Federal Acquisition Regulation; Employee Compensation Costs

DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 31

[FAC 90-40; FAR Case 93-005; Item XII]

RIN 9000-AF97

Federal Acquisition Regulation; Employee Compensation Costs

AGENCIES: Department of Defense (DOD), General Services Administration

(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Civilian Agency Acquisition Council and the Defense

Acquisition Regulations Council have agreed on a final rule amending

the Federal Acquisition Regulation (FAR) to clarify the regulations

concerning the allowability of personal services compensation costs.

This regulatory action was not subject to Office of Management and

Budget review under Executive Order 12866, dated September 30, 1993,

and is not a major rule under 5 U.S.C. 804.

EFFECTIVE DATE: September 24, 1996.

FOR FURTHER INFORMATION CONTACT: Mr. Jerry Olson at (202) 501-3221 in

reference to this FAR case. For general information, contact the FAR

Secretariat, Room 4037, GS Building, Washington, DC 20405 (202) 501-

4755. Please cite FAC 90-40, FAR case 93-005.

SUPPLEMENTARY INFORMATION:

A. Background

This final rule amends FAR 31.001, Definitions, and 31.205-6,

Compensation for personal services. The Defense Contract Audit Agency

has raised concerns that the language in FAR 31.205-6(b) may be

susceptible to differing interpretations and that the FAR does not

provide adequate guidance with regard to contractor compensation

systems. This final rule adds definitions at FAR 31.001; clarifies the

standard for reasonableness of labor-management compensation agreements

at FAR 31.205-6 (b) and (c); removes the examples from FAR 31.205-6(b);

revises FAR 31.205-6(b)(1)(i) to clearly allow offsets of allowable

elements of employees' compensation packages among jobs of the same pay

grade or level; and revises FAR 31.205-6(i) to provide a general

allowability rule. This final rule also makes editorial changes and

adds clarifying language. Most notable of these changes is the

redesignation of FAR 31.205-6(f)(2) to a restructured and renamed

31.205-6(d) to improve the flow of the cost principle and provide a

more logical placement of the language.

A proposed rule was published in the Federal Register at 59 FR

51399, October 11, 1994, with corrections published at 59 FR 60686,

November 25, 1994. Eighteen comments were received in response to the

proposed rule. All comments were considered in the development of the

final rule.

B. Regulatory Flexibility Act

The Department of Defense, the General Services Administration, and

the National Aeronautics and Space Administration certify that this

final rule will not have a significant economic impact on a substantial

number of small entities within the meaning of the Regulatory

Flexibility Act, 5 U.S.C. 601, et seq., because most contracts awarded

to small businesses are awarded on a competitive, fixed-price basis and

do not require application of the FAR cost principles.

C. Paperwork Reduction Act

The Paperwork Reduction Act does not apply because the changes to

the FAR do not impose recordkeeping or information collection

requirements, or collections of information from offerors, contractors,

or members of the public which require the approval of the Office of

Management and Budget under 44 U.S.C. 3501, et seq.

List of Subjects in 48 CFR Part 31

Government procurement.

Dated: July 16, 1996.

Edward C. Loeb,

Director, Federal Acquisition Policy Division.

Therefore, 48 CFR Part 31 is amended as set forth below:

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

1. The authority citation for 48 CFR Part 31 continues to read as

follows:

Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42

U.S.C. 2473(c).

2. Section 31.001 is amended by adding, in alphabetical order, the

definitions of ``Job'', ``Job class of employees'', and ``Labor

market'' to read as follows:

31.001 Definitions.

* * * * *

Job, as used in this part, means a homogeneous cluster of work

tasks, the completion of which serves an enduring purpose for the

organization. Taken as a whole, the collection of tasks, duties, and

responsibilities constitutes the assignment for one or more individuals

whose work is of the same nature and is performed at the same skill/

responsibility level--as opposed to a position, which is a collection

of tasks assigned to a specific individual. Within a job, there may be

pay categories which are dependent on the degree of supervision

required by the employee while performing assigned tasks which are

performed by all persons with the same job.

Job class of employees, as used in this part, means employees

performing in positions within the same job.

* * * * *

Labor market, as used in this part, means a place where individuals

exchange their labor for compensation. Labor markets are identified and

defined by a combination of the following factors:

(1) Geography,

(2) Education and/or technical background required,

(3) Experience required by the job,

(4) Licensing or certification requirements,

(5) Occupational membership, and

(6) Industry.

* * * * *

3. Section 31.205-6 is amended-

a. By revising the introductory text of paragraph (a) and (a)(1);

b. In paragraph (a)(5) by removing the parenthetical at the end of

the paragraph;

c. By adding introductory text to paragraph (b) and revising

paragraph (b)(1);

d. By revising the introductory text of paragraph (c);

e. By revising paragraph (d);

f. By removing paragraph (f)(2) and redesignating (f)(3) as (f)(2);

and

g. By revising paragraph (i).

The revised text reads as follows:

31.205-6 Compensation for personal services.

(a) General. Compensation for personal services includes all

remuneration paid currently or accrued, in whatever form and whether

paid immediately or deferred, for services rendered by employees to the

contractor during the period of contract performance (except as

otherwise provided for in other paragraphs of this subsection). It

includes, but is not

[[Page 39218]]

limited to, salaries; wages; directors' and executive committee

members' fees; bonuses (including stock bonuses); incentive awards;

employee stock options, and stock appreciation rights; employee stock

ownership plans; employee insurance; fringe benefits; contributions to

pension, other postretirement benefits, annuity, and employee incentive

compensation plans; and allowances for off-site pay, incentive pay,

location allowances, hardship pay, severance pay, and cost of living

differential. Compensation for personal services is allowable subject

to the following general criteria and additional requirements contained

in other parts of this cost principle:

(1) Compensation for personal services must be for work performed

by the employee in the current year and must not represent a

retroactive adjustment of prior years' salaries or wages (but see

31.205-6 (g), (h), (j), (k), (m), and (o) of this subsection).

