GAB Decision 348
September 30, 1982 Federation of Physicians; Docket No. 82-63 Ford,
Cecilia; Settle, Norval Garrett, Donald
The Federation of Physicians (Federation) appealed a decision by the
Health Care Financing Administration (HCFA) disallowing $282,500. The
Federation requested this amount in its final budget submitted as part
of its termination procedures. The disallowed amount represented
supplementary severance pay allegedly due the Federation's Executive
Director when the Federation ceased to operate as a Professional
Standards Review Organization (PSRO). The Federation alleged that its
employment contract with the Executive Director required the
supplementary severance payment. HCFA disallowed the cost based on its
determination that the amount of severance pay requested was
unreasonable. The Federation argued that the amount was reasonable
under the circumstances at the time the contract was signed and that
HCFA's failure to object to the severance pay clauses in the Executive
Director's contract, at an earlier time, estopped HCFA from refusing to
provide funds for the severance pay. For the reasons discussed below,
we find that the amount of supplementary severance pay provided for
under the contract was unreasonable and that the facts of the case do
not support the Federation's claim of estopple against HCFA. Therefore,
we sustain the disallowance.
Background
The Federation is a non-profit organization which had been operating
since 1973. HCFA designated the Federation as the "conditional" PSRO
for Wayne County, Michigan, effective October 1, 1977, and terminated
the Federation as a PSRO, effective October 1981.
In September 1977 the Federation signed a contract with the
individual who would serve as Executive Director. The record does not
indicate when the Executive Director actually began working for the
Federation or when he ceased working. In October 1977, the Federation
forwarded a copy of the employment contract, along with copies of its
personnel policies, to the Project Officer for the Public Health
Service, Division of Quality and Standards -- PSRO, Region v.
(Federation's Exhibit 11) There is no evidence in the record that the
(2) Federation requested specific approval of all or any part of the
employment contract, or that HCFA acknowledged the submission.
In June 1981, HCFA notified the Federation that it might be
terminated as a federal PSRO. HCFA issued its final decision,
terminating the Federation's grant, on August 28, 1981; at that time
HCFA requested that the Federation submit a wind-down budget. As part
of that budget, the Federation included an item for the Executive
Director's supplementary severance pay, pursuant to paragraph (7)A.(2)
of the employment contract. The Federation proposed to pay from federal
funds the equivalent of five years salary to the Executive Director
($282,500). HCFA rejected the proposed payment on the grounds that the
supplementary severance pay provision which the Federation sought to
invoke had not been approved and that the amount of severance pay called
for by the agreement was unreasonable as a charge to federal funds.
HCFA recommended the release of two months salary ($7,469.79) as
severance compensation.
Pertinent Terms of the Employment Contract
The specific parts of the Executive Director's contract (Federation's
Exhibit 12) pertinent to our analysis are as follows:
(3) Term:
The term of employment under this Agreement shall begin on the first
day of January, 1976, and continue to the 31st day of December, 1981,
unless terminated sooner as hereinafter provided.
(7) Termination:
A. Federation may terminate this Agreement without cause at any time
upon 180 days' notice to Executive Director, and Federation shall be
required to pay to Executive Director the compensation due him up to the
effective date of the termination notice. In addition, in the event of
termination without cause by Federation, Federation shall pay
supplementary severance compensation to Executive Director in accordance
with the following schedule:
(1) If termination occurs by Federation, without cause, before the
expiration of the 36(th) month of this contract, then supplementary
severance compensation (3) shall be paid to Executive Director
consisting of the full amount of the balance due and owing to Executive
Director to the end of the 5-year contract period.
(2) In the event termination shall occur by Federation, without
cause, between the commencement of the 37th month of this contract and
the expiration of the 60th month, then supplementary severance
compensation will be paid to employee in an aggregate amount equal to a
five-year payment calculated by multiplying then prevailing annual
salary of Executive Director at the time of the termination times five.
Federation's Position
The Federation's position is based on two major contentions: (1) the
amount of supplementary severance pay awarded to the Executive Director
was reasonable under the circumstances existing at the time the contract
was made; and (2) HCFA, by its failure to object to any of the contract
terms when the contract was submitted to the Project Officer, is
estopped from refusing to fund this payment.
