engage in continuing collaboration and will establish timeframes to provide information and comments. National labor organizations with multiple local labor organizations accorded exclusive recognition will determine how their units will be represented within this framework.

As the Department determines necessary, employee representatives will be provided with an opportunity to discuss their views with DHS officials and/or to submit written comments at initial identification of implementation issues and conceptual design and/or at review of draft recommendations or alternatives. Employee representatives also will be given a copy of the proposed final draft and will be provided with an opportunity for written and/or oral comment. These comments will become part of the record and will be forwarded with the final directive to the Secretary or designee for a final decision. However, nothing in the continuing collaboration process affects the right of the Secretary to determine the content of implementing directives and to make them effective at any time.

As required by the Homeland Security Act, § 9701.105(f) provides that the Secretary and the Director will jointly establish any procedures necessary to carry out the continuing collaboration process as internal rules of Departmental procedure which are not subject to review.

Section 9701.106—Relationship to Other Provisions

Section 9701.106 describes the relationship of the authority provided DHS under 5 U.S.C. 9701 and these regulations to the authorities in other sections of law and regulations. During the meet-and-confer process, the participating labor organizations requested clarification regarding when waived laws and regulations will and will not apply to categories of employees approved for coverage under one or more subparts of these regulations.

We agree and have revised § 9701.106 to clarify that, for the purpose of applying other provisions of law or Governmentwide regulations that reference provisions under the waivable chapters (

i.e.

, chapters 43, 51, 53, 71, 75, and 77 of title 5, U.S. Code), the referenced provisions are not waived but are modified consistent with the corresponding regulations in part 9701, except as otherwise provided in that part or in DHS implementing directives. For example, hazardous duty differentials under 5 U.S.C. 5545(d) are payable only to General Schedule employees covered by 5 U.S.C. chapter 51 and subchapter III of chapter 53. To ensure that DHS employees continue to be eligible for hazardous duty differentials when they convert from the General Schedule to the DHS pay system, they will be deemed to be covered by the referenced General Schedule provisions of law for the purpose of applying section 5545(d). In addition, in applying the back pay law in 5 U.S.C. 5596 to DHS employees covered by subpart G of these proposed regulations (dealing with appeals), the reference in section 5596(b)(1)(A)(ii) to 5 U.S.C. 7701(g) (dealing with attorney fees) is considered to be a reference to a modified section 7701(g) that is consistent with § 9701.706(h).

We also revised paragraph (c) to clarify that the listed provisions in paragraph (c) do not apply to categories of employees upon conversion to a new classification and pay system established under 5 CFR part 9701, subparts B and C.

We also added a new paragraph (a) to clarify that provisions of title 5 are waived or modified to the extent authorized by 5 U.S.C. 9701 to conform with these regulations—

i.e.

, these regulations supersede the corresponding laws they replace. In addition, for clarification purposes, we have restated the rule of construction, which was located in § 9701.502 of subpart E of the proposed regulations, as a general rule of construction applicable to the entire part. However, in so doing, we do not intend to imply that the rule of construction is limited only to that subpart; rather, the express language of

§ 9701.106(a) extends that rule of construction to the entire part.

Section 9701.107—Program Evaluation

During the meet-and-confer process, the labor organizations recommended that the regulations require DHS to conduct ongoing evaluations of these regulations and that employees and employee representatives be involved in such evaluations. Other commenters also recommended that regulations include a formal evaluation of the HR system with implementation goals, including predetermined benchmarks for success.

Consistent with the commitment made in the Preamble to the proposed regulations, DHS intends to conduct evaluations of its HR system. We added a new § 9701.107 to carry out this intent by requiring DHS to establish procedures for evaluating the regulations and their implementation. DHS will provide employee representatives with an opportunity to be briefed and comment on the design and results of the program evaluation. This opportunity includes participation in identifying the scope, objectives, and methodology to be used in the program evaluation and reviewing draft findings and recommendations, subject to any time limits prescribed in DHS's procedures. Involvement in this process does not waive the rights of DHS or the employee representatives under the applicable laws and these regulations.

Subpart B—Classification

General Comments

As a result of concerns expressed during the meet-and-confer process, we have replaced the term “job evaluation” with the term “classification” throughout these regulations.

Commenters were concerned about the lack of specificity in subpart B of the proposed regulations regarding the structure and rules for the DHS classification system. Commenters found it difficult to ascertain where their positions would fit within the classification framework of occupational clusters and bands. Although some found the classification concepts simple and clear, most commenters felt the proposed regulations were too vague and difficult to understand because of the lack of detailed information on such features as how occupational clusters and bands will be established, which occupations will be assigned to each cluster, how GS grades will “cross-walk” to bands, and which positions will be assigned to each band. Because of the lack of details in the proposed regulations, commenters questioned whether the proposed classification system would be fair and credible. Commenters expressed a strong desire that the regulations be more transparent and that DHS closely involve employees and employee representatives in the design of the DHS classification system.

Because of the lack of specificity, commenters recommended a number of amendments to subpart B of the regulations to provide more detailed criteria and conditions for the DHS classification system or to clarify how positions will be converted into the system. The comments included recommendations on and clarifications regarding the criteria for grouping occupations into clusters and the specific occupational clusters DHS will create, how competencies will be identified and used in the system, the definitions of the bands and the criteria DHS will use to assign positions to bands, the purpose of the Senior Expert band and the criteria that DHS will use to promote employees to that band, how manager and team leader positions will be assigned to clusters and bands, how law enforcement officer positions will be treated, the standards DHS will use to qualify and promote employees to higher bands (

e.g.

, time-in-service, formal education requirements), and the process for converting positions to the DHS classification system. In reaction to the lack of detail in the regulations, the labor organizations recommended that the bar on collective bargaining of the DHS classification system under § 9701.205(b) of the proposed regulations be removed.

We understand the desire for the regulations to provide more specificity and assurances regarding how the DHS classification system will operate. However, the regulations must provide DHS with sufficient flexibility to design a classification system with occupational clusters and bands that support the market-based features of the DHS pay system and that can be tailored to DHS's mission requirements and strategic human capital needs. Except as otherwise explained in this section of the

SUPPLEMENTARY INFORMATION,

we have not modified subpart B of the regulations in response to these comments. DHS will consider the suggestions and recommendations made by commenters as it develops implementing directives for the DHS classification system.

