Obama Administration to Choose Between Conflicting Caps on Federal Contractor Pay Reimbursement Levels

January 10, 2014

Just before the holidays, Congress approved two bills which will impose conflicting dollar limits on the amount the federal government can reimburse federal contractors for their highest paid employees.  Prior to the passage of the conflicting bills, the allowable pay reimbursement expense for the senior executives of non-defense federal contractors was set pursuant to a statutory formula established in 1998 based on private sector compensation surveys.  For defense contractors, the allowable compensation reimbursement limit was applied more broadly to all employees, not just to senior executives.  However, with the reimbursement amount as set by the statutory formula approaching $1 million for 2014, there has been a considerable push to reduce the cap, with the White House calling for a cap of $250,000 to mirror the highest dollar amount payable to federal employees.  On December 18, the Senate passed the Bipartisan Budget Act which cut the reimbursement cap for compensation costs in cost-plus contracts for all employees of both defense and non-defense federal contractors from the current $987,000 to $487,000.  One day later, the Senate passed the fiscal year 2014 National Defense Authorization Act (NDAA), which caps allowable reimbursement at $625,000 for all employees of both defense and non-defense federal contractors.  Each bill tied future increases in the amount to the Employment Cost Index for all workers as calculated by the Bureau of Labor Statistics and allows agency heads to make an exception in the deduction limit for scientists and engineers upon a "determination that such exceptions are needed to ensure the executive agency has continued access to the needed skills and capabilities."  Under legislative interpretation doctrine, the law passed later in time governs, meaning the NDAA's higher cap of $625,000 would apply.  However, observers on all sides have indicated that the Obama Administration could choose to enforce the lower amount, likely prompting legal action to try to enforce the NDAA's higher cap.