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Loyalty, Fitness and Employee Welfare

The costs of maintaining employee health, morale and well-being can generally be claimed, while recreation costs and gifts cannot. The difficulty sometimes is in distinguishing between them.

FAR 31.205-13 defines generally allowable employee expenses and credits as expenses for “activities designed to improve working conditions, employer-employee relations, employee morale, and employee performance (less income generated by these activities).” Examples falling under this definition include the costs for:

  • A company newsletter.
  • A nurse’s office.
  • An on-site fitness facility.

FAR 31.205-14, on the other hand, specifically excludes recreation costs, including those incurred for amusement, diversion and social activities. These expenses also cannot be claimed under any other cost principle. In other words, FAR 31.205-13 cannot be used to make fun an allowable expense. Examples of recreational costs that cannot be claimed include:

  • Tickets to sporting events, shows and museums.
  • Memberships in country clubs.

This may seem straightforward, but determining where a cost fits in is often difficult. Consider the issue of supporting employees’ participation in company-sponsored sports teams. Is this a disallowed expense because it is a recreational activity or is it money spent on employee health and morale? In this case, the cost is allowable because membership on the teams can foster corporate loyalty, stimulate teamwork and improve physical fitness.

Typically, the expense of holiday parties and company picnics cannot be claimed. On the other hand, suppose your organization sponsors a wellness day. In that event, the costs may be allowable if the primary purpose is to enhance physical fitness and well-being. For instance the costs may be allowable if the event included:

  • Activities geared toward disseminating health-related information by local suppliers of such health products as vitamins and organic food and drink.
  • Demonstrations of physical therapy or fitness activities by trainers, masseurs, yoga instructors and acupuncture specialists.
  • A meal designed to demonstrate proper nutrition and diet (think all the bean sprouts and tofu you can eat).

Tip: To qualify as an employee health, morale and welfare cost, you must answer yes to at least one of the following questions: Does the activity foster company loyalty, stimulate teamwork or improve physical fitness?

Always remember to evaluate a cost for reasonableness and allocability. And keep in mind that there are specific criteria for the allowability of food and dormitory losses. Check with your government contracts adviser on both of these issues.

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