As justification for the supplementary severance pay provision, the
Federation pointed to the circumstances at the time the Executive
Director's contract was negotiated. The Federation noted that the
Executive Director had been an employee of Blue Cross and Blue Shield of
Michigan (Blue Cross) prior to joining the Federation and alleged that
he had sacrificed the extensive benefits and job security offered by
Blue Cross. Since the Federation could not match the benefit package
provided by Blue Cross, the Federation included the supplementary
severance provision in the employment contract. The Federation further
justified the provision on the basis that ". . . at the time of its
execution, great uncertainties existed with respect to the potential
success of Federation, as well as the impact employment by Federation
would have on his (Executive Director's) personal career." (Federation's
Brief, p. 8) The federation argued that the contract was a prudent
business decision which took into consideration the needs of both
parties and was the result of good faith and arms length bargaining.
The Federation argued that the supplementary severance payment was
reasonable under the standards set forth in the "Cost Principles for
Nonprofit Organizations," Office of Managment a Budget (OMB) Circular
A-122 (July 8, 1980).
(4) The Federation maintained that since HCFA did not object to any
of the contract terms when it had an opportunity to do so, the principle
of equitable estoppel should prevent HCFA from successfully challenging
the contract's validity now. The Federation never alleged that the
contract was submitted prior to the Notice of Grant Award, but contended
that its grant was approved "at substantially the same time" as it
submitted the employment contract to HCFA. (Federation's Brief, p. 3)
It alleged that approval of its grant constituted tacit, if not
specific, approval of the contract. The Federation implied that it was
being made to suffer because certain individuals in the federal
government failed to discharge their responsibilities by not reviewing
the contract and either approving or disapproving its terms.
The Federation argued that notions of justice and fair play require
federal funding of the supplementary severance pay because the Executive
Director relied on the contract and materially changed his position to
his detriment. The Federation insisted that, had it known HCFA's
objections to the contract, it could have accommodated both HCFA and the
Executive Director in a more acceptable manner.
Analysis
We consider first the reasonableness of the amount of supplementary
severance pay as a charge to federal funds. We find that it is not a
reasonable charge to federal funds. We also find that the doctrine of
estoppel does not apply.
HCFA maintained that the five year supplementary severance pay
provision is execssive, imprudent, and unreasonable, and argued that the
cost principles support this determination. Further, HCFA noted that it
never approved the contract, and that it had no obligation to approve it
at the time it was submitted.
A. Reasonableness of the Supplementary Severance Pay Provision
Both parties agreed that the applicable standards are found in OMB
Circular No. A-122. Attachment B, 44.a., states that:
Costs of severance pay are allowable only to the extent that in each
case it is required by (i) law, (ii) employer-employee agreement, (iii)
established policy that constitutes, in efect an implied agreement on
the organization's part, or (iv) circumstances of the particular
employment.
(5) In this appeal the Federation contended that the supplementary
severance payment was due pursuant to a valid contract. HCFA did not
challenge the validity of the contract itself; rather it challenged the
reasonableness of the amount which the Federation wished to charge the
federal grant.
As discussed below,it is not entirely clear from the record that the
supplementary severance pay was required by this agreement. Moreover,
we agree with HCFA that all costs, including those costs which meet the
conditions set out in Attachment B, 44.a., must also meet the general
test of reasonableness.
OMB Circular No. A-122, Attachment A, A.2a., indicates that for a
cost to be allowable under an award it must be "reasonable for the
performance of the award." One of the factors which indicates the
reasonableness of a cost is the circumstances existing at the time of
the decision to incur the cost. Furthermore, the cost must be ordinary
and necessary to the performance of the grant or operation of the
organization. Consideration must also be given to state and federal
laws or regulations and the terms and conditions of the grant, as well
as the use of sound business practices. Organizations receiving the
preponderance of their support from federal awards are subject to
special scrutiny.(OMB Circular A-122, Attachment A, A.3)
By the Federation's own admission, great uncertainties existed with
respect to the success of the Federation as a PSRO. In spite of these
uncertainties, the Federation entered into an employment contract which
obligated the Federation to pay in excess of a quarter million dollars
under certain circumstances.