* * * * *

(b) Reasonableness. The compensation for personal services paid or

accrued to each employee must be reasonable for the work performed.

Compensation will be considered reasonable if each of the allowable

elements making up the employee's compensation package is reasonable.

This paragraph addresses the reasonableness of compensation, except

when the compensation is set by provisions of a labor-management

agreement under terms of the Federal Labor Relations Act or similar

state statutes. The tests for reasonableness of labor-management

agreements are set forth in paragraph (c) of this subsection. In

addition to the provisions of 31.201-3, in testing the reasonableness

of individual elements for particular employees or job classes of

employees, consideration should be given to factors determined to be

relevant by the contracting officer.

(1) Among others, factors which may be relevant include general

conformity with the compensation practices of other firms of the same

size, the compensation practices of other firms in the same industry,

the compensation practices of firms in the same geographic area, the

compensation practices of firms engaged in predominantly non-Government

work, and the cost of comparable services obtainable from outside

sources. The appropriate factors for evaluating the reasonableness of

compensation depend on the degree to which those factors are

representative of the labor market for the job being evaluated. The

relative significance of factors will vary according to circumstances.

In administering this principle, it is recognized that not every

compensation case need be subjected in detail to the tests described in

this cost principle. The tests need be applied only when a general

review reveals amounts or types of compensation that appear

unreasonable or unjustified. Based on an initial review of the facts,

contracting officers or their representatives may challenge the

reasonableness of any individual element or the sum of the individual

elements of compensation paid or accrued to particular employees or job

classes of employees. In such cases, there is no presumption of

reasonableness and, upon challenge, the contractor must demonstrate the

reasonableness of the compensation item in question. In doing so, the

contractor may introduce, and the contracting officer will consider,

not only any circumstances surrounding the compensation item

challenged, but also the magnitude of other compensation elements which

may be lower than would be considered reasonable in themselves.

However, the contractor's right to introduce offsetting compensation

elements into consideration is subject to the following limitations:

(i) Offsets will be considered only between the allowable elements

of an employee's (or a job class of employees') compensation package or

between the compensation packages of employees in jobs within the same

job grade or level.

(ii) Offsets will be considered only between the allowable portion

of the following compensation elements of employees or job classes of

employees:

(A) Wages and salaries.

(B) Incentive bonuses.

(C) Deferred compensation.

(D) Pension and savings plan benefits.

(E) Health insurance benefits.

(F) Life insurance benefits.

(G) Compensated personal absence benefits. However, any of the

above elements or portions thereof, whose amount is not measurable,

shall not be introduced or considered as an offset item.

(iii) In considering offsets, the magnitude of the compensation

elements in question must be taken into account. In determining the

magnitude of compensation elements, the timing of receipt by the

employee must be considered.

* * * * *

(c) Labor-management agreements. If costs of compensation

established under ``arm's length'' negotiated labor-management

agreements are otherwise allowable, the costs are reasonable if, as

applied to work in performing Government contracts, they are not

determined to be unwarranted by the character and circumstances of the

work or discriminatory against the Government. The application of the

provisions of a labor-management agreement designed to apply to a given

set of circumstances and conditions of employment (e.g, work involving

extremely hazardous activities or work not requiring recurrent use of

overtime) is unwarranted when applied to a Government contract

involving significantly different circumstances and conditions of

employment (e.g., work involving less hazardous activities or work

continually requiring use of overtime). It is discriminatory against

the Government if it results in employee compensation (in whatever form

or name) in excess of that being paid for similar non-Government work

under comparable circumstances. Disallowance of costs will not be made

under this paragraph (c) unless--

* * * * *

(d) Form of payment. (1) Compensation for personal services

includes compensation paid or to be paid in the future to employees in

the form of cash, corporate securities, such as stocks, bonds, and

other financial instruments (see paragraph (d)(2) of this subsection

regarding valuation), or other assets, products, or services.

(2) When compensation is paid with securities of the contractor or

of an affiliate, the following additional restrictions apply:-

(i) Valuation placed on the securities shall be the fair market

value on the measurement date (i.e., the first date the number of

shares awarded is known) determined upon the most objective basis

available.-

(ii) Accruals for the cost of securities before issuing the

securities to the employees shall be subject to adjustment according to

the possibilities that the employees will not receive the securities

and that their interest in the accruals will be forfeited.

* * * * *-

(i) Compensation based on changes in the prices of corporate

securities or corporate security ownership, such as stock options,

stock appreciation rights, phantom stock plans, and junior stock

conversions.

(1) Any compensation which is calculated, or valued, based on

changes in the price of corporate securities is unallowable.

(2) Any compensation represented by dividend payments or which is

calculated based on dividend payments is unallowable.

[[Page 39219]]

(3) If a contractor pays an employee in lieu of the employee

receiving or exercising a right, option, or benefit which would have

been unallowable under this paragraph (i), such payments are also

unallowable.

* * * * *

[FR Doc. 96-18509 Filed 7-25-96; 8:45 am]

BILLING CODE 6820-EP-P