We agree that the DHS classification system must be designed in a transparent and credible manner that involves employees and employee representatives. While we have not removed the bar on collective bargaining in § 9701.205, we have made a number of revisions throughout subpart B that require DHS to carry out the new classification system through detailed implementing directives, as defined in § 9701.103. As previously discussed, these implementing directives will be established using the “continuing collaboration” provisions in revised § 9701.105. (

See Section 9701.103—Definitions

and

Section 9701.105—Continuing collaboration.

)

Other Comments on Specific Sections of Subpart B

Section 9701.201—Purpose

Section 9701.201 explains the purpose of subpart B, which contains regulations establishing a classification structure and rules for covered DHS employees and positions. During the meet-and-confer process, the participating labor organizations recommended that the definition of “classification” under § 9701.204 include a reference to the principle of equal pay for equal work. We agree, but rather than revising this definition, we have added the merit principle of “equal pay for work of equal value” to the end of the purpose description in new § 9701.201(a).

For clarification purposes, we also moved § 9701.205(a) in the proposed regulations to a new § 9701.201(b) in the final regulations. We have retitled § 9701.205 as Bar on collective bargaining, consistent with the title of § 9701.305.

Section 9701.203—Waivers

Section 9701.203 of the regulations specifies the provisions of title 5, United States Code, that are waived for employees covered by the DHS classification system established under subpart B. During the meet-and-confer process, the participating labor organizations requested that the regulations clarify when such waivers will be applied. We have amended § 9701.203(a) to clarify that the waivers apply when a category of DHS employees is covered by a classification system established under subpart B.

We also have amended § 9701.203(a) by adding § 9701.222(d) to the list of exceptions to the waiver of 5 U.S.C. chapter 51. See

Section 9701.222—Reconsideration of classification decisions

for additional information on this exception.

Section 9701.204—Definitions

A commenter suggested adding a definition of “competency” to § 9701.204 to clarify its meaning in the definition of “position” or “job.” We agree and have added a definition of “competencies” that is identical to the

definition of that term in § 9701.404 concerning the DHS performance management system.

To help respond to commenters' general confusion with the classification provisions, we also have—

• Added a definition of “basic pay” that is identical to the definition of that term in § 9701.304 to clarify its use under § 9701.231, regarding conversion into the DHS classification system.

• Revised the definition of “classification” to clarify that this term, also referred to as job evaluation, means the process of analyzing and assigning a job or position to an occupational series, cluster, and band for pay and other related purposes.

• Amended the definition of “occupational cluster” to clarify that an occupational cluster may include one or more occupational series.

Section 9701.211—Occupational Clusters

Section 9701.211 provides DHS with the authority to establish occupational clusters after coordination with OPM. In response to commenters' concerns about the lack of specificity in the regulations regarding how DHS will define occupational clusters, we have revised § 9701.211 to clarify that DHS must document in writing the rationale, as well as the criteria, for grouping occupations or positions into occupational clusters.

Section 9701.212—Bands

Section 9701.212 provides DHS with the authority to establish one or more bands within each occupational cluster after coordination with OPM. Section 9701.212(a)(1)(iv) of the proposed regulations provided that each occupational cluster may include a Supervisory band reserved primarily for first-level supervisors. Commenters observed that limiting Supervisory bands to first-level supervisors does not adequately accommodate the range of supervisory and managerial positions at DHS that are below the executive level. Some commenters questioned whether the Senior Expert band should be used for other supervisory/managerial levels or team leader positions. Others questioned whether the number of Supervisory bands should be limited above the first-level in an effort to “flatten-out” organizational structures. We agree that the description of Supervisory band in the proposed regulations was too narrow. To clarify, we have reordered § 9701.212 and revised § 9701.212(b)(4) (formerly § 9701.212(a)(1)(iv)) to provide that a Supervisory band includes work that may involve hiring or selecting employees, assigning work, managing performance, recognizing and rewarding employees, and other associated duties. DHS will address the number and use of Supervisory bands and the assignment of team leaders to bands in its implementing directives.

Section 9701.212(b) of the proposed regulations provided DHS with the discretionary authority to establish qualification standards and requirements for occupational series, occupational clusters, and/or bands after coordination with OPM. During the meet-and-confer process, the participating labor organizations were concerned that DHS may choose not to establish qualifications standards. To clarify our intent, we have redesignated § 9701.212(b) as § 9701.212(d) and revised this paragraph to require DHS to establish qualifications standards and requirements. Under this provision, DHS has the flexibility to (1) adopt the qualifications standards and requirements issued by OPM and/or (2) establish different qualifications standards and requirements after coordination with OPM. In addition, we have clarified this section to reflect the fact that DHS retains its authority to establish qualification standards under 5 U.S.C. chapters 31 and 33 and implementing regulations.

Section 9701.222—Reconsideration of Classification Decisions

Section 9701.222 of the proposed regulations required DHS to establish policies and procedures for handling an employee's request for reconsideration of classification decisions. The proposed regulations limited reconsideration requests to occupational series or pay system assignment and provided employees no right to appeal classification decisions outside DHS.

Because the proposed regulations provided no authority for independent review of DHS classification decisions, the labor organizations recommended that the regulations be revised to provide bargaining unit employees with the authority to challenge classification determinations through negotiated grievance procedures. They also recommended that employees be provided the right to challenge classification decisions beyond occupational series and pay system assignment. Other commenters advised that DHS's authority to reconsider classification decisions should be appealable to an independent arbitrator.

We agree that the DHS classification system should provide covered employees with the right to a broader scope of review of the classification of their position by an independent third party. We have therefore revised § 9701.222 to provide employees with the right to request that DHS or OPM reconsider the occupational cluster and band assignment as well as the pay system and occupational series of their official position of record at any time. This right is parallel to the classification appeal right of current General Schedule employees under 5 U.S.C. 5112(b). In addition, the regulations require both DHS and OPM to establish implementing directives for reviewing these requests, including, but not limited to, policies on nonreviewable issues, rights of representation, and effective dates of any corrective actions.

