H.R. 1540 - Employee Compensation

Last December 31st, President Obama signed into law, H.R. Bill 1540, the National Defense Appropriations Act for Fiscal Year 2012. With respect to compensation, the salary cap that was heretofore applied to the five most highly compensated employees in management positions at each home office and each segment of the contractor (see FAR 31.205-6(p)), was broadened to cover "any contractor employee" The cap is set annually by the Office of Federal Procurement Policy (OFPP). The current cap is $ 693,951. This cap covers the total amount of wages, salary, bonuses, deferred compensation and employer contributions to defined contribution pension plans.

The new law includes an escape clause for certain targeted positions. It states that the Secretary of Defense may establish one or more narrowly targeted exceptions for scientists and engineers upon a determination that such exceptions are needed to ensure that the Department of Defense has continued access to needed skills and capabilities. Look for upcoming guidance in the DoD FAR Supplement (DFARS) on how to make such requests.

The effective date for this section of the law is January 1, 2012 and applies to all " ... contracts entered into before, on, or after the date of the enactment of this Act."

In making this change, Congress was swayed by the fact that DCAA (Defense Contract Audit Agency) had shown that there are lower-level executives not subject to the cap and non-executive employees who receive compensation in excess of the benchmark compensation amount. Congress believes that this section would reduce the risk of excessive individual compensation charged to defense contracts.

Most contractors - especially small contractors - will be unaffected by this cap. $694 thousand is a lot of money. That would not have been the case if other proposals had won out. One would have limited compensation to $200 thousand and another to $400 thousand. Contractors who are affected by this cap need to be sure to record excess amounts to an unallowable account to avoid penalties for claiming unallowable costs.

Happy Valentine's Day.