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Gifts and gratuities in government contracting: free key chains, hats, meals, and invitations to golf tournaments may be "business as usual" in the commercial world, but government employees and contractors play by stricter rules.

On a typical government contract, contractors and government employees have a great deal of interaction. At any point in time, a sales manager may buy a meal for his government client, a contracting officer's technical representative may receive a shirt with a company's logo from his contractor counterpart, or a company may ask a colonel to come to its meeting to speak about the latest technological advances.


Although these transactions may be acceptable in the commercial world, failure to know which rules apply to a government employee-contractor relationship can expose a contractor and the government employee to civil or criminal liability. Learning these important rules may prevent someone in your organization or command from making an avoidable mistake.


Because of the requirement to maintain public trust and eliminate any conflict, or appearance of conflict, Congress and the executive agencies have produced numerous rules and ethical guidance on the limitations and best practices for accepting gifts or gratuities from outside sources.

The first step in our analysis comes from 5 USC [section]7353, which states that
  No member of Congress or officer or employee of the executive,
  legislative, or judicial branch shall solicit or accept anything of
  value from a person--

(1) Seeking official action from, doing business with, or (in the case of executive branch officers and employees) conducting activities regulated by, the individual's employing entity; or

(2) Whose interests may be substantially affected by the performance or nonperformance of the individual's official duties. (1)

Executive Order 12674 updated several longstanding executive orders on the subject of gifts and gratuities (2) and provided meaningful text on the reasons for the rules--among them "to ensure every citizen can have complete confidence in the integrity of the federal government" and "that employees shall not use public office for private gain." The Office of Government Ethics (OGE) is charged with establishing and maintaining the standards for enforcing these rules. Primary among them is the prohibition from accepting gifts or gratuities from a prohibited source.

What Is a Gift or Gratuity?

A gift is essentially defined as anything of value (e.g., a material good, such as golfing fees, tickets, key chains, or gift baskets) or a service (e.g., professional financial advice, painting, a carwash). It also can be a discount on a good or service, if not covered by an exemption. It can be a forbearance of debt or obligation, such as forgiveness of a loan. It can be given directly (taking a government employee on vacation) or indirectly (giving a government employee's child a scholarship, if not properly exempted, or donating to a charity at the direction or suggestion of the employee.) (3)

Who Is a Prohibited Source?

Persons listed as prohibited sources include people seeking business or other favorable action from an agency. (4) Favorable actions include contract awards and modifications, as well as policy decisions, regulatory actions, legal rulings, employment or hiring decisions, tax or zoning rulings, and the like. It includes any individual in the entire company, not just the project manager or individual seeking the contract or favorable action. This knowledge is critically important for large companies that have multiple points of contact with key government officials.


There are nine exceptions to the definition of "gift," and there are 21 exceptions under which it is acceptable to accept a gift (discussed later). The nine stated categories of things that are explicitly "not a gift" are as follows:

* Modest refreshments, defined as food or drink "incidental to a meal" (although meals are prohibited, coffee, donuts, and snacks that are not a meal are exempt); (5)

* Items of little intrinsic value (6) (including items such as holiday cards, certificates of appreciation, and even plaques or trophies, but not gift certificates or any monetary item that accompanies such an award);

* Loans from banks with generally available terms (This category exempts lenders and allows them to make loans to government employees on terms that are generally available to the public. It would not allow a loan on terms materially more favorable than to members of the public.); (7)

* Opportunities and benefits (discounts) widely available to all federal employees or military personnel; (8)

* Rewards and prizes; (9)

* Pensions or retirement benefits by a former employer; (10)

* Items obtained under a government contract (11) (e.g., safety incentive awards given to contractor employees, sample production);

* Travel, sustenance, or related expense accepted in connection with attendance at a meeting related to the employee's official duties while away from his or her normal duty station; (12) and

* Gifts for which market value is paid. (13) (In any situation, the government employee and the giver can take the exchange out of the realm of 5 USC [section]7353 by having the government employee pay market value for the item. In this way, we are not talking about gifts or gratuities anymore--we are talking about the sale or reimbursement of goods or services [e.g., a government employee may accept a meal or movie tickets if he pays the contractor market value for the goods].)