Section 9701.222(c) of the regulations allows an employee to request that OPM reconsider a DHS classification reconsideration decision. However, an employee may not request that DHS review an OPM reconsideration decision. If an employee does not request an OPM reconsideration decision, § 9701.222(c) provides that a DHS classification determination is final and not subject to further review or appeal. Section 9701.222(d) provides that OPM's final determination on an employee's request is not subject to further review or appeal. This provision, in conjunction with the waiver exception in § 9701.203(a), is intended to preserve OPM's authority under 5 U.S.C. 5112(b) and 5 U.S.C. 5346(c) to review and issue final classification decisions without judicial review.

During the meet-and-confer process, the participating labor organizations suggested that the regulations authorize retroactive effective dates for promotions if an employee's position is found by OPM to be misclassified. Under the current classification law and regulations (5 U.S.C. chapter 51 and 5 CFR part 511) classification decisions generally may not be made effective retroactively. (

See

5 CFR 511.701(a)(4).) In addition, the Supreme Court has held that neither the Classification Act under 5 U.S.C. chapter 51 nor the Back Pay Act under 5 U.S.C. 5596 creates a substantive right to back pay for periods of wrongful classifications. (

See United States

v.

Testan,

424 U.S. 372 (1976).)

OPM regulations at 5 CFR 511.703 provide an exception to this general rule and allow a retroactive effective date if upon classification appeal an employee is found to be wrongfully demoted. Any similar retroactive effective date provisions regarding classification reconsideration decisions will be addressed in DHS's and OPM's policies and procedures for reviewing these requests.

Section 9701.232—Special Transition Rules for Federal Air Marshal Service

Section 9701.232 provides that if DHS transfers Federal Air Marshal Service positions from the Transportation Security Administration (TSA) to another organization within DHS, DHS may cover such positions under a classification system that is parallel to the classification system that was applicable to the Federal Air Marshal Service within TSA. These revised regulations provide that DHS will issue implementing directives on converting Federal Air Marshal Service employees to any new classification system under subpart B, consistent with the conversion rules in § 9701.231.

Labor organization commenters recommended that the regulations provide DHS with the authority to transfer Federal Air Marshal Service positions only if Federal Air Marshals are granted full collective bargaining rights and the ability to join a labor organization of their choice. We disagree. Federal Air Marshals are excluded from collective bargaining by section 1-123 of E.O. 12666, January 12, 1989.

Subpart C—Pay and Pay Administration

General Comments

Commenters expressed concerns about the lack of specificity in subpart C of the proposed regulations on the pay structure and the pay administration rules governing the proposed DHS pay system. Commenters felt the proposed regulations were too vague and difficult to understand because of the lack of detailed information on such issues as how band rate ranges will be established and adjusted, how locality and special pay supplements (hereafter called locality and special rate supplements) will be established and adjusted, and how performance pay pools will be funded and operated. Commenters had difficulty ascertaining how their pay and pay adjustments would be determined under the new system and how individual and team performance would affect pay. They also were concerned that their pay would not keep up with their counterparts in other Federal agencies. Commenters expressed a strong desire that the regulations be more transparent and that DHS closely involve employees and employee representatives in the design of the pay system. Because of the lack of details in the proposed regulations, commenters questioned whether the proposed pay system would be fair and equitable.

Because of the lack of specificity, commenters recommended a number of different amendments to subpart C of the regulations to provide detailed criteria and conditions for setting and adjusting basic rate ranges and granting rate range increases to employees; setting and adjusting locality and special rate supplements and providing for increases in those supplements; addressing staffing issues that may result from geographic pay differences; funding pay pools; determining and granting performance pay increases; setting pay upon promotion, demotion, initial appointment, and other actions; granting within-band pay increases; granting special skills, assignment, and staffing payments; and transitioning and converting employees into the new pay system. In reaction to the lack of specificity, the labor organizations recommended that the regulations be revised to remove the bar on collective bargaining of the DHS pay structure and system in § 9701.305; require the new pay system to be faithful to merit system principles and protect against prohibited personnel practices; require DHS to assess the impact of the system on employees prior to implementation to maximize fairness, uniformity, and objectivity; implement the current locality pay program, modified to be occupation specific; and establish a Department-level compensation board to address and make recommendations on continuing issues regarding the administration of the new pay system. Labor organization commenters felt that such a compensation board would make pay decisions more credible and transparent. Other commenters felt that employees should receive pay increases equivalent to the increases they would have received under the General Schedule.

We understand the desire for the regulations to provide more specificity and assurances regarding how the pay system will operate. However, the regulations also must provide DHS with sufficient flexibility to design a nimble pay system that is performance-sensitive, market-based, and tailored to DHS's performance goals, mission requirements, and strategic human capital needs. Except as otherwise explained in this section of the Supplementary Information, we have not modified subpart C of the regulations in response to these comments.

However, we agree that the DHS pay system must be designed in a transparent and credible manner that involves employees and employee representatives. While we have not removed the bar on collective bargaining in § 9701.305, we made a number of revisions throughout subpart C that require DHS to establish more detailed policies to carry out the new pay system through implementing directives, as defined in § 9701.103. As previously discussed, these implementing directives will be developed using the “continuing collaboration” provisions in revised § 9701.105. (

See Section 9701.103—Definitions

and

Section 9701.105—Continuing collaboration

.) DHS will consider the suggestions and recommendations made by commenters as it develops implementing directives for the DHS pay system.

In addition, we agree that labor organization involvement in both the design and administration of the pay system can contribute to its credibility and acceptance with bargaining unit employees. Therefore, we have provided for such involvement by giving the Department's national labor organizations four seats on the newly established Homeland Security Compensation Committee (Compensation Committee). As part of the Compensation Committee, the labor organization representatives and some of the Department's most senior leaders will be able to participate in the development of recommendations and options for the Secretary's consideration on strategic compensation matters such as Departmental compensation policies and principles, the annual allocation of funds between market and performance pay adjustments, and the annual adjustment of rate ranges and locality and special rate supplements. While the Secretary retains the final decisionmaking authority in all of these matters, we believe this degree of labor organization involvement is consistent with our guiding principles. The Department will prescribe procedures governing the membership and operation of the Compensation Committee, including setting schedules for discussions and submission of recommendations. In addition, the establishment of the Compensation Committee will not affect the right of the Secretary to make determinations regarding the annual allocation of funds between market and performance pay adjustments and the annual adjustment of rate ranges and locality and special rate supplements, and to make such determinations effective at any time. See new § 9701.313 of these regulations for additional information.

