B-210011 L/M, MAR 28, 1983, OFFICE OF GENERAL COUNSEL

B-210011 L/M: Mar 28, 1983

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AMOS CHARLES TOWNSEND: THIS IS IN RESPONSE TO YOUR LETTER OF NOVEMBER 23. IN WHICH YOU CONTEND THAT THE METHOD THE INTERNAL REVENUE SERVICE (IRS) USES TO CALCULATE AND DISTRIBUTE MERIT PAY RESULTS IN DISCRIMINATORY TREATMENT OF EMPLOYEES WHOSE SALARY IS IN THE LOWER RANGE OF BASIC PAY FOR THEIR GRADE AND IS NOT ACCORD WITH 5 U.S.C. WE BELIEVE THERE IS NOTHING IMPROPER IN THE WAY IRS ADMINISTERS ITS MERIT PAY PROGRAM. SEC. 5402(B)(4) THE OFFICE OF PERSONNEL MANAGEMENT (OPM) IS REQUIRED TO DETERMINE THE AMOUNT OF FUNDS AVAILABLE FOR THE MERIT PAY PROGRAM OF EACH EXECUTIVE AGENCY AND DEPARTMENT. OPM IS TO CALCULATE THAT FUND BY ADDING THE WITHIN-GRADE STEP INCREASES AND QUALITY STEP INCREASES THAT MERIT PAY EMPLOYEES WOULD HAVE RECEIVED IF THEY WERE NOT COVERED BY THE MERIT PAY SYSTEM TO THE AMOUNT OF THE COMPARABILITY ADJUSTMENT THOSE EMPLOYEES WOULD HAVE RECEIVED.

B-210011 L/M, MAR 28, 1983, OFFICE OF GENERAL COUNSEL

PRECIS-UNAVAILABLE

MR. AMOS CHARLES TOWNSEND:

THIS IS IN RESPONSE TO YOUR LETTER OF NOVEMBER 23, 1982, IN WHICH YOU CONTEND THAT THE METHOD THE INTERNAL REVENUE SERVICE (IRS) USES TO CALCULATE AND DISTRIBUTE MERIT PAY RESULTS IN DISCRIMINATORY TREATMENT OF EMPLOYEES WHOSE SALARY IS IN THE LOWER RANGE OF BASIC PAY FOR THEIR GRADE AND IS NOT ACCORD WITH 5 U.S.C. SEC. 5402 AND ITS IMPLEMENTING REGULATIONS.

AS YOU REQUESTED, WE REVIEWED THE PROVISIONS OF INTERNAL REVENUE MANUAL (IRM) 0540 WHICH GOVERNS IRS'S MERIT PAY APPRAISAL SYSTEM AND ITS MERIT PAY DISTRIBUTION SYSTEM. FOR THE REASONS EXPLAINED BELOW, WE BELIEVE THERE IS NOTHING IMPROPER IN THE WAY IRS ADMINISTERS ITS MERIT PAY PROGRAM.

ACCORDING TO THE PROVISIONS OF 5 U.S.C. SEC. 5402(B)(4) THE OFFICE OF PERSONNEL MANAGEMENT (OPM) IS REQUIRED TO DETERMINE THE AMOUNT OF FUNDS AVAILABLE FOR THE MERIT PAY PROGRAM OF EACH EXECUTIVE AGENCY AND DEPARTMENT, PRIOR TO THE BEGINNING OF THE FISCAL YEAR. OPM IS TO CALCULATE THAT FUND BY ADDING THE WITHIN-GRADE STEP INCREASES AND QUALITY STEP INCREASES THAT MERIT PAY EMPLOYEES WOULD HAVE RECEIVED IF THEY WERE NOT COVERED BY THE MERIT PAY SYSTEM TO THE AMOUNT OF THE COMPARABILITY ADJUSTMENT THOSE EMPLOYEES WOULD HAVE RECEIVED, LESS THE ADJUSTMENT MADE UNDER 5 U.S.C. SEC. 5402(C)(1). SECTION 5402(C)(1) PROVIDES FOR AN ADJUSTMENT TO THE RATE OF BASIC PAY OF MERIT SYSTEM EMPLOYEES IN AN AMOUNT EQUAL TO ONE-HALF OF THE COMPARABILITY ADJUSTMENT (OR A GREATER AMOUNT AS DETERMINED BY OPM).

