GAB Decision 591
November 6, 1984
Economic Opportunity Planning Association of Greater Toledo; Inc.;
Settle, Norval; Teitz, Alexander Ford, Cecilia
Docket No. 84-90
The Economic Opportunity Planning Association of Greater Toledo, Inc.
(Grantee) appealed a determination by the Office of Health Development
Services (Agency) disallowing $14,715 charged as salary and wages to the
Grantee's Head Start program for the project year ending December 31,
1981. The Agency determined that no services were rendered by the
person to whom the money was paid and that there was no other basis for
allowing the costs. We uphold the disallowance, except to the extent
that we conclude that the Grantee may claim a portion of the disallowed
amount as accumulated annual leave.
The Board's expedited procedures under 45 CFR 16.12 applied to this
appeal because the amount in dispute was not more than $25,000 and no
unique or unusually complex issues were involved. This decision is
based on the written record and the summary of the telephone conference
call, which was held in accordance with section 16.12(c)(2).
How This Case Arose
The claimed costs were incurred in connection with the termination of
the Grantee's Head Start Program Director (Director). During the latter
part of 1980 the Grantee experienced labor problems because a union was
attempting to organize its employees. (The Grantee took the position
that its employees were exempt from the National Labor Relations Act.)
The Grantee alleged that the Director's "inept leadership" had caused
unrest among the employees, leading to the labor problems. Grantee
Appeal File, Section 1, Letter of May 29, 1984 from Grantee's counsel.
The Grantee was not specific about the Director's actions leading to the
characterization "inept," but argued that removal of the Director
was in
the best interests of the Head Start Program. The Grantee entered into
a contract with the Director in which the Director received "leave with
pay" for a period of six months (January 11, 1981 - June 1981), at the
end of which time the Director would be permanently terminated. Grantee
Appeal File, July 5, 1984, Section 1, Exhibit A. The (2) Grantee argued
that it entered into this contract as the least costly, least disruptive
method of terminating the employment, and that the payment made to the
Director directly benefitted the Head Start Program by removing the
Director from the Program.
The Grantee alleged that if it had terminated the Director
immediately, disciplinary proceedings would have been necessary under
the Grantee's personnel policies, and that the Grantee did not think it
could support specific charges in order to justify a termination with
cause. Grantee Appeal File, Section 1, Letter; Summary of Telephone
Conference Call, August 22, 1984. The Grantee also alleged that on two
other occasions when attempts had been made to remove the Director, she
had threatened to sue. The Grantee asserted that it believed the
Director would sue the Grantee for unlawful termination. Finally, the
Grantee alleged that it would have continued to experience labor
problems as long as the Director remained in her job.
The contract provided that the Director would receive payment for
accrued leave, as well as full salary and health, death, and disability
benefits for the six month period. The contract also provided that if
the Director wished to "go on permanent lay-off" before the end of
the
six month period, she would receive the balance of her fringe benefits
and salary as severance pay. Grantee Appeal File, Section 1, Exhibit A,
para. (4). Moreover, the contract included a provision that the
Director would not participate in any of the Grantee's Head Start
activities (para. (7)), and that she was free to accept other employment
during the six month period (para.(6)).
The record shows that the Director had been hired in August 1978,
"laid-off" in May 1979 (the stated reason was that the 1978-1979 Head
Start program had ended); hired in August 1979, "laid-off" again in
June 1980; and then re-hired in July 1980. Grantee submission,
September 20, 1984, Section 1. The personnel forms which provide this
information confirm the Executive Director's explanation, during the
telephone conference call, of the Grantee's employment practice. The
Grantee hired personnel each fall for the school term (nine months),
terminated them at the end of the term so that they could collect
unemployment benefits during the summer months, and then rehired them at
the end of the summer for the next school term. Summary of Telephone
Conference Call, August 22, 1984.
