[Federal Register Volume 61, Number 145 (Friday, July 26, 1996)]
[Rules and Regulations]
[Pages 39217-39219]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18509]
=======================================================================
-----------------------------------------------------------------------
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
