Annual Pay Adjustments

Chapter 1: Section 3

The Federal Wage System: Background

The Federal Wage System (FWS)—also known as the wage grade or prevailing rate system—is designed to make the pay of federal blue-collar workers comparable to prevailing private sector local rates for similar positions. It is overseen by the Federal Prevailing Rate Advisory Committee, made up of agency and labor union members and an independent chairman, which studies matters pertaining to prevailing rate determinations and advises OPM on pay policies for FWS employees.

The main FWS pay plan covers most trade, craft, and laboring employees in the Executive Branch. It does not cover Postal Service employees. Special pay plans cover certain employees in special circumstances. OPM authorizes special pay plans when unusual labor market conditions seriously handicap agencies in recruiting and retaining qualified employees.

Wage Grade Locality Pay Procedures

The FWS is a partnership among OPM, other federal agencies, and labor organizations. OPM specifies procedures for agencies to design and conduct wage surveys, to construct wage schedules, to grade levels of work, and to administer basic and premium pay for employees.

To issue common job-grading standards for major occupations, OPM occupational specialists follow specific steps to develop new standards and to update existing standards. They make full occupational studies, which include onsite visits to interview employees, supervisors, and union representatives. Specialists write standards and ask agencies and unions for comments. Federal agencies are required to apply these standards.

OPM defines the geographic boundaries of individual local wage areas—there are about 130 of them, with the number varying somewhat from time to time—and reviews survey job descriptions to ensure that they are accurate and current. In addition, OPM works with agencies and unions to schedule annual local wage surveys in each wage area. Each FWS wage area consists of a survey area and an area of application. A survey area includes the counties, townships, and cities where the lead agency in the wage area collects and analyzes private sector wage data to produce a wage schedule for the wage area. An area of application includes the survey area and nearby counties, townships, and cities where the wage schedule also applies.

Wage grade raises are paid at differing times of a fiscal year, varying by locality. Wage adjustments become effective in accordance with what is commonly referred to as the 45-day law. This law states that the government has 45 working days to put FWS pay adjustments into effect after each wage survey starts. Each wage schedule has a uniform effective date for all employees in a wage area, regardless of the agency. Normally, the effective date is based on the pay period cycle for the largest employer in the wage area, with the effective date set on the first day of the first pay period following the 45-day wage survey period. 

OPM does not conduct local wage surveys. For each wage area, OPM identifies a “lead” agency—in almost all cases the Department of Defense—that employs the most wage grade employees in the area. That agency is responsible for conducting wage surveys, analyzing data, and issuing wage schedules under the policies and procedures prescribed by OPM. Out-of-area data are used where the government has large numbers of employees in specialized occupations for which there are insufficient comparable private sector jobs locally. All agencies in a wage area pay their hourly wage employees according to the wage schedules developed by the lead agency. 

Labor organizations also play a role in the wage determination process by providing representatives at all levels of the wage determination process. The employee unions having the greatest number of wage employees under exclusive recognition designate two of the five members of a lead agency’s national level wage committee. Locally, the union with the most employees under exclusive recognition in a wage area designates one of the three members of each local wage survey committee. In addition, labor organizations nominate half of the federal employees who collect wage data from private enterprise employers. A team of one labor data collector and one management data collector visits each surveyed employer.

Under the FWS, pay is based on what private industry is paying for comparable levels of work in a local wage area. Employees are paid the full prevailing rate at step 2 of each grade level. Step 5, the highest step in the FWS, is 12 percent above the prevailing rate of pay. However, legislation may limit or delay annual wage adjustments for FWS employees. This has been the practice for many years, in which wage grade raises have been capped at the national average (before 2004) or local (since 2004) General Schedule amount for the fiscal year. Wage grade pay schedules are at www.cpms.osd.mil/subpage/wage.

GS Annual Increases: Background

The annual pay adjustment for most General Schedule employees consists of two parts: a national, across-the-board increase, and a locality-based pay adjustment, both normally effective at the start of the first full pay period each January.

Under the Federal Employees Pay Comparability Act of 1990 (Section 529 of P.L. 101-509) (FEPCA), the amount of the across-the-board increase is supposed to be based on a change in the Employment Cost Index, less 0.5 percent. The ECI is a Bureau of Labor Statistics measure of changes in private sector labor costs (not living costs). Because of the lag time involved in the federal budget process, the period used is the 12 months ending with the September of the year prior to the year preceding the raise.

Under that same law, locality pay increases are supposed to be paid to bring federal pay within 5 percent of pay of comparable non-federal jobs in a defined area, also as measured by the BLS. Specific locality raises are determined for metropolitan areas that meet certain standards as described in GS Locality Pay Procedures, below (the number and boundaries of localities thus change at times), plus separate rates for both Alaska and Hawaii in their entirety and a rate for a catchall “rest of the U.S.” locality for places in the contiguous 48 states outside of one of those areas and for U.S. territories and possessions. (Note: Employees in foreign areas do not receive locality pay but may be eligible for various types of allowances as described in Overseas Employment in Chapter 8, Section 1).

