Employee Morale - Overview

Today we begin a short series on the FAR (Federal Acquisition Regulation) Cost Principle that regulates employee morale costs (FAR 31.205-13).

The full title is "Employee Morale, Health, Welfare, Food Service, and Dormitory Costs and Credits" but everyone refers to the cost principle as simply "Employee Morale". Subject to certain limitations, employee morale costs are allowable. However, while employee morale tends to be allowable, entertainment is not allowable (FAR 31.205-14) and these two overlapping cost principles have been the source of constant friction between contractors and contract administration, Congress and GAO. See, for example, Entertainment vs. Employee Morale. Some costs do not fall neatly into either employee morale or entertainment definitions. Contractors tend to classify those grey areas into employee morale and make them allowable while the Government tends to classify them into entertainment so that they become unallowable.

The cost principle states that aggregate costs (at one time it stated "reasonable costs") incurred on activities designed to improve working conditions, employer-employee relations, employee morale, and employee performance (less income generated by these activities) are allowable subject to certain limitations. The cost principle then goes on to define some examples of allowable activities, including:

• House publications (most likely to be electronic media these days)
• Health clinics
• Wellness/fitness centers;
• Employee counseling services; and
• Food and dormitory services for the contractor's employees at or near the contractor's facilities. 

There are a lot of costs that, in the abstract, will improve employee morale. That's how contractors justify the cost of private clubs, concert and sports tickets, flowers, and Christmas parties. Of course, these costs could just as easily be entertainment as well. 

Costs of gifts are unallowable. Gifts do not include performance awards. Performance awards are covered under FAR 31.205-6(f). Also, gifts do not include awards made in recognition of employee achievements pursuant to an established contractor plan or policy. There is no cost threshold in this cost principle regarding the value of gifts. Thus, under this standard, even "de minimis" gifts would be unallowable.

Next: Food and Dormitory Costs