Allowability of Backpay

Sometimes, contractors have temporarily reduced employee salaries because they are experiencing temporary cash-flow issues, with a promise (sometimes written, sometimes not) to "make it up to them" when things get better. When things do get better the following year, contractors do make up the difference. This is an example of backpay. The precise FAR definition of backpay is "a retroactive adjustment of prior years' salaries or wages." (see FAR 31.205-6(h)).

Backpay is unallowable under Government contracting except under very limited circumstances. None of these circumstances allow contractor discretion to pay or not to pay. Those circumstances include:

• The payments result from underpaid work that was actually performed and the payments are required by a negotiated settlement, order, or court decree.
• The payments are to union employees for the difference in their past and current wage rates for working without a contract or labor agreement during labor management negotiations.
• The payments are to nonunion employees that are based on the results of union agreement negotiations, only if:
• A formal agreement or understanding exists between management and the employees concerning these payments, or
• An established policy or practice exists and is followed by the contractor so consistently as to imply, in effect, an agreement to make such payments.