THEREFORE, MERIT PAY SYSTEM EMPLOYEES ARE ENTITLED TO A NONDISCRETIONARY ADJUSTMENT IN THEIR RATE OF BASIC PAY OF AT LEAST ONE HALF OF THE COMPARABILITY ADJUSTMENT RECEIVED BY NON-MERIT PAY SYSTEM EMPLOYEES. THE REMAINING, DISCRETIONARY PORTION OF THAT ADJUSTMENT, TOGETHER WITH THE AMOUNT OF STEP INCREASES WHICH WOULD HAVE BEEN AWARDED, MAKE UP THE MERIT PAY POOL.

YOUR CONCERNS WITH IRS'S ADMINISTRATION OF MERIT PAY APPEAR TO ARISE SOLELY FROM ITS TREATMENT OF EMPLOYEES WHOSE SALARY IS AT THE BOTTOM OF THE PAY RANGE FOR THEIR GRADE. AS OUTLINED IN SECTION 0540.36(4) OF THE IRM, THE IRS REVIEWS A LIST OF EMPLOYEES WHOSE SALARY IS NEAR THE BOTTOM OF THE PAY RANGE AND MAKES AN INITIAL DETERMINATION OF THE AMOUNT OF THEIR MERIT PAY INCREASES. THE MERIT PAY INCREASE IS DETERMINED BY AWARDING POINTS TO EACH EMPLOYEE, THE VALUE OF WHICH IS DETERMINED BY DIVIDING THE TOTAL NUMBER OF POINTS AWARDED INTO THE TOTAL MERIT PAY POOL. FROM THIS AMOUNT IS SUBTRACTED AN AMOUNT CALLED THE ADDITIONAL ADJUSTMENT, WHICH IS THE AMOUNT NECESSARY TO BRING THE EMPLOYEE'S SALARY TO THE NEW MINIMUM OF THE GRADE AFTER THE AUTOMATIC PORTION OF THE COMPARABILITY INCREASE IS ADDED. IF THE INITIAL DETERMINATION OF THE EMPLOYEE'S MERIT INCREASE IS LESS THAN OR EQUAL TO THE ADDITIONAL ADJUSTMENT, THE EMPLOYEE'S ACTUAL MERIT INCREASE IS ZERO. IF THE INITIAL DETERMINATION OF HIS MERIT INCREASE IS GREATER THAN THE ADDITIONAL ADJUSTMENT, THE RESULT OF THE SUBTRACTION DESCRIBED ABOVE IS HIS ACTUAL MERIT INCREASE.

YOU CONTEND THAT THE ADDITIONAL ADJUSTMENT SHOULD BE MADE AND THAT AN EMPLOYEE'S MERIT PAY SHOULD THEN BE AWARDED ON TOP OF THE RESULTING MINIMUM SALARY. YOU POINT TO SECTION 540.105(C) OF TITLE 5 OF THE CODE OF FEDERAL REGULATIONS IN SUPPORT OF YOUR POSITION, THE RELEVANT PORTION OF WHICH PROVIDES AS FOLLOWS:

"(C) A MERIT PAY SYSTEM EMPLOYEE'S RATE OF BASIC PAY MAY NOT BE LESS THAN THE MINIMUM NOR MORE THAN THE MAXIMUM RATE OF BASIC PAY FOR THE EMPLOYEE'S GRADE IN THE MERIT PAY SYSTEM.

NOTWITHSTANDING ANY MERIT PAY DETERMINATION -

"(1) EACH MERIT PAY SYSTEM EMPLOYEE'S RATE OF BASIC PAY MUST BE INCREASED, EFFECTIVE ON THE SAME DAY A PAY ADJUSTMENT UNDER 5 U.S.C. 5402(C)(1) BECOMES EFFECTIVE, BY ANY AMOUNT NECESSARY TO RAISE THE EMPLOYEE'S RATE OF BASIC PAY TO THE NEW MINIMUM RATE FOR THE EMPLOYEE'S GRADE; ***."

OPM AGREES THAT THE REGULATION REQUIRES THAT AN EMPLOYEE RECEIVE HALF OF COMPARABILITY AND AN ADJUSTMENT UP TO THE MINIMUM RATE PRIOR TO THE MERIT INCREASE, BUT DISAGREES THAT IT PROHIBITS THE COMPUTATION IRS THEN MAKES. OPM BELIEVES THAT IT IS THE TOTAL INCREASE IN AN EMPLOYEE'S PAY WHICH SHOULD BE CONSIDERED. UNDER YOUR PROPOSAL, AN EMPLOYEE AT THE LOWER END OF THE PAY RANGE, AWARDED THE SAME NUMBER OF MERIT PAY POINTS AS AN EMPLOYEE IN THE MIDDLE RANGE, WOULD RECEIVE A GREATER PERCENTAGE INCREASE IN HIS SALARY.

