Two recent actions by Congress and President Obama combine to narrow the pay gap between the highest and lowest wage earners at federal contractors, along with creating some new compliance requirements.
Congress slashed in half the amount of compensation that the government will reimburse federal contractors for the salaries of their highest-paid employees, creating new cost and compliance burdens for contractors.
Meanwhile, the Obama Administration says it plans to issue an executive order in the coming weeks that will require federal contractors to pay a minimum wage of $10.10 for new contracts signed after the start of next year.
The Bipartisan Budget Act (BBA), signed by President Barack Obama in December, reduces the amount that the government will reimburse contractors for their highest-paid executives under cost-reimbursement contracts from $952,000 to $487,000. Compensation paid in excess of the cap is considered an unallowable cost by the government and would have to be covered by the contractor out of its own pocket, since the cap doesn't expressly limit what companies pay their employees.
The reality, however, is that what the government reimburses some companies, particularly small- to mid-sized companies, sets the ceiling on what they're able to pay, says Alan Chvotkin, executive vice president and counsel of the Professional Services Counsel, the national trade association of the government professional and technical services industry. “In other words, they just don't have the resources to pay more without being able to be reimbursed for that salary on their contracts.”
Some industry groups argue that the lowered cap will hamper federal contractors' ability to attract highly qualified executives, who may be lured by more lucrative private-sector opportunities. “We will clearly see some impact on access to, and competition for, talent, particularly in areas of high skills and high shortage,” says Chvotkin.
The law allows agencies to establish exemptions from the compensation cap for “scientists, engineers, or other specialists upon a determination that such exceptions are needed to ensure that the executive agency has continued access to needed skills and capabilities.” Chvotkin points out, however, that the Department of Defense has had such authority to do so for two years now and has never used it.
Other industry groups say the lowered compensation cap comes as little surprise. “Given all the budget restrictions going on, I don't think government contracting executives were going to fight too hard for a higher cap,” says Michael Fischetti, executive director of the National Contract Management Association, a membership organization for individuals who deal with procurement and contract management. “Most of the industry didn't put up too much of a fuss.”
Compliance Burdens
For compliance officers at federal contractors, however, the most pressing concern is figuring out which cap applies to which contract. For many years, the compensation cap applied only to the top-five highest-paid executives at defense contractors.
In June 2013, the Department of Defense, NASA, and Coast Guard issued an interim rule that extended the limitation on compensation for defense contractors from the top-five highest-paid executives to all employees.
“Given all the budget restrictions going on, I don't think government contracting executives were going to fight too hard for a higher cap.”
—Michael Fischetti,
Executive Director,
National Contract Management Association
Under the BBA, however, the compensation cap has further been extended to apply to all defense and civilian contractor employees. A nearly identical provision was also included in the National Defense Authorization Act for fiscal year 2014, which President Obama signed the same day as the BBA.
Once the change is reflected in the Federal Acquisition Regulations, the new compensation cap will apply to costs incurred under contracts entered into on or after June 24, 2014.
“From a compliance perspective, contractors have to be aware of all of these different patchworks of caps,” says Paul Pompeo, a partner with law firm Arnold & Porter and a member of the government contracts and litigation practice groups.
Contractors now have to pay attention to compensation levels of not only their top-five highest-paid executives but now all agency employees—federal or civilian, says Chvotkin. That means companies are going to have a “devil of a time” making sure they properly apply those caps to the various contracts, so that they're properly charging the government, he says.
That effectively means they need a system in place to be able to connect the dots to identify “which particular cap in which particular year applies to which particular contract,” says Pompeo.
Contractors must “begin to tailor their payroll and accounting systems to be able to track the work being done by employees on government contracts,” adds Chvotkin.
LIMITING CONTRACTOR COSTS
Below is an excerpt from the Bi-Partisan Budget Act's Sec. 702, “Limitation on Allowable Government Contractor Compensation Costs.”
(a) LIMITATION.—
(1) CIVILIAN CONTRACTS.—Section 4304(a)(16) of title 41, United States Code, is amended to read as follows:
‘‘(16) Costs of compensation of contractor and subcontractor employees for a fiscal year, regardless of the contract funding source, to the extent that such compensation exceeds $487,000 per year, adjusted annually to reflect the change in the Employment Cost Index for all workers, as calculated by the Bureau of Labor Statistics, except that the head of an executive agency may establish one or more narrowly targeted exceptions for scientists, engineers, or other specialists upon a determination that such exceptions are needed to ensure that the executive agency has continued access to needed skills and capabilities.''
(2) DEFENSE CONTRACTS.—Section 2324(e)(1)(P) of title 10, United States Code, is amended to read as follows: "(P) Costs of compensation of contractor and subcontractor employees for a fiscal year, regardless of the contract funding source, to the extent that such compensation exceeds $487,000 per year, adjusted annually to reflect the change in the Employment Cost Index for all workers, as calculated by the Bureau of Labor Statistics, except that the head of an executive agency may establish one or more narrowly targeted exceptions for scientists, engineers, or other specialists upon a determination that such exceptions are needed to ensure that the executive agency has continued access to needed skills and capabilities.''
(b) CONFORMING AMENDMENTS.—
(1) REPEAL.—Section 1127 of title 41, United States Code, is hereby repealed.
(2) CLERICAL AMENDMENT.—The table of sections at the beginning of chapter 11 of title 41, United States Code, is amended by striking the item relating to section 1127.
(c) APPLICABILITY.—This section and the amendments made by this section shall apply only with respect to costs of compensation incurred under contracts entered into on or after the date that is 180 days after the date of the enactment of this Act.
Source: Bi-Partisan Budget Act.
“Most government contractors—particularly the larger ones—have multiple contracts, and those contracts are awarded at different points in time,” says Catherine Kunz, a partner at the law firm Crowell & Moring and a member of the firm's government contracts group. “So understanding when each cap applies to which contracts is the tricky part.”
The Federal Acquisition Regulations that implements the new compensation cap have not yet been published. Once they have been issued, however, contractors are going to have “pay attention to how it's worded to see how it should be applied,” says Kunz.
“It's very possible that down the road this will end up becoming a subject of litigation, because government auditors will take one position about how and when the cap will apply,” says Pompeo. Contractors, on the other hand, armed with spreadsheets in hand, may argue otherwise, he says.
Increased Minimum Wage
The reduced compensation cap is not the only hit that federal contractors are taking. During the State of the Union address, President Obama announced that he intends to sign an Executive Order in the coming weeks that will increase the minimum wage for federal contractor employees from $7.25 to $10.10 per hour. A statement issued by the White House said the executive order will apply to new contracts and renegotiated contracts issued after Jan. 1, 2015.
Connie Bertram, a partner in the labor and employment group of law firm Proskauer, says that the agencies that administer government contracts “will need to reconcile the executive order with existing programs and requirements.” For example, both the Service Contract Act and the Davis-Bacon Act require that hourly workers on qualifying federal contracts be paid a prevailing wage set by wage order. “Certain of those wage orders allow contractors to pay workers less than $10.10 per hour,” says Bertram.
What also remains unclear is the scope of the executive order. If it applies to all contractor employees, as opposed to only those employees assigned to federal government contracts, “it could have a significant impact on certain contractors,” says Bertram. “Hopefully, the order will provide clarity on this issue.”
No comments yet