Finally, as previously discussed, we have added a new paragraph (b) to § 9701.101, which provides the overall criteria for the design of the DHS human resources system, to include a requirement that the system be designed to generate respect and trust and be

based on the principles of merit and fairness embodied in the merit system principles contained in 5 U.S.C. 2301. We also have added a new paragraph (c) to § 9701.301 to require that the DHS pay system, working in conjunction with the performance management system established under subpart D, be designed to incorporate a number of elements, including adherence to the merit system principles, and that it must be implemented and managed in a fair, transparent, and inclusive manner. These criteria are based on similar criteria that Congress recently enacted with respect to chapters 47, 54, and 99 of title 5, United States Code.

Other Comments on Specific Sections of Subpart C

Section 9701.301—Purpose

In addition to the new § 9701.301(c) discussed in the General Comments section, we also have added a new paragraph (b) to § 9701.301 to clarify that any pay system under subpart C must be established in conjunction with the classification system described in subpart B. This addition is consistent with a similar provision in § 9701.201(b).

Section 9701.303—Waivers

Section 9701.303(a) specifies the provisions of title 5, United States Code, that are waived for employees covered by the DHS pay system established under subpart C. During the meet-and-confer process, the participating labor organizations requested that the regulations clarify when such waivers will be applied. We have amended § 9701.303(a) to clarify that the waivers apply when a category of DHS employees is covered by a pay system established under subpart C. We have also reordered some of the paragraphs in this section for clarification.

Section 9701.303(c)(2) of the proposed regulations raised the limitation on rates of basic pay payable under 5 U.S.C. 5373—for categories of DHS employees whose pay is fixed by administrative action—to the rate for level III of the Executive Schedule, consistent with the level III basic pay cap that applies to employees paid under the DHS pay system established under subpart C of these regulations. (See § 9701.312 of these regulations.) Currently, 5 U.S.C. 5373 provides a basic pay limitation equal to the rate for Executive Level IV. During the meet-and-confer process, the participating labor organizations requested clarification regarding which categories of employees were covered by the pay limitation under 5 U.S.C. 5373. In reordering this section, we have redesignated paragraph (c)(2) as paragraph (c) and revised it to clarify that the pay limitation under 5 U.S.C. 5373 applies to DHS employees whose pay is set by administrative action, such as Coast Guard Academy faculty. We note that 5 U.S.C. 5373 does not apply to employees covered by a pay system established under subpart C. The basic pay limitation for employees covered by subpart C is provided in § 9701.312.

Section 9701.303(c)(3) of the proposed regulations revised 5 U.S.C. 5379 to provide DHS with the authority to establish a student loan repayment program for DHS employees. During the meet-and-confer process, the participating labor organizations requested clarification regarding the process for establishing a new student loan repayment authority. In reordering this section, we have redesignated paragraph (c)(3) as paragraph (d) and revised it to provide that a DHS student loan repayment program under this authority will be established by implementing directives (as defined in § 9701.103). In addition, we have revised § 9701.303(d) to clarify that DHS will coordinate those implementing directives with OPM.

Section 9701.304—Definitions

The definition of “control point” has been removed consistent with the removal of the control point provisions in § 9701.321 and other sections of the regulations. (See

Section 9701.321—Structure of bands.

) We have added a definition of “competencies” that is identical to the definition of that term in § 9701.404 concerning the DHS performance management system. This is consistent with the addition of that term to the definitions section in subpart B. (See

Section 9701.204—Definitions.

) We have added a reference to the description of “performance expectations” in § 9701.406(c) to clarify the use of that term in the definitions of “rating of record” and “unacceptable performance” in § 9701.304. As a result of comments made during the meet-and-confer process, we have added a definition of “modal rating” to explain the use of this term in revised § 9701.342(a)(2). Finally, we have deleted the definition of “unacceptable rating of record” as unnecessary.

Section 9701.311—Major Features

Section 9701.311 requires that a DHS pay system established under subpart C include a number of specific features. Commenters noted that the term “rate” appeared to be missing after “basic pay” in paragraph (b). We agree and have inserted the term in § 9701.311(b).

Section 9701.312—Maximum Rates

Section 9701.312 provides that DHS may not pay an employee covered by a pay system established under subpart C a rate of basic pay in excess of the rate for level III of the Executive Schedule. This section further provides that DHS may establish the maximum annual rate of basic pay at the rate for level II of the Executive Schedule for members of the SES if DHS obtains the certification required under 5 U.S.C. 5307(d). Commenters observed that this proposed basic pay limitation and other features of the pay system proposal will not resolve the pay compression and limitation issues for senior law enforcement officers.

The rate of pay received by senior law enforcement officers and other employees who earn premium pay under 5 U.S.C. chapter 55 is subject to a special limitation in 5 U.S.C. 5547. This limitation is not affected by these regulations. Under 5 U.S.C. 9701(c)(2), DHS is prohibited from waiving the premium pay limitation or any other premium pay provision authorized under 5 U.S.C. chapter 55. See also the discussion of changes made in § 9701.332(c) to clarify that locality and special rate supplements are considered basic pay for the purpose of applying the limitation in § 9701.312 in

Section 9701.332—Locality rate supplements.

Section 9701.314—DHS Responsibilities

Section 9701.313 of the proposed regulations provided a list of DHS's overall responsibilities in implementing the pay system established under subpart C. This section has been redesignated as § 9701.314 due to the insertion of a new § 9701.313, Homeland Security Compensation Committee. (

See

the discussion of new § 9701.313 under

General Comments.

