GAB Decision 222
October 29, 1981 Alcoholism Center for Women; Docket No. 81-49 Settle,
Norval; Ford, Cecilia Garrett, Donald
By letter dated March 23, 1981 the Alcoholism Center for Women
(Grantee) appealed a decision of the Alcohol, Drug Abuse, and Mental
Health Administration Grant Appeals Committee (Agency), upholding the
disallowance of a $9,166.92 charge to Grant No. H84-AA-02893 for
severance pay to Grantee's former Executive Director.
Our decision is based upon Grantee's application for review, the
Agency response, relevant documents submitted by both parties, an Order
to Show Cause issued by the Board on August 26, 1981, and the parties'
responses to that Order.
Background
Grantee's Executive Director resigned by letter submitted to
Grantee's Borad of Directors at a September 21, 1977 meeting. The Board
of Directors accepted the resignation and decided to grant the former
Director six months salary as "severance pay." The facts indicate
that
the Director's resignation was voluntary and the minutes of the meeting
state simply that "the topic of severance pay was discussed."
Congratulatory remarks were addressed to the Director in recognition of
her past service, but no other justification for the award in question
can be discerned from the minutes. In January 1978, the Executive
Director was paid $10,000.28, as severance pay, and that amount was
charged to the grant.
In June 1980, the Natinal Institute on Alcohol Abuse and Alcoholism
(NIAAA) conducted a site visit to Grantee in which it received
documentation to show that the award of severance pay was broken down in
the following manner: $6,666.92 as 4 months salary and $3,333.36 as 2
months accrued leave (Site Report, p. 2). NIAAA determined that the
payment to the former Director was inappropriate because it was contrary
to the Grantee's established personnel policy. The entire amount of
severance pay classified as salary, as well as $2,500 in accrued leave,
was disallowed.
Grantee appealed the disallowance to the Agency, contending that the
award of severance pay was made in accordance with the cost principles,
45 CFR Part 74, Appendix F, G.40.
(2) Grantee asserted that the payment was the result of an
employer-employee agreement; that the award was made in accordance with
an established policy of Grantee; and that it was called for by
circumstance of the particular employment. Further, Grantee claimed
that a November 15, 1977 letter from its Assistant Director to the
Program Administrator (Special Projects Branch, Western Section), NIAAA,
served as timely and constructive good faith notice of Grantee's
intention regarding the severance pay.
Based upon the grounds that Grantee's actions in awarding severance
pay violated controlling cost principles, the Agency upheld the
disallowance. The Agency also found that Grantee's letter to NIAAA did
not constitute prior notice of the intended charge to the grant.
By letter dated June 3, 1981 (Letter), Grantee informed the Board of
the discovery of "a material bookkeeping error." Grantee advised the
Board that the entire amount of severance pay was properly classifiable
as salary. As noted earlier, the Agency thought the award of severance
pay included $3,333.36 in accrued leave, $2,500 of which was disallowed,
apparently providing Grantee with $833.36 in costs chargeable to the
grant. Since the disallowance before the Board is limited to $9,166.92
($10,000.28 -- $833.36), our decision will address that amount only.
Discussion
The regulation at 45 CFR Part 74, Appendix F, G.40. Severance Pay,
provides:
(a) Severance pay, also commonly referred to as dismissal wages, is a
payment in addition to regular salaries and wages, by institutions to
workers whose employment is being terminated. Costs of severance pay
are allowable only to the extent that, in each case, it is required by
(1) law, (2) employer-employee agreement, (3) established policy that
constitutes, in effect, an implied agreement on the institution's part,
or (4) circumstance of the particular employment.
Grantee does not contend that the severance pay in this case was
required by law, but seeks to demonstrate that it meets one of the three
remaining regulatory conditions. /1/
(3)$UEmployer-Employee Agreement
Grantee has stated that to the best of its knowledge a written
employment contract between itself and its Executive Director did not
exist. Grantee claims, however, that "a contract (oral and/or implied)
obviously existed, or was understood . . . and was subject to
modification especially if by mutual agreement" (Letter, p. 1). It is
Grantee's contention that such a modification occurred when its Board of
Directors voted to make an award of severance pay. Grantee argues that
its actions "represented a mutually accepted condition of employment,
even to the extent of the obvious termination of such employment and the
retroactive nature of the decision" (Letter, p. 2).
Grantee's argument lacks merit in several respects. Grantee admits
that no written agreement exists. Further, even if an an "oral"
agreement were sufficient, Grantee has presented no evidence of the
terms of such an agreement, nor has Grantee demonstrated that such an
agreement was entered into prior to, or at the inception of employment.
By arguing that Grantee's Board of Directors met the agreement condition
by modifying an implied contract following the Director's resignation,
Grantee is stripping the regulation of any substance.
The element central to the allowability of severance pay is that it
must be "required" by an agreement. Grantee does not claim that
severance pay was an originally agreed upon condition of a contract with
its Executive Director. Had an original employment agreement required
severance pay there would be no need to "modify" it. The "modification"
occurred after the Executive Director's resignation. She did not forego
a right to finish out a defined term of employment in exchange for
severance pay; she resigned of her own volition.
