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The decision of the Authority follows:
21 FLRA No. 107 INTERNAL REVENUE SERVICE, BALTIMORE DISTRICT OFFICE Activity and NATIONAL TREASURY EMPLOYEES UNION AND NTEU CHAPTER 62 Union Case No. 0-AR-822 DECISION I. STATEMENT OF THE CASE This matter is before the Authority on exceptions to the supplemental award of attorney fees by Arbitrator Clair V. Duff filed by the Activity under section 7122(a) of the Federal Service Labor-Management Relations Statute and part 2425 of the Authority's Rules and Regulations. II. BACKGROUND AND ARBITRATOR's AWARD The underlying grievance in this case concerned the 10-day suspension of the grievant for alleged failure to process tax remittances and tax returns in a timely manner. The Activity's charges or reasons for the action were based on a number of specifications of unprocessed checks, tax returns and other documents found in or around the grievant's desk and in a file cabinet in the collection division office area. The Arbitrator separated the evidence presented into two parts: the items found in the file cabinet and the items found in the grievant's desk and adjacent work area. As to the specifications concerning the items discovered in the file cabinet, the Arbitrator found that no culpable conduct on the part of the grievant was established, but rather, that at most the evidence indicated inefficiency on the part of management. The Arbitrator concluded that the evidence presented as to those items did not constitute substantial evidence of an infraction, as required by a provision in the parties' collective bargaining agreement establishing the burden of proof for disciplinary actions. As to the items found in the grievant's desk and adjacent work area, the Arbitrator found that there was no substantial evidence proving that the grievant was in any way at fault or connected with the documents. The Arbitrator further found that the location of the documents in the grievant's work area was sufficient to create suspicion, but that upon careful examination of the documents and consideration of the other facts and circumstances involved, the evidence was more consistent with the grievant's innocence than with her guilt. The Arbitrator concluded that the Activity's proof concerning the items in and around the grievant's desk was inadequate to meet the required standard of substantial evidence. Accordingly, as his award, the Arbitrator set aside the suspension, directed the Activity to expunge from the grievant's personnel file all references to the charges against her, and to reimburse the grievant for all wages, leave and other benefits lost as a result of the suspension. At the request of the Union, the Arbitrator also left the record in the proceeding open to permit the parties to file briefs on the issue of whether reasonable attorney fees should be granted pursuant to the Back Pay Act, 5 U.S.C. Section 5596. /1/ The Union subsequently filed an application for an award of fees in the amount of $6090 for the legal services provided the grievant by two of its staff attorneys. The Union's application and supporting brief claimed that it was entitled to compensation for the services of one of the attorneys for 87 hours at $75 per hour and for the services of the second attorney for 5 hours at $85 per hour based upon the market value of similar legal services in the locality. In his supplemental opinion and award, the Arbitrator identified the issue as whether the Union, as counsel for the grievant, was entitled to an award of reasonable attorney fees pursuant to 5 U.S.C. Section 5596, 5 U.S.C. Section 7701(g), /2/ and the relevant provision of the parties' collective bargaining agreement. The Arbitrator found that the first two requirements of 5 U.S.C. Section 7701(g)(1), i.e., that the fees claimed be incurred by the employee and that the employee must be prevailing party, were satisfied and not in dispute. The Arbitrator further found that the focal point of the case was whether the payment of fees by the Activity was warranted in the interest of justice. As to this requirement, the Arbitrator found that two of the examples set forth in the decision of the Merit Systems Protection Board (MSPB) in Allen v. U.S. Postal Service, 2 MSPB 582 (1980), to illustrate "interest of justice" were applicable: - Where the agency's action was "clearly without merit" (Section 7701(g)(1)), or was "wholly unfounded," or the employee is "substantially innocent" of the charges brought by the agency; and - Where the agency "knew or should have known that it would not prevail on the merits" when it brought the proceeding. Applying those standards to the Activity's charges against the grievant, the Arbitrator found with regard to the allegations concerning the items found in the office file cabinet that based on the various facts and circumstances involved the Activity knew or should have known that it would not prevail on the merits. The Arbitrator therefore concluded that attorney fees were warranted in the interest of justice for the legal services related to those allegations. In that regard, the Arbitrator essentially found that approximately half of the time claimed by the attorneys was devoted to this aspect of the case. As to the Activity's allegations concerning the items found in and around the grievant's desk, however, the Arbitrator found that while the evidence was insufficient to sustain the charges against the grievant, the charges were not wholly unfounded and this part of the case was not so clear that the Activity knew or should have known that it would not prevail on the merits. The Arbitrator therefore concluded that counsel fees were not warranted for the legal services related to those allegations. For the legal services for which fees were found to be warranted, the Arbitrator ruled that the compensation claimed by the Union was based on a reasonable allocation of time and an amount per hour that was reasonable but below the prevailing rate of legal compensation in the