WE HAVE FOUND NO SUPPORT FOR YOUR VIEW THAT AN EMPLOYEE'S MERIT PAY SHOULD BE ADDED TO THE NEW, ADJUSTED MINIMUM RATE OF BASIC PAY. THE STATUTE GOVERNING MERIT PAY, AT 5 U.S.C. SEC. 5402(C)(3) PROVIDES SIMPLY THAT, "NO EMPLOYEE TO WHOM THIS CHAPTER APPLIES MAY BE PAID LESS THAN THE MINIMUM RATE OF BASIC PAY OF THE GRADE OF THE EMPLOYEE'S POSITION." THERE IS NOTHING IN THE STATUTE OR LEGISLATIVE HISTORY TO INDICATE THAT CONGRESS CONTEMPLATED THAT AN EMPLOYEE IN THE LOWER RANGE SHOULD RECEIVE THE ADVANTAGE YOUR PROPOSAL WOULD PROVIDE.

THERE IS ANOTHER, PERHAPS MORE IMPORTANT, ARGUMENT AGAINST YOUR PROPOSAL. CONSIDERING ONLY THE COMPARABILITY PORTION OF THE MERIT PAY POOL, AN EMPLOYEE CONTRIBUTES ONE-HALF OF THE COMPARABILITY ADJUSTMENT TO THE POOL. IF THAT EMPLOYEE IS AT THE LOWER RANGE OF THE GRADE, HE MUST BE GIVEN AN AMOUNT EQUAL TO ONE-HALF OF THE COMPARABILITY ADJUSTMENT IN ORDER FOR HIM TO REACH THE MINIMUM RATE. IF MERIT PAY IS AWARDED ON TOP OF THAT SALARY, AN AGENCY MUST, TO PRESERVE THE POOL, DRAW THE ADDITIONAL ADJUSTMENT FROM THE GENERAL SALARY AND EXPENSES APPROPRIATION, THUS CAUSING MORE FUNDS TO BE EXPENDED UNDER THE MERIT PAY SYSTEM THAN UNDER THE PRE-MERIT PAY SYSTEM. WE HAVE HELD THE LEGISLATIVE HISTORY OF THE MERIT PAY PROVISIONS CONVINCINGLY DEMONSTRATES THAT CONGRESS INTENDED FOR THE MERIT PAY SYSTEM TO COST NO MORE THAN THE PRE-MERIT PAY SYSTEM. SEE OFFICE OF PERSONNEL MANAGEMENT'S IMPLEMENTATION OF MERIT PAY, B-203022, SEPTEMBER 8, 1981. OF COURSE, THE AMOUNT OF THE ADDITIONAL ADJUSTMENT COULD BE DRAWN FROM THE POOL BUT THAT WOULD CREATE A SUBSIDY OF THE EMPLOYEES IN THE LOWER RANGE OF THEIR GRADE BY THOSE IN THE MIDDLE AND UPPER RANGES.

IF OPM DIRECTED AGENCIES TO AWARD MERIT PAY AND THEN MAKE ADJUSTMENTS FOR THOSE WHOSE SALARIES REMAINED BELOW THE MINIMUM RATE, THE SAME PROBLEMS OUTLINED ABOVE WOULD OCCUR. THE AGENCIES COULD DEDUCT THAT ADJUSTMENT FROM THE MERIT PAY POOL, WITH THE RESULTING UNFAIRNESS, OR THEY COULD DRAW IT FROM THE SALARIES AND EXPENSES APPROPRIATION, WITH THE RESULTING OVEREXPENDITURE.

TO SOLVE THIS PROBLEM OPM HAS DIRECTED THE AGENCIES TO EMPLOY A METHOD IT CALLS "DISCOUNTING," WHICH IS THE IRS METHOD OF CALCULATING MERIT PAY DESCRIBED ABOVE. YOU FEEL THIS IS SIMPLY A WAY TO INCREASE THE MERIT PAY POOL AND DISTRIBUTE THE MERIT PAY EARNED BY EMPLOYEES IN THE LOWER RANGE TO THOSE IN THE MIDDLE AND UPPER RANGES.

