[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]


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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.

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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