Compensation - Part 7 - Severance Pay

Severance pay is a payment, in addition to regular salaries and wages, by contractors to workers whose employment is being involuntarily terminated. Severance pay is only allowable under Government contracts to the extent that it is required by

• Law
• Employer-employee agreement
• Established policy that constitutes, in effect, an implied agreement on the contractor's part; or
• Circumstances of the particular employment.

These are pretty broad categories and we do not recall when a contractor's intention to pay or actual payment of severance pay was successfully challenged by the Government for failing to meet one of these four conditions.

Back in the 1970s and perhaps the early 1980s, as service contracts changed hands, winning contractors would hire the employees of the incumbent contractor and those employees would continue to do the same work that they had been performing. Sometimes, hiring incumbent employees was a requirement of the solicitation and other times, it was convenient and made business sense. However, upon losing the contract, incumbent contractors were paying their employees a severance pay and seeking reimbursement for those costs from the Government. That precipitated a new rule where payments made in the event of employment with a replacement contractor where continuity of employment with credit for prior length of services is preserved under substantially equal conditions of employment or continued employment by the contractor at another facility, subsidiary, affiliate, or parent company of the contractor are not severance pay and are unallowable.

There are two kinds of severance pay addressed in this cost principle; normal severance pay and abnormal severance pay.

Actual normal turn over severance payments shall be allocated to all work performed in the contractor's plant. However, if the contractor uses the accrual method to account for normal turnover severance payments, that method will be acceptable if the amount of the accrual is

• reasonable in light of payments actually made for normal severances over a representative past period, and
• allocated to all work performed in the contractor's plant.

Abnormal or mass severance pay is of such a conjectural nature that accruals for this purpose are not allowable. However, the Government recognizes its obligation to participate, to the extent of its fair share, in any specific payment. Thus, the Government will consider allowability on a case-by-case basis.

Specific requirements for foreign national employees. The costs of severance payments to foreign nationals employed under a service contract performed outside the US are unallowable to the extent that such payments exceed amounts typically paid to employees providing similar services in the same industry in the US. Further, all such costs of severance payments that are otherwise allowable are unallowable if the termination of employment of the foreign national is the result of the closing of, or the curtailment of activities at a US facility in that country at the request of the government of that country. This does not apply if the closing of a facility or curtailment of activities is made pursuant to a status-of-forces or other country-to-country agreement entered into with he government of that country before November 29, 1989. Applicable statutes permit the head of the agency to waive these cost allowability limitations under certain circumstances.

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