ALTHOUGH IT MAY APPEAR AT FIRST GLANCE THAT THIS IS SO, OPM HAS DEVISED A WAY TO PREVENT THAT RESULT WHICH IS NOT CLEARLY EVIDENT FROM IRS'S REGULATIONS. WHEN IT CALCULATES THE MERIT PAY POOL FOR EACH AGENCY, OPM ADDS THE STEP INCREASES AND THE COMPARABILITY ADJUSTMENT WHICH WOULD HAVE BEEN RECEIVED AND THEN SUBTRACTS THE SUM OF THE 5402(C)(1) ADJUSTMENT AND THE ADJUSTMENT NECESSARY TO BRING EMPLOYEES UP TO THE NEW MINIMUM. OPM'S VIEW IS THAT THE MERIT PAY POOL SHOULD CONTAIN ONLY DISCRETIONARY FUNDS AND SINCE AN AGENCY IS REQUIRED TO PAY THE EMPLOYEES IN QUESTION AT THE MINIMUM RATE, COMPARABILITY FOR THEM IS NOT DISCRETIONARY FOR MERIT PAY PURPOSES. THEREFORE, THE POOL IS CALCULATED SO THAT IT DOES NOT INCLUDE COMPARABILITY FOR THOSE EMPLOYEES AND THEY DO NOT DRAW COMPARABILITY MONEY FROM THE POOL. AFTER AN AGENCY DETERMINES THE EMPLOYEE'S MERIT PAY INCREASE AND SUBTRACTS FROM IT THE AMOUNT REQUIRED TO ADJUST AN EMPLOYEE'S PAY TO THE MINIMUM RATE, OPM'S INSTRUCTIONS ARE THAT THE AGENCY IS TO DRAW THE ADJUSTMENT AMOUNT FROM THE GENERAL SALARIES AND EXPENSES APPROPRIATION AND TO DRAW THE REMAINDER FROM THE MERIT PAY POOL.

AFTER THESE STEPS HAVE BEEN TAKEN, IRS SUBTRACTS THE LOWER RANGE EMPLOYEES' MERIT PAY POINTS FROM THE TOTAL POINTS AWARDED TO ALL MERIT PAY EMPLOYEES. THEN IRS DIVIDES THE REMAINING POINTS INTO THE MERIT PAY POOL, WHICH IS REDUCED BY THE AMOUNTS DRAWN FROM THE POOL AS DESCRIBED ABOVE, TO ARRIVE AT AN ADJUSTED POINT VALUE FOR MERIT PAY PURPOSES. THE MERIT PAY AWARDS FOR THE OTHER EMPLOYEES ARE RECALCULATED ON THE BASIS OF THOSE NEW POINT VALUES.

THE PROPOSAL YOU HAVE MADE TO PREVENT WHAT YOU SEE AS THE IMPROPER DISTRIBUTION OF THE MERIT PAY OF LOWER RANGE EMPLOYEES TO THE REST OF THOSE IN THE MERIT PAY POOL IS TO SUBTRACT THE ADDITIONAL ADJUSTMENT FROM THAT POOL AND THEN DISTRIBUTE THE SMALLER POOL TO ALL MERIT PAY EMPLOYEES. WE FEEL THAT THIS, IN EFFECT, WOULD MEAN THAT EMPLOYEES IN THE MIDDLE AND UPPER RANGES OF PAY WOULD BE SUBSIDIZING THOSE IN THE LOWER RANGE. THE FORMER EMPLOYEES WOULD BE UNNECESSARILY PENALIZED AND NO BENEFIT WOULD RESULT TO THE LATTER EMPLOYEES.

UNDER THE OPM METHOD, AN EMPLOYEE IN THE LOWER RANGE OF HIS PAY WHOSE MERIT PAY EXCEEDS THE AMOUNT OF THE ADDITIONAL ADJUSTMENT RECEIVES THE EXACT AMOUNT OF MONEY TO WHICH HE IS ENTITLED ACCORDING TO HIS MERIT APPRAISAL. THE EMPLOYEE WHOSE MERIT INCREASE IS LESS THAN THE ADDITIONAL ADJUSTMENT RECEIVES THE NEW MINIMUM RATE OF SALARY FOR HIS GRADE, AS GUARANTEED BY 5 U.S.C. SEC. 5402(C)(3). IT APPEARS TO US THAT OPM'S DIRECTIONS TO THE AGENCY AND IRS'S IMPLEMENTATION OF THOSE DIRECTIONS IS EQUITABLE TO ALL EMPLOYEES AND, ABSENT ANY INDICATION THAT A RESULT OTHER THAN THAT REACHED BY THE METHODS OUTLINED ABOVE WAS INTENDED, WE FIND NO BASIS TO QUESTION THOSE METHODS.