Scott Arnold and Stephanie M. Harden
On May 30, 2014, the Federal Acquisition Regulatory Council issued a final rule expanding the FAR’s executive compensation cap—which is currently set at $952,308—to all contractor employees on contracts for the Department of Defense (DoD), NASA, and the Coast Guard. The final rule adopts without any changes the interim final rule issued on June 26, 2013, as modified by a subsequent technical amendment.
Overview of the Final Rule
The FAR’s executive compensation cap limits the allowability of executive compensation to an amount set each year by the Administrator of the Office of Federal Procurement Policy. The rule, which is implemented by FAR 31.205-6(p), previously applied only to the CEO and the next four most highly compensated employees in management at the company’s headquarters, as well as the five most highly compensated employees at certain other home offices of the contractor. The updated rule expands the applicability of the cap to all contractor employees on DoD, NASA, and Coast Guard contracts awarded on or after December 31, 2011.
The final rule was issued pursuant to Section 803 of the National Defense Authorization Act (NDAA) for Fiscal Year 2012 (Pub. L. 112-81). In response to a comment that the final rule will reduce contractors’ ability to attract and retain experienced and talented individuals, the comments to the final rule explain that a June 2013 GAO report found that less than .4 percent of defense contractor employees would be affected by a cap set at the President’s salary of $400,000. The comments also note that GAO found that fewer than .1 percent of employees covered by the existing cap were affected by the cap from 2010 to 2012. The final rule also indicated that the DoD is not prohibited from considering an exception to the cap for scientists and engineers.
Retroactive Application of the Rule
The new rule applies retroactively to all contracts awarded on or after December 31, 2011—the date of the enactment of Section 803 of the FY 2012 NDAA. The background section of the final rule notes that a proposed rule that would retroactively apply the expanded cap to contracts awarded prior to the enactment of Section 803 is also being separately considered.
Several contractors raised questions about the retroactive application of the rule to contracts awarded after the enactment of the statute, but prior to the issuance of the interim final rule on June 26, 2013. Citing the Court of Federal Claims’ decision in General Dynamics Corp. v. United States, 47 Fed. Cl. 514 (2000), and the Armed Services Board of Contract Appeals’ (ASBCA) decision in ATK Launch Systems, Inc., ASBCA No. 55395, 09-1 BCA ¶ 34,118 (April 9, 2009), the commenters contended that the retroactive application of the rule constitutes a breach of contract.
Both of these cases involved challenges to the retroactive application of the executive compensation cap enacted by Section 808 of the FY 1998 NDAA. In General Dynamics, the Court found that the retroactive application of the cap to contracts issued prior to the enactment of Section 808 breached the plaintiff’s contract. The Court found that the government was not entitled to rely upon the “sovereign acts doctrine,” pursuant to which the government may be excused from performing a contractual obligation if performance is rendered impossible by a public and general sovereign act. The Court explained that the executive compensation cap was not a “public and general” act because a “major purpose” of the cap was to pare down federal expenses by applying the cap retroactively. The ASBCA reached a similar conclusion in ATK Launch Systems.
The challenges in both of these cases related to contracts awarded prior to the enactment of the statute (rather than to contracts awarded after enactment of the statute, but prior to the issuance of implementing regulations). Relying on this fact, the FAR Council rejected the commenters’ concerns about the retroactive application of the final rule to contracts awarded after the enactment of the FY 2012 NDAA, but before the issuance of the interim final rule. The FAR Council did not respond, however, to the commenters’ assertion that other cases establish that statutory language which explicitly requires the issuance of implementing regulations is not self-executing, meaning that the application of the cap to contracts issued prior to the effective date of the interim final rule would arguably constitute a breach of contract.
Complying with the Rule
Contractors holding DoD, NASA, and Coast Guard contracts that were issued on or after December 31, 2011 should carefully review their compliance with the final rule by assessing whether compensation for all of their employees for which they are seeking reimbursement falls within the annual allowability limits set by the government. Contractors who face significant disallowances under the new rule may wish to challenge its retroactive application to any contracts issued between December 31, 2011 and June 26, 2013, on the grounds that the retroactive application of the regulations to this time period breaches their contracts.
The final rule may be found at 79 Fed. Reg. 31,195 (May 30, 2014).