Given the above facts, it is the decision of the Board that severance
pay was not required by an employer-employee agreement in this case.
Established Policy
Grantee claims that the decision of its Board of Directors to award
severance pay, was made pursuant to an established policy.
Again, Grantee has applied a reading of the regulation which is
broader than reasonable. Grantee has included in the case file excerpts
from its relevant personnel policy.Under this policy Grantee did not
provide severance pay for voluntary terminations. It apparently did
allow for two weeks severance pay, in lieu of two weeks notice, for
employees who were terminated for any reason other than engaging in a
"prohibited practice." From the facts before us it cannot be said
that
Grantee had an established policy calling for an award of severance pay
to any employee voluntarily resigning. In fact, the silence of the
personnel policy on severance pay for employees who (4) resign is
arguably a policy not to award such pay, in view of the explicit
provision for severance pay in certain other circumstances.
The action of Grantee's Board did not establish a policy on severance
pay. Use of the term "policy" in the cost principles envisions a
definite course of action, generally applicable. Grantee has not shown
that its decision to award six months severance pay was based upon any
preexisting scale or formula. It did not delineate a policy which could
be followed, in any definite manner, for other employees in like
circumstances. Accordingly, we conclude that the award of severance pay
here was not required by an established policy.
Circumstance of the Particular Employment
Grantee's argument that there were obviously "circumstances of the
particular employment" requiring severance pay or there would have been
no need for the actions of its Board of Directors is circular at best.
Grantee in effect contends that the very fact that severance pay is not,
under the facts of this case, clearly required by law, employer-employee
agreement, or established policy is itself a circumstance whic requires
severance pay.
The regulatory provision allowing severance pay where particular
circumstances require it cannot reasonably be viewed as a catchall
clause which would allow severance pay when it cannot be justified by
any of the other criteria in the regulation. The regulations evidence
an intent to establish limits for the allowability of severance pay.
Such pay is allowable "only to the extent" that it is required. An
appropriate example would be where an institution such as Grantee would
be harmed if an incompetent executive director were to remain in that
position for a full term. Thus, the element of give and take would
exist where Grantee gives severance pay and the employee steps down in
advance of a predetermined time. (See Health Systems Agency of Western
New York, Inc., Decision No. 221, October 21, 1981.)
Grantee claims that severance pay was justified because this was its
first Executive Director and no precedent existed for handling her
employment or termination (Letter, p. 2). As noted above, Grantee's
personnel policy provided for severance pay only in the context of a
non-voluntary termination and then only in lieu of two weeks notice. It
is reasonable to assume that Grantee's stated policy was a decision to
preclude its award in any instance of voluntary resignation. Thus,
Grantee's argument regarding lack of precedent and opportunity to deal
with the Executive Director's voluntary termination is not persuasive.
As noted above, the minutes of the Board of Directors meeting provide
no indication of any circumstances which compelled the Directors to
award severance pay to the Executive Director. Further, we find it (5)
hard to conceive of circumstances in which voluntary resignation would
require six months salary as severance pay. Essential to the
allowability of any cost is the element of reasonableness. The extent
of pay allowable under "circumstance of the particular employment"
must
necessaryily be determined by that circumstance and limited by general
principles of reasonableness.The excessive nature of the award here is
further reason for us to conclude that it was not required by the
circumstance of the particular employment.
Notice
Grantee asserts that the November 15, 1977 letter from its Assistant
Director to NIAAA put the Agency on notice of Grantee's intention
regarding severance pay and the Director's termination. While no
mention of the termination or severance pay was made in the letter
itself, a copy of the September 21, 1977 Board of Directors' Minutes was
enclosed. Although these minutes effectively notified the Agency of the
Director's resignation, no reference was made to the amount of severance
pay (other than six months salary) nor that the source would be Federal
funds. Hence, Grantee cannot reasonably argue that this letter put the
Agency on notice regarding its actions. Moreover, even if the Agency
had been on notice, Grantee would still be bound to show that severance
pay was required by one of the criteria discussed above, or that such
notice would otherwise require the Agency to consider the costs
allowable.
Grantee's response to the Order to Show Cause disagrees with the
Board's tentative opinions but accepts our presentation of the facts of
this appeal. While Grantee maintans that severance pay was proper here
as a result of an employer-employee agreement, established policy and
the circumstance of employment, Grantee has not offered any new evidence
which would compel the Board to alter its preliminary analysis.
Conclusion
For the reasons stated above, this appeal is denied. /1/ In our
Order we questioned whether the regulation applies to those
situations where an employee receives a bonus for meritorious work upon
voluntary resignation since the pay at issue would not be "severance
pay" within the ordinary meaning. We do not reach that issue in our
decision, however, since the Agency has acquiesced in the application of
the "severance pay" regulations to the circumstances here.
OCTOBER 22, 1983