)

Section 9701.321—Structure of Bands

Section 9701.321 provides DHS with the authority to establish basic pay rate ranges for bands after coordination with OPM. In the proposed regulations, this section also provided DHS with the authority to establish control points within bands to limit the initial pay-setting or pay progression of employees. The labor organizations expressed concerns about the control point provisions. They felt that control points could prevent employees who are meeting or exceeding performance expectations from achieving the same level of pay they could receive under the current system. They recommended that the regulations be modified to require that control point policies be collectively bargained.

We have removed the provisions concerning control points in §§ 9701.321(a) and (d) and 9701.342(d)(3), as well as the definition of “control point” in § 9701.304 of the proposed regulations, as it is not our intention to unduly limit pay progression.

Section 9701.321(c) of the proposed regulations provided DHS with the authority to establish different basic pay rate ranges for employees in a band who are stationed in locations outside the 48 contiguous States. Commenters requested clarification regarding how basic pay rate ranges for employees stationed outside the 48 contiguous States will be determined. Other commenters were concerned that employees working in Hawaii, Puerto Rico, Alaska, and other nonforeign areas and foreign areas would never see another annual pay increase because funding will be used for performance pay increases and that employees in such areas will not receive any locality rate supplement. During the meet-and-confer process, the participating labor organizations asked whether locality rate supplements under § 9701.332 would apply to employees stationed outside the 48 contiguous States and what protections would be offered to replicate the current pay-setting criteria for employees in these locations.

We have removed paragraph (c) from § 9701.321. We have also removed paragraph (d) from § 9701.322, which provided DHS with the authority to provide basic pay rate range adjustments in locations outside the 48 contiguous States that differ from the adjustments within the 48 States. Under the revised regulations, employees in a band who are stationed in locations outside the 48 contiguous States will be covered by the same basic pay ranges as other employees in that band who are stationed within the 48 States. In addition, under §§ 9701.332 and 9701.333, and after coordination with OPM, DHS may establish locality or special rate supplements for employees stationed outside the 48 contiguous States. Employees stationed in locations outside the 48 contiguous States also will continue to be entitled to foreign and nonforeign area cost-of-living allowances and other differentials and allowances under 5 U.S.C. chapter 59, as applicable.

Section 9701.322—Setting and Adjusting Rate Ranges

Section 9701.322 provides DHS with the authority to set and adjust the basic pay rate ranges of bands after coordination with OPM. Section 9701.322(b) of the proposed regulations provided DHS with the authority, after coordination with OPM, to determine the effective date of newly set or adjusted band rate ranges and stated that, generally, ranges will be adjusted annually. The labor organizations recommended that the regulations be amended to guarantee that basic rate ranges will be adjusted annually and normally become effective in January.

We have revised § 9701.322(a) to clarify that DHS may set and adjust rate ranges on an annual basis. In addition, we have revised § 9701.322(b) to provide that, unless DHS determines that a different date is needed for operational reasons, annual adjustments to basic rate ranges will become effective on or about the same date as the annual General Schedule pay adjustment authorized by 5 U.S.C. 5303.

Section 9701.322(c) provides that DHS may provide different rate range adjustments for different occupational clusters. A commenter requested clarification regarding whether the pay ranges will vary between occupational clusters. We have clarified paragraph (c) to provide that DHS may establish different rate ranges and rate range adjustments for different bands.

As previously discussed, we also have removed paragraph (d) from § 9701.322, which provided DHS with the authority to provide basic pay rate range adjustments in locations outside the 48 contiguous States that differ from the adjustments within the 48 States. (See

Section 9701.321—Structure of bands.

) Paragraph (e) in the proposed regulations has been redesignated paragraph (d) in these final regulations.

Section 9701.323—Eligibility for Pay Increase Associated With a Rate Range Adjustment

Section 9701.323(a) of the proposed regulations provided that an employee who meets or exceeds performance expectations must receive an increase in basic pay equal to the percentage value of any increase in the minimum rate of the employee's band resulting from a basic rate range adjustment under § 9701.322. Section 9701.323(b) provides that an employee who has an unacceptable rating of record may not receive a pay increase as a result of a rate range adjustment. During the meet-and-confer process, the participating labor organizations requested that the regulations clarify which type of pay increase paragraph (a) covers and when eligible employees would be entitled to such a pay increase.

We agree and have revised § 9701.323(a) to clarify that when a band rate range is adjusted under § 9701.322, employees covered by that band are eligible for an individual pay increase if they meet or exceed performance expectations. We also clarified that for an employee receiving a retained rate, the amount of the pay increase is determined under § 9701.356. (

See Section 9701.356—Pay retention.

) We have also redesignated paragraph (b) as paragraph (c) for clarification purposes.

The labor organizations also recommended that § 9701.323(a) be revised to provide that an employee who meets or exceeds expectations must receive an increase in pay equal to either (1) the percentage value of any increase in the minimum rate of the employee's band resulting from a rate range adjustment (as stated in the proposed regulations) or (2) the percentage value equal to the average of the increase in the minimum rate and the increase in the maximum rate of the employee's band, whichever is greater.

We have not revised § 9701.323(a) in response to this recommendation. Under § 9701.322(d), DHS has the authority to adjust the minimum and maximum rates of band ranges by different percentages. This will allow DHS, for example, to increase the maximum rate by a greater percentage than the minimum rate in response to labor market factors that warrant a broader rate range for a particular occupational category. However, § 9701.323 requires DHS to increase the pay of eligible employees by only the percentage value of any increase in the minimum rate of the band. As a result, DHS has greater opportunities to enhance employee pay through the use of performance pay increases under § 9701.342. Providing greater opportunities for high performers to earn pay increases will help DHS be more competitive in the labor market, since in the private sector high performers are generally provided with larger pay increases.

We also note that increases in the maximum rate may be unrelated to changes in the labor market and, thus, should not be used to determine the general increase for DHS employees. For example, DHS may decide that a rate range is too narrow to appropriately recognize high performers and extend the range by 10 percent. That does not mean that all eligible employees in the band should receive a 10 percent increase.

Commenters also requested that § 9701.323(a) be revised to make the payment of the annual adjustment nondiscretionary. We have not adopted this recommendation. These regulations authorize DHS to establish a contemporary pay system that is more performance-sensitive to help achieve

and sustain a high performance culture. Providing annual basic pay increases only to employees whose performance meets or exceeds expectations will help support this goal. This policy is consistent with the findings of the National Academy of Public Administration (NAPA) in its May 2004 report, “Recommending Performance-Based Federal Pay.” The NAPA report states that most private sector companies base all pay adjustments on performance.

