DAB Decision 221
October 21, 1981 Health Systems Agency of Western New York; Docket No.
81-60; Decision No. 221 Settle, Norval D. (John); Ford, Cecilia Sparks
Garrett, Donald F.
DECISION
The Health Systems Agency of Western New York (Grantee) appealed from a
March 24, 1981 decision of the Public Health Service Grant Appeals Board
(PHS) regarding a disallowance under Grant No. 02-P-000111-04. At issue
is the amount of severance pay, given to Grantee's former Executive
Director, which may be charged to the grant.
Grantee is the successor corporation to the Comprehensive Health
Planning Council of Western New York (CHPC). Effective January 1, 1970,
CHPC hired a Director of Planning Consultation. In December 1972, this
individual became Executive Director of CHPC. Grantee was formed as
successor to CHPC on June 10, 1976 and Grantee chose the same individual
as its Executive Director.
In 1979 Grantee's Administrative Committee reviewed the Executive
Director's performance and recommended his dismissal. Although Grantee's
personnel policy provided a six week probationary period prior to the
dismissal of most employees, it was Grantee's opinion that placing the
Executive Director on probation would be detrimental not only to
Grantee's internal operation, but to its public image as well. It was
decided, therefore, that he should be terminated as quickly as possible,
but on mutually agreeable terms.
Grantee's President entered into negotiations with the Executive
Director regarding the conditions of his termination. It was agreed
that he would resign May 31, 1980. However, he would effectively be
kept on the payroll for an additional four month period receiving his
salary and full benefits through September 30, 1980. The agreement was
reduced to a memorandum of understanding submitted to, and approved by,
Grantee's Executive Committee on April 17, 1980.
Region Il officials were informed of the agreement but did not find it,
or any alternatives, acceptable. In view of the difficulties
encountered at the Regional level, the terminated Executive Director
retained counsel. As a result of further negotiations between his
attorney and Grantee a new settlement was achieved on May 22, 1980
providing for payment of the lump sum equivalent of four months' salary
($11,195.15).
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On October 14, 1980, the HEW Region II Office of Grants Management (OGM)
officially determined that the settlement "... was (1) inappropriate
because it was not supported by an established institutional policy and
(2) it was not a reasonable charge to the grant." OGM also decided that,
due to the awkward circumstances surrounding the termination, payment of
one month's salary and fringe benefits would be fair and could be
charged to the 04 year grant.
Grantee appealed this determination to PHS, citing the reasonableness of
the amount of severance pay and arguing that the memorandum of
understanding constituted an employer-employee agreement under the
controlling regulation. That regulation, 45 CFR Part 74, Appendix F,
G.40. Severance pay., states:
(a) Severance pay, also commonly referred to as dismissal wages,
is a payment in addition to regular salaries and wages, by
institutions to workers whose employment is being terminated.
Costs of severance pay are allowable only to the extent that, in
each case, it is required by (1) law, (2) employer-employee
agreement, (3) established policy that constitutes, in effect, an
implied agreement on the institution's part, or (4) circumstance
of the particular employment.
PHS decided that an employer-employee agreement, as envisioned by the
regulation, did not include one initiated in the shadow of imminent
dismissal; rather, the regulation was meant to be read in the more
conventional sense, i.e., as a contract entered into at the inception of
employment. However, PHS also failed to find merit in the arguments of
OGM as outlined above. Considering the unique position of an Executive
Director as the principal management official, PHS reasoned, some
severance pay was appropriate, although four months' was extreme.
PHS looked to CHPC's policy, as carried over by Grantee, as the basis
for a determination of the proper severance pay. This policy provided
that severance pay was to be given to employees whose dismissal was the
result of a reduction or termination of Federal grant support under the
Public Health Service Act which caused a mandatory reduction in force
(PHS Decision, p. 1). Severance pay was based on the following scale:
1-3 years employment - 1 month's pay 3-5 years
employment - 2 months' pay 5-9 years employment - 3
months' pay
PHS applied this policy even though the employee was?not terminated due
to a reduction in force. PHS determined that the employee began work
for Grantee in June 1976 and was entitled to two months' salary as
severance pay, based upon the above scale.
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The issue before us is the allowability of the additional two months'
salary paid to the employee. For reasons stated below, we reverse the
PHS disallowance. This decision is based upon Grantee's application for
review, filed April 24, 1981; an Order to Show Cause, issued August 26,
1981; and the PHS response to that Order, dated August 17, 1981.
Discussion
The PHS decision was based on the provision in the regulations
permitting reimbursement for severance pay when required by the
"circumstance of the particular employment."
The focus of Grantee's appeal and our analysis in the Order to Show
Cause was whether the amount of severance pay due the terminated
Executive Director was correctly calculated. Grantee alleged that the
date from which the Executive Director's seniority should have been
calculated was January 1, 1970. Throughout this appeal, Grantee has
maintained that the similarity between itself and its predecessor, CHPC,
is such that the two corporations are indistinguishable and the
Executive Director's length of service should be calculated from his
first day with CHPC. Accordingly, Grantee argued that the four-month
award was proper and the Board, in its Order to Show Cause, tentatively
determined that the evidence was sufficient to support Grantee's
position on this issue.
Responding to the Order, PHS revealed that at the time of its decision
in this case it was unaware of the facts which Grantee has since
presented to the Board on this question.
PHS has failed to show good cause why the Board's preliminary finding on
the issue of the Executive Director's seniority should not be adopted.
Therefore, it is the decision of the Board that the proper date from
which to begin calculation of the Executive Director's term of service
is January 1, 1970.
Having made the above finding, it becomes necessary to reexamine the
award of severance pay in view of the Executive Director's length of
employment. In concluding that two months' salary was proper, PHS
depended on the severance pay scale used by Grantee to compensate
employees who are terminated due to a reduction in force.
The Board's Order to Show Cause directed PHS to demonstrate why payment
of four months' salary for 10 1/2 years of service would not be a
logical extension of Grantee's scale. That scale provided one month of
salary for approximately every three year increment of service. In its
response to the Order, PHS stated: "Although ... the same scale
conceivably could be viewed as limiting severance pay to
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a maximum of 3 months, we find no reason in this case to counter the
Board's position of authorizing an award of 4 months severance pay." In
view of this response, we adopt the position tentatively taken in the
Order.
Conclusion
For the reasons stated above, the disallowance is reversed. D11 June 5,
1992