The DCAA questioned DynCorp’s severance payments paid to its former CEO based on reasonableness (31.201-3) rather than the Compensation for personal services – severance pay cost principle at 31.205-6(g).  

DynCorp paid the severance in 2015 and 2016 pursuant to the former CEO’s employment agreement wherein the severance was based on 2x the CEO’s base salary plus 130% of the CEO’s targeted bonus.  Even though severance is specifically excluded from the definition of “compensation” (see 31.001 and 31.205-6(p)), the DCAA nonetheless argued that since the severance was calculated based on base salary and bonus, severance is just a different form of compensation for services rendered.  Fortunately, the Board disagreed with the DCAA’s interpretation.

Further, the Board squarely put the burden of proof on DynCorp to prove the reasonableness of its severance payments specifically pointing to the reasonableness criteria at 31.201-3(b)(3) quoting:  “(3)  The contractor’s responsibility to the Government…and the public at large.”  From this broad language, the Board concluded that DynCorp has an affirmative responsibility not to claim severance costs over the statutory limit.  The Board stated:  “We find that portion of the severance payments derived from unallowable salary and bonus amounts above the statutory caps are likewise unallowable.”

Silver Linings:  While we agree that severance costs must be reasonable to be allowable, we question the logic of trying to equate severance to salary and bonus and then applying the statutory comp cap.  Why not compare severance payments to other customary industry severance plans and practices to determine cost reasonableness? 

Fortunately, this case settles the question of whether severance payments should be included along with salaries, wages, bonuses, etc. in the contractor’s annual excess compensation analysis.  They shouldn’t be.

Finally, as a practical matter, most severance payments made in the normal course are less than the salary cap, and so, this case won’t impact those payments.  To the extent that senior executives receive severance, those payments will be separately subject to the cap each year that payments are made.  In time, executive employment agreements will most likely be restructured to defer the severance payments over several years to minimize disallowances.