Section 9701.323(b) of the proposed regulations provided that the “denial” of a pay increase associated with a rate range adjustment is not considered an adverse action under subpart F. To clarify our intent, we have revised this paragraph (now redesignated as paragraph (c)) to state that if an employee's pay remains unchanged because he or she has received an unacceptable rating of record, the “failure to receive a pay increase” is not an adverse action.

Section 9701.323(c) of the proposed regulations provided that if an employee does not have a rating of record for the purpose of granting a pay increase under § 9701.323(a), the employee is deemed to meet or exceed performance expectations. During the meet-and-confer process, the participating labor organizations asked that the regulations be revised to provide that such determinations be based on the employee's most recent rating of record.

We agree that this provision must be clarified. Therefore, we have redesignated paragraph (c) as paragraph (b) and revised it to provide that an employee without a rating of record for the most recently completed appraisal period must be treated in the same manner as an employee who meets or exceeds performance expectations and is entitled to receive an increase based on the rate range adjustment under § 9701.323(a).

Section 9701.323(d) of the proposed regulations provided DHS with the authority to adopt policies under which an employee who is initially denied a pay increase under this section based on an unacceptable rating of record may receive a delayed increase after demonstrating improved performance. The regulations provided that any such delayed increase would be made effective prospectively.

During the meet-and-confer process, the participating labor organizations expressed a concern that certain employees would fall below the minimum pay rate for their bands if they were at or near the low end of the band and were denied a rate range increase as a result of an unacceptable rating of record. They also expressed a concern that the proposed regulations allow managers to continuously rate employees unacceptable and indefinitely deny them pay increases. The labor organizations believe that DHS, and not its employees, should bear the burden of proof in any action that denies employees a rate range increase. The labor organizations also argued that any pay system that allows certain employees to be paid below the minimum rate set for a band is not truly a market-based system.

Other commenters suggested that if an employee loses a pay increase due to poor performance, the increase should be restored automatically when performance becomes satisfactory as an incentive to become successful. Commenters expressed a need for less manager discretion and more policy governing the granting of previously denied pay increases based on performance improvement. The commenters were concerned that the lack of clear policy may result in disparate use of this authority and increased grievances and equal employment opportunity (EEO) complaints.

We agree with some of these concerns and have revised the regulations as follows:

• We have added a new § 9701.324,

Treatment of employees whose rate of basic pay does not fall below the minimum rate of their band.

This section provides that an employee who initially does not receive a pay increase under § 9701.323 based on an unacceptable rating of record, and whose rate does not fall below the minimum rate of the band, must receive a delayed increase after demonstrating performance that meets or exceeds performance expectations, as reflected in a new rating of record. Any such delayed increase will be made effective on the first day of the first pay period beginning on or after the date the new rating of record is issued.

• We have added new § 9701.325,

Treatment of employees whose rate of basic pay falls below the minimum rate of their band.

Paragraph (a) of this section requires that in the case of an employee who does not receive a pay increase under § 9701.323 DHS must (1) initiate action within 90 days after the date of the rate range adjustment to demote or remove the employee in accordance with the adverse action procedures under subpart F, or (2) if the employee demonstrates performance that meets or exceeds performance expectations within 90 days after the date of the rate range adjustment, issue a new rating of record and adjust the employee's pay prospectively.

• Paragraph (b) of new § 9701.325 provides that if DHS fails to initiate a removal or demotion action under paragraph (a) within 90 calendar days after the date of a rate range adjustment, the employee becomes entitled to the minimum rate of his or her band rate range on the first day of the first pay period beginning on or after the 90th day following the date of the rate range adjustment.

We do not agree that managers should be required to initiate an adverse action whenever employees are rated unacceptable. Unless such a rating results in an employee being paid below the minimum band rate, an employee's ability to grieve his or her performance rating is sufficient protection against unfair or inaccurate ratings.

The labor organizations also recommended that § 9701.323(d) be revised to require that delayed increases must be retroactively effective if there is a management error in assessing an unacceptable rating or when a rating is overturned on appeal. We did not make a change in the regulations in response to this comment. If an employee does not receive a pay adjustment because of an error in assessing an unacceptable rating, when the rating error is corrected, the employee is entitled to receive any pay increase associated with the correct rating. This pay increase must be made effective retroactive to the effective date of the incorrectly denied increase and is subject to back pay under 5 U.S.C. 5596.

Section 9701.331—General

Section 9701.331 of the proposed regulations provided that basic pay ranges under the new DHS pay system may be supplemented by locality or special rate supplements. During the meet-and-confer process, the participating labor organizations asked that the regulations provide that payment of such supplements to employees be mandatory.

We agree that locality and special rate supplements should be paid in appropriate circumstances and have revised § 9701.331 to clarify this point. We do not agree that such payments should be mandatory, but have revised § 9701.331 to clarify that DHS may pay locality or special rate supplements in appropriate circumstances. For example, DHS may decide that a locality rate supplement is unnecessary for nonforeign or foreign areas or that a different pay flexibility (e.g., recruitment bonuses, retention allowances, or special staffing payments under § 9701.363) will better address a

particular staffing problem instead of establishing a special rate supplement. DHS must retain the flexibility under §§ 9701.332 and 9701.333 to establish locality rate supplements for geographic areas and occupational clusters when warranted by mission requirements, labor market conditions, and other factors and special rate supplements when warranted by current or anticipated recruitment and/or retention needs.

Section 9701.332—Locality Rate Supplements

Section 9701.332(a) and (b) provides DHS with the authority to establish locality rate supplements and set the boundaries of locality pay areas after coordination with OPM. The regulations provide DHS with the authority to establish different locality rate supplements for different occupational clusters or for different bands within an occupational cluster.