HCFA pointed out that, although the Federation has argued that the
supplementary severance pay provision was a prerequisite to employing
the Executive Director, the Federation has offered no comparisons to
other PSROs or small private agencies with operational state or federal
grants, to demonstrate the necessity or reasonableness of this
provision. HCFA argued that the five year supplementary severance pay
provision "far exceeds any comparable benefit structure within the
federal employment system, the PSRO program, or state employment in
Michigan." (HCFA's Brief, p. 7)
Severance pay is generally recognized as a normal and necessary cost
for the operation of an organization. However, the Federation has not
demonstrated that the supplemenmtary (6) severance pay provision at
issue was necessary to hire anyone other than this particular
individual, (or, indeed, even this individual) or that it considered any
other candidates for the position. Certainly, the Federation has not
shown that this cost was, in any way, ordinary. /1/
The Federation argued that the supplementary severance pay provision
was intended to compensate the Executive Director for the lack of fringe
benefits comparable to those he had received at Blue Cross.The only way
the plan could make up for that lack, however, is if the Executive
Director was terminated under conditions activating the supplementary
severance pay provision. Thus, if he remained employed for the full
period of his contract, he would not be compensated in a manner
comparable to when he worked for Blue Cross. Therefore, we do not
consider it reasonable to find that severance pay was an appropriate
substitute for fringe benefits. /2/
We also note that certain terms of the contract raise questions which
are not resolved by the record. While the contract, paragraph (7)A.(1),
states that the contract period is five years the plain language of
contract paragraph (3), Term, contradicts that. That paragraph states
that the Executive Director's term of employment began January 1, 1976
and ended December 31, 1981. In its brief, the Federation alleged that
the Executive Director's employment contract began September 14, 1977.
(Federation's Brief, p. 5) The Federation has not indicated the exact
dates on which the (7) Executive Director began and ended his
employment. Furthermore, the Federation alleged that termination
occurred approximately September 1, 1981, /3/ which they stated was the
56th month of the term. September 14, 1977 to September 1, 1981 is 48
months. Thus, these inconsistencies support a finding that invocation
of the supplementary severance pay provision as a charge to the federal
government is unreasonable.
Both parties discussed whether the notices provided by HCFA to the
Federation about its termination as a PSRO were sufficient to comply
with the 180-day notice requirement under paragraph (7)A of the
contract. The issue is not whether HCFA gave the Executive Director
notice but rather whether the Federation ever terminated the Executive
Director in such a fashion as to activate the supplementary severance
pay provision at all. HCFA is not a party to the employment contract
between the Federation and its Executive Director. HCFA did not
terminate the incorporation or authority of the organization, merely its
right to federal funding as a PSRO. The Federation was in operation for
several years before it received this grant, and there is no reason to
automatically assume that it would no longer operate once the grant was
terminated. HCFA pointed out that other organizations terminated as
PSROs continued to function after their termination. (HCFA's Brief, p.
3) It is clear, however, that the Federation, not HCFA, was under an
obligation to provide the Executive Director with notice of his
termination. The contract provided that all notices under the contract
must be in writing and sent by registered or certified mail. (Contract
paragraph (12)) Neither party has provided any evidence that such notice
was given to the Executive Director. Thus, we do not have any evidence
that he was, in fact, terminated by the Federation in accordance with
the contract.
We have measured th supplementary severance pay provision against the
applicable standard of reasonableness set out in the OMB Circular.
Based upon the foregoing analysis, we have determined that the amount of
supplementary severance pay (8) called for under the contract would be
an inappropriate charge to federal funds. We next review the
Federation's contention that HCFA should be estopped from denying the
validity of the supplementary pay provision.
B. Estoppel
A grantee alleging estoppel must satisfy the following criteria:
(1) the party to be estopped must know the facts; (2) he must intend
that his conduct be acted on, or must so act that the party asserting
estoppel has a right to believe it is so intended; (3) the latter must
be ignorant of the true facts; and (4) he must rely on the former's
conduct to his injury. /4/
In addition, where the estoppel is asserted against the federal
government, the Supreme Court has held that estoppel cannot be applied
against the federal government unless there is a showing of affirmative
misconduct on the part of the government. Schweiker v. Hansen, 450 U.