locality. As his award the Arbitrator provided: The Union's Application for Award of Attorney's Fees is granted to the extent that a total of $3,000 is warranted and the Agency is directed to reimburse the Union in said amount. III. FIRST EXCEPTION A. Contentions In its first exception, the Activity contends that the Arbitrator's award of fees is contrary to law. Specifically, the Activity contends that under MSPB's decision in the Allen case and 5 U.S.C. Section 7701(g), a determination as to whether attorney fees are warranted in a case such as this requires that an agency's reasons for initiating a disciplinary action must be viewed as a totality and not separately. The Activity similarly argues that an arbitrator may only find either that there was a reasonable basis for the action or find that there was not such a basis, and that an issue-by-issue analysis and determination is not permitted. Thus, the Activity concludes, an award of attorney fees in a case such as this would be warranted only if an agency's reasons for the action were determined to be "wholly unfounded." B. Analysis and Conclusions The Authority finds that the Activity has failed to establish that the Arbitrator's award of attorney fees is contrary to law as alleged in this exception. Neither the decision of the MSPB in Allen nor 5 U.S.C. Section 7701(g) precludes an arbitrator from granting part of a request for attorney fees based on a determination that only that part was warranted under applicable legal requirements. In this regard, the U.S. Court of Appeals for the Federal Circuit has clearly indicated in two decisions that an award of less than the full amount of fees claimed can be appropriate. In Thomson v. Merit Systems Protection Board, 772 F.2d 879, 882 (Fed. Cir. 1985), the court held in remanding the case to MSPB for correction of certain errors that "the Board should have the opportunity initially to determine whether full fees, no fees, or partial fees should be allowed." In Van Fossen v. Merit Systems Protection Board, No. 86-536, slip op. at 7-8 (Fed. cir. April 10, 1986), the court held that because the charges against the employee that were sustained were technical and very minor and because the original drastic penalty of removal was significantly mitigated to a 30-day suspension, not only did the employee prevail in the proceeding but he had also shown himself to be substantially innocent of the charges so as to be entitled to attorney fees. In remanding the case to the MSPB for determination of an appropriate award, the court directed that "(t)he Board will have to decide whether to allow full attorney fees or to make some deduction for the fact that these minor and technical charges were sustained." Based upon the decisions of the Federal Circuit, the Authority concludes, contrary to the Activity, that an arbitrator properly can award partial attorney fees based upon the Arbitrator's disposition of different aspects of a case, if the award of fees otherwise meets the requirements of 5 U.S.C. Section 5596 and 5 U.S.C. Section 7701(g)(1). In this regard, the Authority recently summarized those requirements in Naval Air Development Center, Department of the Navy and American Federation of Government Employees, Local 1928, AFL-CIO, 21 FLRA NO. 25 (1986). In order for an award of attorney fees to be authorized, the award of fees first must be in conjunction with an award of backpay to the grievant on the correction of an unjustified or unwarranted personnel action; it must be reasonable and related to the personnel action; and it must be in accordance with the standards established under 5 U.S.C. Section 7701(g). Section 7701(g)(1), which applies to all cases except those of discrimination, requires that the fees must be reasonable and must have been incurred by the employee; that the employee must be the prevailing party in the proceeding; and that payment of the fees by the agency involved must be warranted in the interest of justice. Finally, there must be "fully articulated, reasoned decision" setting forth the specific findings supporting the determination on each pertinent statutory requirement, including the basis upon which the reasonableness of the amount was determined when fees are awarded. In this case, it is clear that the Arbitrator properly established in a fully articulated and reasoned decision that the Union is entitled to an award of attorney fees. Thus, the award of fees is in conjunction with an award of backpay to the grievant on correction of the unwarranted suspension action. There is no dispute that fees were incurred in behalf of the employee and that the grievant is the prevailing party. With regard to the "interest of justice" standard, the Arbitrator expressly found, based upon consideration and discussion of the various facts and circumstances involved, that the Activity knew or should have known that it would not prevail on the merits of its allegations against the grievant concerning the documents found in the office file cabinet. The Authority therefore concludes that the Arbitrator's determination that the Union is entitled to reimbursement for attorney fees incurred in defending the grievant against those allegations is fully consistent with applicable legal requirements and that the Activity's exception provides no basis for finding the award deficient. The Authority turns now to the question of the reasonableness of the amount of fees awarded as raised in the Activity's second exception. IV. SECOND EXCEPTION A. Contentions In its second exception, the Activity contends that the Arbitrator's supplemental award of attorney fees to the Union based on an hourly rate at or near the prevailing private practice rate for those hours is contrary to law as enunciated by the Federal courts and MSPB. The Activity further contends that salaried union staff attorneys are only entitled to fees calculated on a cost-plus basis. B. Analysis and Conclusions In determining what constitutes reasonable attorney fees, courts have applied a variety of