The Agency's Determination
The Agency disallowed these costs because the Director did not render
any services to the Head Start Program during the six-month leave of
absence and because the Grantee offered no (3) other allowable
justification for the costs. /1/ The Agency stated that the Grantee's
personnel policies and procedures did not provide for terminating an
employment agreement or for the particular method used by the Grantee.
The Agency also alleged that the Director did not have a fixed term
contract of employment which would have been enforceable in a lawsuit.
The Agency originally asserted, as a basis for disallowance, that the
Grantee had not obtained advance written approval for the costs, but the
Agency later dropped that as a basis for the disallowance. /2/ Agency
submission, September 28, 1984. The Agency added as a basis for the
disallowance, however, that the Grantee did not have, and had failed to
seek, insurance for losses incurred in avoiding litigation resulting
from employment termination. The Agency asserted that the costs
incurred here were settlement costs which were an insurable loss and, as
such, were not allowable under the cost principles.
Analysis
The applicable cost principles are found at 45 CFR Part 74, Appendix
F (1980). The contract provided that the Director would receive her
salary and benefits for six months and the audit report indicates that
the Grantee claimed the costs as (4) salaries and wages. Agency Exhibit
2, Letter of September 5, 1983, from Regional Audit Director, p. 3. The
contract also provided that the Director would receive payment for the
accrued leave she had earned (through January 10, 1981), in the amount
of $1226.25. Appeal File, Section 1, Exhibit A, para. (2). The total
amount claimed, including payment for accrued leave, was $14,715.
a) Salaries and wages.
The cost principles, section G-6(b)(1) and (2), provide that
compensation for personal services is allowable to the extent that it is
"paid in accordance with policy, programs and procedures that
effectively relate individual compensation to the individual's
contribution to the performance of grant or contract work . . ." and
that the "total compensation of individual employees is reasonable for
the services rendered."
Here, the Grantee acknowledged that the Director did not contribute
to the program or render any services during the six month period, and
the contract clearly required the Director to refrain from any Head
Start Program activities. It would be ludicrous to uphold a claim for
salary based upon the notion that a person who renders no service and
performs no duties should receive payment as salaries and wages. The
Grantee's personnel policies show no institutional practice of granting
"leave with pay." Nor has the Grantee alleged that any of the conditions
existed which generally form the basis for "leave with pay" status
(e.g., employment performed at another institution but which is related
to the employee's tasks with the home institution; sabbatical based
upon years of service and/or outstanding performance; conduct of
business, such as a lawsuit, related to employment). Thus, we agree
with the Agency that the costs are not allowable here as compensation
for services rendered (salaries and wages).
b) Accrued leave.
The contract provided that the Director would receive payment in the
amount of $1226.25 for accrued leave. Appeal File, Section 1, Exhibit
A, para. (2). The Grantee confirmed that a portion of the disallowed
amount represented this payment. Summary of Telephone Conference Call,
August 22, 1984.
The following statement is found in the Grantee's personnel policies,
the section labelled Termination of Employment (Section XV, B, at p.
17).
. . . In every case of involuntary termination of employment, the
employee shall be paid the full amount of his accumulated vacation leave
and compensatory time as severance pay.
(5) We think that the Grantee's personnel policies confirm a normal
business practice of payment for earned leave upon termination of an
employee and that this cost is allowable under Appendix F, section G-6.
c) Insurable loss.
The Grantee argued that it reasonably incurred these costs because
the potential costs and problems associated with terminating the
employee and the possibility of a lawsuit would have been greater than
the cost of paying the employee's salary and benefits for six months.
The Agency then asserted that the costs were settlement costs and were
an insurable loss, for which the Grantee had not obtained insurance.
The Agency relied on a previous Board decision, Community Action
Commission of the Cincinnati Area, Decision No. 380, January 31, 1983,
in which the Board determined, based on the grantee's admission, that
settlement costs could be an insurable loss and that, in light of the
facts of that case, the costs were unallowable under the cost
principles. /3/ The Agency argued that these costs were settlement
costs and that Decision No. 380 was directly analogous to this appeal
and, therefore, controlled the result.