S. 785 (1981); INS v. Hibi, 414 U.S. 5 (1973).
The Federation alleged that it submitted the contract to the PSRO
Project Officer and HCFA did not, thereafter, object to any of the
contract terms; therefore, the Federation argued, HCFA should be
estopped from disallowing the cost of the supplementary severance pay.
The Federation further refined its position by stating that since HCFA
failed to even acknowledge receipt of the contract, the Federation
detrimentally relied on HCFA's failure to respond. (Federation's Reply
Brief, p. 2) However, the Federation did not submit a proposed contract
to HCFA; rather it submitted a signed contract and, thus, was already
bound to its terms with or without HCFA's approval.
The Federation did not specifically request approval or point out the
supplementary severance pay provision when it submitted the contract.
(Federation's Exhibit 11) The Federation has (9) not shown that HCFA was
under an obligation to review the contract nor that the contract was
subject to a prior approval requirement. The Federation has admitted
that no action was taken on the contract and that it relied upon the
inaction of HCFA to conclude that HCFA had no objection to any part of
the contract. Thus, there was no affirmative misconduct on the part of
HCFA upon which the Federation could have justifiably relied. Without
that affirmative misconduct, HCFA cannot be estopped. Schweiker, supra,
at 788. Since the Federation has not met the affirmative misconduct
standard, we need not discuss the other elements of estoppel.
We think the Federation was remiss in relying upon HCFA's inaction,
rather than obtaining affirmative approval of the contract provision, if
the supplementary severance pay plan was indeed essential in securing
the Executive Director's employment. This is especially true in light
of language contained in the preamble of the contract and in section
(7)D:
The parties are aware that the position of Executive Director is
recognized as a so-called "key position" by the Bureau of Quality
Assurance (HEW) and the salary provisions of this Contract and fringe
benefits may be subject to contract limitations imposed by the United
States Government, and the parties further recognize a possible
supersession of the provisions of this Agreement in connection with
those terms and provisions which the United States Government may
modify, change or amend in connection with governmental authority.
(Emphasis added)
D. Federation will negotiate the payment of Executive Director's
supplementary severance compensation with the Department of Health,
Education and Welfare as part of its prime contract with the said
Department, the same being contract 240-75-0119, and any modifications
or amendments thereto.
This language indicates that the Federation knew that it should have
negotiated specifically with HCFA concerning the supplementary severance
pay provision.
(10) Conclusion
The Federation has neither demonstrated that the award of severance
pay was reasonable in its amount, nor shown that the doctrine of
estoppel applies. However, HCFA has not stated that severance pay was
totally improper in this instance, merely that the amount called for
under the contract was unreasonable. Nothing in this decision precludes
HCFA from determining that some severance pay is appropriate in these
circumstances. We agree with HCFA's determination, and uphold its
decision to disallow the supplementary severance pay award of $282,500.
/1/ OMB Circular A-122, Attachment B, 44., stated that costs of
severance pay are divided into two categories: those due to normal
recurring turnover and those due to abnormal termination. We believe
that this supplementary severance pay is allegedly due because of an
abnormal termination. The fact that it is termed "supplementary
severance pay" in the contract further indicates that it is not a normal
type of severance pay. Section 44 b.(2) stated that this type of
severance pay is of such a conjectural nature that allowability will be
determined on a case-by-case basis in the event of occurrence. /2/ In
fact, OMB Circular A-122, Attachment B, paragraph 6, lists frine
benefits and severance pay as two separate items under Compensation for
personal services. /3/ From the record it appears likely that
the Federation cited this date because HCFA's notice of termination of
PSRO funding, effective October 1, 1981, was issued on August 28, 1981.
The record does not show an actual date of notice of termination to the
Executive Director, or a date that he, in fact, ceased his employment.
/4/ Hampton v. Paramount Pictures, Corp., 279 F.2d 100, 104 (9th Cir.
1960), United States v. Georgia Pacific Co., 421 F.2d 92, 96 (9th Cir.
1970), and see, Choat v. Rome Industries, Inc., 462 F. Supp. 728, 730
(N.D. Ga. 1978).
OCTOBER 22, 1983