methods and analyses. An example of a method acceptable to administrative adjudicatory agencies and most courts is the "lodestar" method, where the attorney's customary hourly billing rate is multiplied by the number of hours reasonably devoted to the case with appropriate adjustments for any special factors. Naval Air Development Center, slip op. at 9. This is the method ordinarily applied by the MSPB in determining reasonable attorney fees under 5 U.S.C. Section 7701(g)(1) when the attorney involved is in private practice, e.g., Kling v. Department of Justice, 2 MSPB 620, 624-28 (1980), and applied by the Authority in reviewing an arbitrator's award of fees to an attorney in private practice. Naval Air Development Center, slip op. at 12. Where, however, the attorney is an employee of a union, a different method must be applied in computing reasonable fees under 5 U.S.C. Section 5596 and 5 U.S.C. Section 7701(g)(1). Where attorney fees are to be paid to a union, the fees are computed based on actual costs rather than on the prevailing market rate for the legal services rendered. Further, a special fund created by the union into which all fees awarded to attorney employees would be paid and expended solely for legal work does not entitle the union to market-rate fees for the services of its attorneys. Id. at 10; National Treasury Employees Union v. Department of the Treasury, 656 F.2d 848 (D.C. Cir. 1981); Goodrich v. Department of the Navy, 733 F.2d 1578 (Fed. Cir. 1984), cert. denied 105 S. Ct. 958 (1985); Wells v. Schweiker, 12 MSPB 329 (1982). With regard to the computation of actual costs, there are three elements to be considered: the compensation paid to the attorney employee for the time expended on the case; out-of-pocket expenses related to the case; and overhead costs. Additionally, as to overhead costs, in the absence of evidence that an allowance of 100 percent of the attorney's compensation for overhead is substantially excessive or insufficient, such an overhead allowance may normally be included as an element of the actual costs. Powell v. Department of the Treasury, 8 MSPB 21 (1981). Among the reasons for limiting fees for salaried union attorneys under 5 U.S.C. Section 5596 and 5 U.S.C. Section 7701(g)(1) to recovery of actual costs is, as the MSPB held in Wells v. Schweiker, 12 MSPB at 333: (T)o award more . . . than that which is available under the cost-plus method would be inconsistent with the language and purpose of 5 U.S.C. Section 5596(b)(1)(A)(ii), the fees provision of the Back Pay Act. An attorney fee award ordered under that provision may not exceed the cost reasonably incurred by or on behalf of the employee for legal representation. Cf. 5 U.S.C. Section 7701(g). This is consistent with the general purpose of the Back Pay Act to "make whole" employees who had suffered a loss in salary and benefits as the result of an improper personnel action. Senate Report No. 1062, 89th Cong., 2nd Sess. (1966) 1-2. Nothing in the Civil Service Reform Act Congress, in amending section 5596, intended to deviate from this basic principle. Thus, section 5596 clearly limits the recovery of costs for legal expenses incurred by or on behalf of employees to the expense they suffered as a result of the action. It is not intended to provide a union with a windfall profit for the performance of services which it was created to provide and by their dues its members support. In this case, it is undisputed that the attorneys who represented the grievant are employees of the Union. Consequently, reasonable attorney fees under 5 U.S.C. Section 5596 and 5 U.S.C. Section 7701(g)(1) for their services can only be awarded on a cost-plus basis. Therefore, to the extent that the Arbitrator awarded attorney's fees on other than a cost-plus basis, the award is deficient and must be modified. V. DECISION Accordingly, for the above reasons, the Arbitrator's award is modified as follows: The Union's Application for Award of Attorney fees is granted for that portion of the legal services provided for which compensation has been determined to be warranted in the interest of justice and the Agency is directed to reimburse the Union for its actual costs in accordance with the applicable cost-plus formula. Issued, Washington, D.C., May 22, 1986. /s/Jerry L. Calhoun, Chairman /s/Henry B. Frazier III, Member FEDERAL LABOR RELATIONS AUTHORITY --------------- FOOTNOTES$ --------------- (1) 5 U.S.C. Section 5596 provides, in pertinent part: Section 5596. Back pay due to unjustified personnel action . . . (b)(1) An employee of an agency who, on the basis of a timely appeal or an administrative determination (including a decision relating to an unfair labor practice or a grievance) is found by appropriate authority under applicable law, rule, regulation, or collective bargaining agreement, to have been affected by an unjustified or unwarranted personnel action which has resulted in the withdrawal or reduction of all or part of the pay, allowances, or differentials of the employee -- (A) is entitled, on correction of the personnel action, to receive for the period for which the personnel action was in effect -- . . . (ii) reasonable attorney fees related to the personnel action which, with respect to any decision relating to an unfair labor practice or a grievance processed under a procedure negotiated in accordance with chapter 71 of this title . . . shall be awarded in accordance with standards established under section 7701(g) of this title(.) (2) 5 U.S.C. Section 7701(g)(1)(1982) provides, in pertinent part: (1) Except as provided in paragraph (2) of this subsection, the Board . . . may require payment by the agency involved of reasonable attorney fees incurred by an employee . . . if the employee . . . is the prevailing party and the Board . . . determines that payment by the agency is warranted in the interest of justice, including any case in which a prohibited personnel practice was engaged in by the agency or any case in which the agency's action was clearly without merit.