However, due to funding restrictions and disagreements regarding the data and methodology used to compare federal versus private sector pay, locality pay adjustments have not reached the levels indicated by the pay law’s formula. In practice, the annual federal raise has been negotiated between Congress and the White House, sometimes using the pertinent ECI figure as a starting point. Typically most of the figure ultimately agreed upon is designated as across-the-board pay and the remainder as locality pay. As a result, while there is variation in pay by locality, the officially reported “pay gap” has not been narrowed nearly to the extent envisioned by the law.

See Chapter 8, Section 7 for information about alternative pay systems.

GS Locality Pay Procedures

The locality pay determination procedure starts with pay comparison studies by the Bureau of Labor Statistics. Findings are presented each autumn to the Federal Salary Council, a group made up of agency and labor union representatives and compensation experts. The council submits recommendations based on that data to the President’s Pay Agent, which consists of the Secretary of Labor and the directors of the Office of Management and Budget and Office of Personnel Management. The council also makes recommendations to the Pay Agent on issues including creating or dropping localities and setting locality boundary lines, using criteria including local labor markets, commuting patterns and the number of federal employees in an area; and dealing with exceptional situations such as facilities that cross boundary lines or areas that do not meet the criteria for inclusion in a metropolitan zone but are surrounded or nearly surrounded by one or more of those zones. 

The Pay Agent decides the pay areas and makes recommendations to the President, who by executive order allocates the across the board versus locality portions payable within the overall raise, with locality payouts apportioned according to the pay gap data. If no figure is set by legislation, the President has authority to set raise amounts by default.

Annual reports of the Salary Council and the Pay Agent, including explanations of the methods used in comparing federal and non-federal pay, are at www.opm.gov/policy-data-oversight/pay-leave/pay-systems/general-schedule.

To determine an employee’s locality rate, agencies increase the employee’s “scheduled annual rate of pay” by the locality pay percentage authorized by the President for the locality pay area in which the employee’s official worksite is located. The “scheduled annual rate of pay” consists of: the General Schedule rate of basic pay for the employee’s grade and step (or relative position in the rate range), excluding additional pay of any kind such as locality payments or special rate supplements; a special base rate for law enforcement officers under section 403 of the Federal Employees Pay Comparability Act of 1990; or for an employee in a category of positions described in 5 U.S.C. 5304(h)(1)(A)-(D) for which the President (or designee) has authorized locality payments under 5 U.S.C. 5304(h)(2); the annual rate of pay fixed by law or administrative action, exclusive of any locality-based adjustments (including adjustments equivalent to local special rate supplements under 5 CFR 530 subpart C) or other additional pay of any kind. Locality pay is considered in applying various pay-setting rules (for example, maximum payable rate, promotion, transfer, or pay retention). A locality rate may not be paid on top of a retained rate. 

Locality pay is considered basic pay for purposes of: retirement deductions and benefits; life insurance premiums and benefits; premium pay and premium pay limitations; severance pay; advances in pay; lump-sum payments for accrued and accumulated annual leave; post differentials under 5 U.S.C. 5925(a) and danger pay allowances under 5 U.S.C. 5928 under certain circumstances; recruitment, relocation, and retention incentive payments, supervisory differentials, and extended assignment incentives; performance-based cash awards when such awards are computed as a percentage of an employee’s rate of basic pay; GS pay administration provisions (for example, GS promotion provisions) to the extent provided in 5 CFR 531 subpart B; pay administration provisions for prevailing rate employees which consider rates of basic pay under the GS pay system in setting pay under certain circumstances; grade and pay retention to the extent provided in 5 CFR 536; and for other provisions as specified in other statutes or OPM regulations, and payments or benefits equivalent to those listed above under other legal authorities.

Eligibility for locality pay is based on where an employee works, not on where he or she lives. Relocating employees receive the rate of pay applying in their new duty stations. Employees on details to a different pay area continue receiving their current salaries while on such assignments. The key is the employee’s official duty station of record; the employee receives the salary paid there.

Employees who receive special pay rates that exceed what they would get under the locality pay formula continue to receive the full amount of their special rate adjustments. They do not get extra pay due to locality increases unless the locality pay in their areas exceeds their special rate, at which time the special rate becomes moot.

The pay law allows, but does not require, the President to extend locality pay to certain categories of employees not in the General Schedule. These include administrative law judges, contract appeals board members, and Executive Branch positions where the rate of basic pay is capped at the pay rate authorized for Level IV of the Executive Schedule. In practice, Presidents have granted eligible employees the same locality increases as GS employees since the system’s creation.

The President may not extend the locality payments to positions under the Executive Schedule, senior executives, employees in senior level or senior scientific and technical positions, employees paid under the Federal Wage System, employees working in foreign countries, or to certain workers designated as “critical.” 

For a listing of the localities, their boundaries and their current rates of pay, see General Schedule Locality Pay Boundaries and Tables in Section 11 of this chapter. 

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