Commenters recommended that § 9701.332 be revised so that locality rate supplements are based on cost-of-living factors instead of the cost of labor, such as through the use of Chamber of Commerce analyses and data on median housing costs in each geographic area. We do not agree. Generally, employers set pay based on the labor market to be sufficiently competitive to avoid staffing problems. Paying above what is necessary to be competitive in the labor market does not make economic sense. If you have a market-based pay system, but grant additional pay for high living costs, you no longer have market-based rates. Also, living costs are very difficult to measure.

If DHS experiences recruitment or retention problems due to living costs in a particular geographic area, other pay flexibilities are available to address such problems. For example, DHS could establish a special rate supplement under § 9701.333 of these regulations or a special staffing payment under § 9701.363 to address staffing problems for a particular category of employees in a given geographic area. DHS also may use recruitment and relocation bonuses under 5 U.S.C. 5753, retention allowances under 5 U.S.C. 5754, and other flexibilities to address staffing problems that may be caused by cost-of-living factors.

Section 9701.332(b) of the proposed regulations provided that if DHS does not use the locality pay areas established by the President's Pay Agent under 5 U.S.C. 5304, it may make boundary changes by regulation or other means. We have revised this paragraph to clarify that DHS may, after coordination with OPM, establish and adjust different locality pay areas within the 48 contiguous States or new locality pay areas outside the 48 contiguous States by regulation. We note that while the final regulations provide DHS with the discretion to establish new or different locality pay areas within and outside the 48 States, DHS will likely adopt the locality pay areas established under 5 U.S.C. 5304 for the purpose of establishing locality rate supplements under § 9701.332.

Section 9701.332(c) lists the purposes for which locality rate supplements are considered basic pay. During the meet-and-confer process, the participating labor organizations requested clarification regarding whether the purposes for which locality rate supplements are treated as basic pay will be different from the purposes for which locality payments under 5 U.S.C. 5304 are treated as basic pay. Another commenter encouraged the consistent treatment of locality supplements as basic pay across the Department.

Under § 9701.332(c), the purposes for which locality rate supplements are considered basic pay include all of the purposes that apply to locality payments under 5 U.S.C. 5304 and 5 CFR part 531, subpart F. We agree that the treatment of locality rate supplements as basic pay should be consistent throughout the Department and only as provided in these regulations, DHS implementing directives, or other laws or regulations, consistent with the requirements in § 9701.332(c). We have revised § 9701.332(c)(6) (as redesignated from § 9701.332(c)(5) in the proposed regulations) to clarify that locality rate supplements may be considered basic pay for the purpose of other payments and adjustments under subpart C only if specified by DHS in implementing directives, consistent with the new definition of “implementing directives” in § 9701.103 and the requirement for continuing collaboration with employee representatives in developing implementing directives under § 9701.105. (See

Section 9701.103—Definitions and Section 9701.105—Continuing collaboration.

)

In addition, we inserted a new § 9701.332(c)(5) to clarify that locality rate supplements (and special rate supplements, by reference under § 9701.333) are considered basic pay for the purpose of applying the maximum rate limitation under § 9701.312. The remaining paragraphs (c)(5) through (c)(7) of the proposed regulations are redesignated as paragraphs (c)(6) through (c)(8).

Section 9701.333—Special Rate Supplements

Section 9701.333 provides DHS with the authority to establish special rate supplements after coordination with OPM that provide higher levels of pay for subcategories of employees in an occupational cluster if warranted by current or anticipated recruitment or retention needs. The proposed regulations provided DHS with the authority to establish rules for implementing such supplements. This section also provides that special rate supplements are considered basic pay for the same purposes as locality rate supplements under § 9701.332(c) and for the purpose of computing cost-of-living allowances and post differentials in nonforeign areas under 5 U.S.C. 5941.

A commenter encouraged consistent treatment of special rate supplements as basic pay across the Department. We agree that the treatment of special rate supplements as basic pay should be consistent throughout the Department and only as provided in these regulations, DHS implementing directives, or other laws or regulations, consistent with the requirements for locality rate supplements under § 9701.332(c), as revised in these regulations.

Section 9701.334—Setting and Adjusting Locality and Special Rate Supplements

Section 9701.334 of the proposed regulations provided that locality and special rate supplements would “generally” be reviewed on an annual basis in conjunction with a rate range adjustment under § 9701.322. Consistent with the changes in revised § 9701.322(a), we have revised § 9701.334(b) to require DHS to review established supplements for possible adjustment on an annual basis in conjunction with a rate range adjustment.

Section 9701.335—Eligibility for Pay Increase Associated With a Supplement Adjustment

We have revised § 9701.335(a) to clarify that when a locality or special rate supplement is adjusted under § 9701.334, an employee is entitled to the pay increase resulting from that adjustment if the employee meets or exceeds performance expectations. This is consistent with part of the revision of § 9701.323(a), which clarifies when an employee is entitled to receive a basic rate range adjustment. (See

Section 9701.323—Eligibility for pay increase associated with a rate range adjustment.

)

Commenters felt that the payment of locality rate supplements should not be discretionary. They argued that locality pay was not designed to reward performance, but to close a salary gap between Federal and non-Federal employees.

The locality rate supplement authority in the DHS regulations is specifically designed to respond to occupation-specific labor market conditions among geographic areas and to support DHS's and OPM's desire to establish a contemporary pay system that is more performance-sensitive to help achieve a high performance culture. Providing locality rate supplement increases only to employees whose performance meets or exceeds expectations will help support this goal and will help DHS become more competitive in recruiting and retaining high performing employees.

Section 9701.335(b) of the proposed regulations provided that an employee who has an unacceptable rating of record may not receive a pay increase as a result of an increase in a locality or special rate supplement. Paragraph (b) of the proposed regulations also provided DHS with the authority to determine the method of preventing a pay increase in this circumstance, including by reducing the employee's rate of basic pay by the amount necessary to prevent an increase.

During the meet-and-confer process, the participating labor organizations expressed concerns about the regulations providing DHS with the authority to reduce the rate of basic pay for an employee with an unacceptable rating of record without adverse action protections in order to offset an increase in a locality or special rate supplement. They expressed the belief that reducing basic pay for unacceptable performance should be considered an adverse action under subpart F even if the employee's total locality or special rate supplement-adjusted pay rate does not change as a result of the basic pay reduction.

