Salary Rate Limitation Questions and Answers
APM 2012-03 Implementation of the Requirements of the FY2012 HHS Appropriations Acts and HHS’ Non-Discrimination Policy
Select a question from the list below to see the answer:
Question 1: There is pertinent FAR coverage at 31.205(p) that is relative to the salary rate limitation. FAR 31.205-6(p) only applies to compensation for personal services (see 31.205-6). Therefore, it does not appear there is any FAR coverage that provides a cap for nonpersonal services. Does paragraph (p) of that section apply to nonpersonal services as well?
Answer: FAR 31.205-6 applies only to personal services and the FAR does not provide a cap for non-personal services. However, please note that the HHSAR clause 352.231-70 Salary Rate Limitation is linked to the use of FY2012 funds and applies to all contractor employees, regardless of how the contracting activity characterizes the services in question (i.e., personal or "non-personal.") The question under HHSAR 352.231-70 is whether a payment is for "direct salary," not whether the compensated services are "personal" or "non-personal."
Question 3: Is there any guidance regarding this new clause as far as how contractors are supposed to be able to use/propose Senior staff to manage contracts if their unloaded rates are more than what a Level II federal executive is paid? How are Contractors supposed to bid for work if they can’t propose the qualified staff that is necessary to do the work because of the pay limitations? For example, if a Contractor proposes a manager that is paid say $90.00/per hour his annual salary would be $187,200.00 which is more than the level allows. Does that mean that the contractor could not use that person for any portion of the contract? What if that same person only works 15 hours on the contract for oversight or something, could they be proposed for those 15 hours? In other words, can a contractor use a senior level person on a part time basis, provided they don’t work fulltime on one contract and the person’s salary is completely paid by the Federal Government?
The HHSAR 352.231-70 states: “An individual’s direct salary is the annual compensation that the Contractor pays for an individual’s direct effort (costs) under the contract.” Does this mean that we can invoice for up to $179,700 per year for an individual, regardless of the individual’s salary? Does it mean that the project, assuming the individual is assigned on a full time basis, can cover the first $179,700 in direct salary?
Is the Level II salary a cap on accumulated direct salary or on the maximum salary allowable regardless of the hours worked? In this example, the project could not cover the first $179,700 but instead would cover only the proportion of direct salary that is the equivalent of direct annual salary of $179,700 or $83.39 per hour for a company that has a forty hour week, or in the case of our company $98.73 because of the 35 hour week. Is this a correct interpretation?
Answer: Please refer to the NOTE in paragraph (b) included in the clause which states: “The salary rate limitation does not restrict the salary that an organization may pay an individual working under an HHS contract or order; it merely limits the portion of that salary that may be paid with contract* funds. (*Note that the original clause read “Federal” rather than “contract” funds. Per question 14 below, this word has been changed.)
Question 4: Is there any guidance on the definition of each executive level? On the OPM website, it does not include the definition of each executive level, so how do we figure out what the qualifications for an executive level staff person is?
Answer: The salary rate limitation applies to the direct salary of any individual working under the contract (and any related subcontract) regardless of qualifications (see 5 U.S.C. § 5313, which identifies Government positions at Executive Level II).
Question 5: If a contract was awarded in FY 2012, prior to December 23, 2011, does the Executive Level I salary level apply for that entire fiscal year? Or, will the Executive II salary level take effect after December 23, 2011, which would require contractors to bill two different levels during the same fiscal year?
Can you confirm that a contract funded with FY2012 funds, regardless of when the option year (or contract itself) became effective is subject to Executive Level II salary cap as of December 23, 2011 and all salary expenditures from December 23, 2011 against that contract and invoiced must adhere to the Executive Level II cap?
For clarification purposes, should an obligation that was awarded prior to December 23, 2011 be held to that level? Should any invoice be revised if a salary expense was incurred after December 23, 2011 for salary that exceeds the new cap but the FY 12 funding was obligated prior to December 23, 2011? Or is the Executive Level II salary cap applicable to ANY FY 12 funding expended past December 23, 2011? For example, if an Option was exercised in November 2011, clearly before the December 23, 2011 cutoff, and fully funded, could contractors continue to use the Executive Level I salary cap that was effective in November 2011?
Answer: The Executive salary level to be used is dependent on when the funds being used were obligated. If funds were obligated prior to December 23, 2011, the Executive Level I salary level can be used until those funds are expended. If the funds were obligated after December 23, 2011, the Executive Level II salary cap must be used.
Question 6: If we follow the guidance provided in Question 8, the clause as it is currently written is in conflict with this guidance, as it speaks to the date that expenses are incurred. Does HHS plan to revise the clause?
Answer: To reflect the guidance provided in Question 8, 352.231-70(a) “Salary Rate Limitation” is hereby changed to read as follows: “(a) Pursuant to the current and applicable prior HHS appropriations acts, the Contractor shall not use contract funds to pay the direct salary of an individual at a rate in excess of the Federal Executive Schedule Level in effect on the date the funding was obligated (the effective date of the contract action). Funding obligated on or after December 23, 2011 cannot be used to pay the direct salary of an individual at a rate in excess of Federal Executive Schedule Level II.”