Although we uphold the disallowance because the costs are not
allowable as salaries and wages, we reject the argument that Decision
No. 380 controls this case and conclude that the argument that these
costs were unallowable as an insurable loss is not a sound basis for
disallowance.
In Decision No. 380 the grantee incurred costs by settling a lawsuit
which had been instituted after an employee was terminated and which had
been pending against the grantee for at least one year. In that
Decision, the Board determined that settlement costs could be a "loss"
within the meaning of the cost principles. The Board relied on the fact
that the grantee had been aware of the lawsuit for a year, knew that it
might incur costs related to the lawsuit (which were a (6) form of
contingent liability), and yet did not notify the Agency that it might
incur such costs despite a requirement in the cost principles that a
grantee disclose such contingent liabilities. The grantee in that case
also admitted that insurance against litigation over termination of an
employee could be obtained and that it was sound business practice to
have such insurance. The grantee could not show that it was
unreasonable to obtain such insurance or that it had attempted to get
such insurance and been refused. Based on all those factors, the Board
concluded that it would not substitute its judgment for that of the
Agency in determining that the costs were not reasonably allowable.
In contrast to the facts in Decision No. 380, however, no lawsuit was
filed in this case. The costs were incurred at the time of the
employee's termination and allegedly paid in part to meet the Grantee's
obligation to employ the Director for the entire school term. Thus, we
cannot conclude that the costs were in fact settlement costs, even
though the Grantee stated that the agreement was entered into partially
to avoid a lawsuit. Decision No. 380 did not address the general
question of what is a "loss," and the cost principles do not define
the
term. The Agency has not shown why these costs should be viewed as a
loss if they are not settlement costs. In contrast to the admissions
made by the grantee in Decision No. 380, the Grantee here argued that it
had no obligation to obtain insurance against such an incident as this
and that such insurance was probably not available. Moreover, even if
the Grantee had obtained insurance against litigation resulting from
unlawful employment termination, there is no showing that it would have
applied to the situation here where there was no lawsuit filed. We think
the facts of the two cases are simply not analogous and that there is no
reason to characterize the costs claimed here as an insurable loss.
Conclusion
Based on the above analysis, we conclude that the Grantee may claim
as an allowable cost the accrued leave paid to the terminated employee
($1,226.25). We uphold the disallowance in the amount of $13,488.75
because the costs are not allowable as salaries and wages. /1/ During
the course of the appeal, the Board asked the parties whether
the costs may be allowable as severance pay under 45 CFR Part 74,
Appendix F. The Grantee stated that it did not consider the costs
severance pay, and argued that it had an obligation to employ the
Director for nine months, which was met by paying her salary even though
it requested that, for the benefit of the Program, she not participate
in the Grantee's Head Start activities. The Grantee also noted that the
contract agreement provided that if the Director chose to be permanently
terminated prior to the end of the six months, the payments could be
deemed severance pay. The Grantee characterized its arrangement as a
"change in duties." Summary of Telephone Conference Call, August 22,
1984. /2/ The Grantee initially alleged that the Agency's
Regional Administrator told the Executive Director, in a telephone
conversation, that the costs were allowable. The Grantee later
acknowledged, however, that the Regional Administrator and the Executive
Director had never discussed the contract agreement, but had had a
general discussion about whether costs were allowable if they did not
exceed a line item of the approved budget. Summary of Telephone
Conference Call, August 22, 1984. /3/ Appendix F, section G-17(
a)(3) says: Actual losses which could have been covered by permissible
insurance . . . are unallowable unless expressly provided for in the
grant . . . . Appendix F, section G-8(c)(2) includes results of pending
litigation in its definition of contingent liabilities which must be
disclosed in order to determine the amount of appropriate contractual
coverage in connection with insurance or severance pay.
MARCH 19, 1985