We redesignated paragraph (b) as paragraph (c). We revised the language to provide that if an employee has an unacceptable rating of record at the time of an increase in a locality or special rate supplement, the employee will not receive an increase in the applicable supplement. Basic pay will not be reduced under this authority. We have also revised this paragraph to clarify our intent that if an employee's pay remains unchanged because he or she has received an unacceptable rating of record, the failure to receive a pay increase associated with a supplement adjustment is not an adverse action.

Section 9701.335(c) of the proposed regulations provided that if an employee does not have a rating of record for the purpose of granting a pay increase associated with a supplement adjustment, the employee is deemed to meet or exceed performance expectations. We have redesignated paragraph (c) as paragraph (b). We revised this paragraph, consistent with the revision of § 9701.323(b), to provide that an employee without a rating of record must be treated in the same manner as an employee who meets or exceeds performance expectations. (

See Section 9701.323—Eligibility for pay increase associated with a rate range adjustment.

)

Section 9701.335(d) of the proposed regulations provided DHS with the authority to adopt policies under which an employee who is initially denied a pay increase under this section based on an unacceptable rating of record may receive a delayed increase after demonstrating improved performance. During the meet-and-confer process, the participating labor organizations questioned whether a denial of a pay increase as a result of an increase in a locality or special rate supplement could cause an employee's pay to fall below the minimum rate of the band. The labor organizations questioned how long an employee's pay rate could be below the minimum band rate without requiring management to take some action (e.g., demotion or removal).

It is possible for an employee's locality or special rate supplement-adjusted pay rate to fall below the locality or special rate supplement-adjusted minimum band rate as a result of a denial of a supplement increase under § 9701.335(c). We agree with the labor organizations' concern about requiring DHS to take action in this situation. Therefore, we revised and moved paragraph (d) to a new § 9701.336,

Treatment of employees whose pay does not fall below the minimum adjusted rate of their band.

This new section provides the requirements for paying a delayed supplement increase after the employee demonstrates performance that meets or exceeds performance expectations, consistent with the changes made in new § 9701.324. We also have added a new § 9701.337,

Treatment of employees whose rate of pay falls below the minimum adjusted rate of their band.

Paragraph (a) of this new section requires DHS to take specific actions within 90 days after the employee's pay rate falls below the adjusted band minimum rate. Paragraph (b) provides that if DHS does not take action within 90 days, the employee's pay rate must be set at the adjusted band minimum rate. This new section is consistent with new § 9701.325 on pay increases associated with rate range adjustments. (See

Section 9701.323—Eligibility for pay increase associated with a rate range adjustment.

)

Section 9701.342—Performance Pay Increases

Section 9701.342(a) provides an overview of the DHS performance-based pay system for employees in a Full Performance or higher band based on ratings of record assigned under a performance management system established under subpart D. We have moved the sentence concerning the rating of record used as a basis for a performance pay increase to a separate paragraph (a)(2). In reaction to concerns about DHS's authority to issue a new rating of record for an employee if the employee's current performance is not consistent with his or her most recent rating of record, we have revised new paragraph (a)(2) to clarify that the employee's supervisor (or other rating official) may make such determinations and prepare any new rating of record. This new language is consistent with the language used in § 9701.409(b) regarding rating employee performance. We note that the definition of “rating of record” in §§ 9701.304 and 9701.404 states that a rating of record is prepared at the end of an appraisal period or to support a pay determination under subpart C of these regulations (or other rules). Because DHS plans to make pay determinations shortly after issuing ratings of record at the end of the appraisal period, we anticipate that DHS will rarely need to issue supplemental ratings of record to support pay decisions.

New paragraph (a)(2) also clarifies that if an employee does not have a rating of record, DHS will use the modal rating received by other employees covered by the same pay pool during the most recent rating cycle to determine the employee's performance pay increase. This change is consistent with other revisions of the regulations on determining the pay increases and adjustments for employees without a rating of record. (See § 9701.342(f) and (g).)

Section 9701.342(c) provides DHS with the authority to establish point values that correspond to the performance rating levels established by the performance management system under subpart D. These point values will be used to determine performance pay increases. This section also provides DHS with authority to establish a point value pattern for each

pay pool and requires DHS to assign zero points to any employee with an unacceptable rating of record.

One commenter recommended that DHS not limit its pay-for-performance options to only the point value system defined in the proposed regulations. The commenter was concerned about unintended consequences of the proposed system that would require regulatory changes to address those consequences. The commenter recommended that the regulations allow alternative pay-for-performance systems to be adopted within major components, subject to DHS objectives, criteria, and approval.

We understand the commenter's desire that the regulations provide DHS with the flexibility to develop different types of pay-for-performance systems tailored to the performance and mission requirements of individual DHS components and not be limited to the proposed point value system. However, in developing the regulations for the DHS pay system, we balanced the need for flexibility with the need for a system that generates respect and trust and is credible and transparent. Subpart C of the regulations provides the parameters and criteria for the point value system in sufficient specificity so that managers, employees, and employee representatives can better understand how performance pay increases will be determined and paid. At the same time, the regulations allow DHS to tailor the point value system to the mission and performance needs of individual components and the specific performance requirements and priorities of individual positions and occupations.

Another commenter requested clarification regarding the logic of establishing different point value patterns by pay pool, as provided in § 9701.342(c)(2). The regulations provide DHS with the flexibility to establish different point value patterns for each pay pool so that each pay pool can better reflect the performance goals, objectives, and priorities of the employees and organizations covered. This matter will be further clarified in implementing directives.

Section 9701.342(d) provides DHS with the authority to determine the value of performance points (as a percentage of basic pay or as a fixed dollar amount), the amount of an employee's performance payout, and the effective dates of performance pay adjustments. This paragraph also specifies that a performance payout may not cause an employee's rate of basic pay to exceed the maximum basic rate of the band and provides DHS with the authority to pay excess amounts as lump-sum payments.

Commenters were concerned that if more employees receive higher ratings, the value of the payout for each employee lessens. We acknowledge that this is a consequence of this type of pay-for-performance system. A point value system requires managers to make distinctions in ratings if they want to grant the highest performers the greatest pay increases. In keeping with our guiding principles, this type of system is designed to place g

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