Answer: The first sentence of the guidance given in the second paragraph under “Section 203 of the Labor, HHS and Education Appropriation Act – Revised HHSAR 352.231-70, “Salary Rate Limitation” on page 6 of APM 2012-03 is hereby changed to read as follows: “Contracting Officers shall unilaterally modify existing extramural contracts to include this HHSAR clause.” The government is exercising its right to unilaterally modify the contract to comply with the appropriations law governing the contract funding. However, if the Contracting Officer chooses, h/she may add a bilateral portion to the unilateral modification to obtain the contractor’s acknowledgement that the modification was received.
Question 8: HHSAR 352.231-70(c) states that a multiple-year contract or order may be subject to a unilateral modification. Does that mean that a contract with options would require a bilateral modification?
Answer: No, contracts with options are multiple-year contracts.
Question 9: Please clarify the term "extramural." Historically, this provision has not been applied consistently across HHS because of this lack of understanding.
Answer: The term extramural is defined in 331.101-70 (a) for the purposes of the salary limitation provision and its application to acquisitions as follows: “...the term “extramural” refers to activities that a contractor undertakes for specified programmatic purposes, other than those of an administrative nature or in support of Federal laboratories, facilities, or information technology systems, through a formal and legally-binding contract.”
Question 10: Does the salary rate limitation need to be applied as an hourly, monthly, or annual rate?
Question 11: The interim rules clearly state that the limitation is an annual salary cap per contract. For example, if an employee who is paid $200,000 per year were to work on two different contracts, both subject to the salary cap, and charge direct salary costs over the course of the year of $100,000 on one contract and $85,000 on the other contract, plus $15,000 to an indirect cost activity, that employee’s salary costs would not exceed the cap on either contract. There is some inconsistency in how this is being implemented.
Since most staff do not receive their full annual salary by working on one contract, but probably 3 or 4 different contracts, does this limitation apply to them?
Answer: The answer necessarily proceeds from the following Q’s & A’s:
Question 11a: Does the salary rate limitation need to be applied as an hourly, monthly, or annual rate?
Question 11b: If the rate limit should be hourly what is the annual number of hours we should use to calculate the rate (e.g. 1,950 hours)? Also, how will this apply to institutions using a % of completion type contracts (e.g. educational institutions)? In these scenarios, is it appropriate to use a monthly rate limit?
Answer: It is not hourly.
The only way to apply the limitation across multiple contracts would be to use an hourly rate. Because the responses above preclude such a methodology, we conclude that the limitation only prevents an employee making more than $179,900 for his or her work on a single contract. (Please also see the answer to Question 3 and Question 14.)
Question 12: If the rate limit should be hourly what is the annual number of hours we should use to calculate the rate (e.g. 1,950 hours)? Also, how will this apply to institutions using a % of completion type contracts (e.g. educational institutions)? In these scenarios, is it appropriate to use a monthly rate limit?
Answer: It is not hourly.
Question 13: As consulting agreements with prime contractors are essentially a subcontract for services, I’m assuming the salary rate limitation applies to consultants as well. Please advise.
Answer: Yes, the salary rate limitation applies to consultants.
Question 14: HHSAR 352.231-70(a) states “the Contractor shall not use contract funds to pay the direct salary of an individual at a rate in excess of the Federal Executive Schedule Level II…” HHSAR 352.231-70(b) goes on to state “The salary rate limitation does not restrict the salary that an organization may pay an individual working under an HHS contract or order; it merely limits the portion of that salary that may be paid with Federal funds.”
Given the discrepancy in language (“contract funds” vs. “Federal funds”) does this mean an individual may not exceed the Federal Executive Schedule Level II in the aggregate for:
- all Federal contracts?
- all HHS contracts? or
- simply that they cannot exceed the limit under the subject contract?
Answer: This means that an individual may not exceed the limit under the subject contract. Since this prohibition was not included in all appropriation bills, this will be changed to consistently read “contract funds” rather than “Federal funds.”
Question15: HHSAR 352.231-70(a) states, “the Contractor shall not use contract funds to pay the direct salary of an individual at a rate in excess of Federal Executive II…” HHSAR 352.231-70(b) co-defines “direct salary”, “salary”, and “institutional base salary” as “the annual compensation that the Contractor pays for an individual’s efforts (costs) under the contract.” HHSAR 352.231-70(b) also “excludes fringe benefits, overhead, and general and administrative expenses (also referred to as indirect costs or facilities and administrative [F&A] costs)” from direct salary.
Given that the fee/profits paid to a Contractor are “contract funds” and are neither indirect nor F&A costs, does this mean that a Contractor is prohibited from applying fee/profit funds to pay an individual at a rate in excess of Federal Executive II?
Question16: What is the implication if a vendors annual hours are less than those of the Government?
Answer: Based on annual salary, not hours.
- APM 2012-03 Implementation of the Requirements of the FY2012 HHS Appropriations Acts and HHS’ Non-Discrimination Policy, 3/28/12
- Attachment A: Interim Updates to HHSAR
- Attachment B: Applicable Public Laws 112-74 and 112-55
- Attachment C: Requirements by Principle Type and/or Purpose of Contract
- Attachment D: Class Deviation - Prohibition Against Contracting with Corporations with a Felony Criminal Conviction Under Federal or State Law or an Unpaid Federal Tax Liability
- Amendment 1: Implementation of the Requirements of the FY2012 HHS Appropriations Acts And HHS’ Non-Discrimination Policy – Issued August 9, 2012