Wednesday, October 31, 2012

Compensation - Part 8 - Backpay

Backpay is a retroactive adjustment of prior years' salaries or wages. Backpay should not be confused with deferred compensation. While backpay is generally unallowable, deferred compensation is usually allowable if a deferred compensation plan is set up correctly.

This provision changed significantly in 2003. Prior to that, backpay included settlements for violations of Federal labor laws and the Civil Rights Act of 1984 (e.g. improper discharge or discrimination). Under the 2003 revision, backpay is defined as additional compensation for work performed.

According to FAR 31.205-6.(h), backpay is unallowable except for a few situations.

  1. Payments to employees resulting from underpaid work actually performed are allowable, if required by a negotiated settlement order, or court decree. Contractor intending to claim backpay under this provision will most likely need legal assistance.
  2. Payments to union employees for the difference in their past and current wage rates for working without a contract or labor agreement during labor management negotiation are allowable.
  3. Payments to nonunion employees based upon results of union agreement negotiation are allowable 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 so consistently as to imply, in effect, an agreement to make such payments.

This rule effectively takes away situations where if a survey shows an employee is underpaid in a particular year, the contractor could make that underpayment up in a future year.

The allocation of backpay costs can be tricky. Usually settlements occur several years after the period to which backpay is allocable. If you have a backpay situation, we advise that you pursue an advance agreement (see FAR 31.109) with the contracting officer. Otherwise, you are risking time-consuming arguments with the auditors.

Next: Section (i) - Compensation based on changes in the prices of corporate securities

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