What Is Market Value?

Market value is generally defined as retail price. (14) Individuals should be prudent in determining market value and should not attempt to transfer gifts under a liberalized idea of market value. For most items, the price paid should be the price the item is readily available for on the market.

If a contractor gives a government employee movie tickets, the face value of those tickets is market value. If the item has a readily determined price (e.g., a meal, a book, a t-shirt), then the market value should be what the contractor paid for it. For promotional items (e.g., key chains or pens with a contractor's logo) the price paid should be the price of an equivalent item on the open market--not a premium price because the contractor had to special order the shirts or a lower price if the contractor received volume discounts.

Because items can vary widely in market value over time and location, the important aspect is to make a good faith determination of the value of the item, and that effort should be proportionate to the cost of the item (e.g., determining market value for a shirt would require less due diligence than if a government employee were purchasing a used car from a contractor).

Other Exemptions to the Basic Rule

We reviewed nine cases in which exchanges are not considered "gifts" under the regulations. In addition to these cases, there are 21 other stated exceptions listed by OGE in which it is acceptable to accept a gift. We will review the most commonly encountered of these exceptions, starting with the "20/50 rule."

The "20/50" Rule

The rule most likely to cause confusion, and therefore technical violations of the law, is the exception based on the idea that some gifts are de minimus in value--they cannot affect a person's position of trust, or they are so small, as to not cause an appearance of impropriety.

The 20/50 rule states that executive branch employees may accept unsolicited gifts from prohibited sources as long as the value of the gift is less than $20 and is limited to $50 per year. However, the 20/50 rule is not a wide exception. It is very tightly interpreted and is designed to minimize small dollar technical violations, not to give parties a broad loophole. The 20/50 rule therefore has many limitations.

(1) First, the 20/50 rule applies to an entire organization, not an individual. Therefore, a government employee could not accept $11 pens from five different employees of a given company. This makes it possible for a company to be in violation of the law even though no specific individual has violated the rule (e.g., a government employee receives a $15 shirt from Employee A in February, is taken out for a $19 lunch by Employee B in March, and receives an $18 gift basket from "the company" at Christmas. The company has committed a violation, even though no individual employee provided a gift over $20).

(2) Second, even gifts less than $20 cannot be given if they are recurring. For example, a gift of a $10 lunch at each of a contractor's quarterly status meeting is not permitted--even though it is under $20 per event and only $40 per year--because it is recurring.

(3) Third, gifts cannot be solicited, regardless of the amount.

(4) Fourth, government employees may not "pay the balance" by accepting a gift over $20 and paying the amount over $20. (15)

Widely Attended Gathering Rule

After the 20/50 rule, one of the most widely encountered, and confusing exceptions, is the Widely Attended Gathering Rule. Under this rule, a government employee may accept free attendance at an event if five criteria are met.

All five criteria must be met, not just one or a majority:

* It is expected that a large number of persons will attend the event. When counting the number of persons, spouses and guests may be included. There is little case law, but several sources indicate that "a large number" means at least 20 people. (16)

* It is expected that people with a diversity of views or interests will be present. This means the event is open to members of a given industry or profession, that the attendees represent a "range of persons interested in a given matter," or there is otherwise a diversity of views or opinions represented.

* The employee's attendance will further agency programs or operations. This includes promoting community relations.

* The cost of the event for employees who attend (and their spouses/guests) will be paid for by the event sponsor or someone other than the event sponsor, if

--either the organization that pays the cost of the employee's attendance does not pick which employee can come to the event, or

--more than 100 people are expected to attend, and the gift (attendance) has a market value of $285 or less. (17)

* If the government employee's duties can substantially affect the interests of the paying source (person or organization), then the employee may not accept free attendance unless there is a written determination by the employee's agency designee that the government's interest outweighs the appearance that the gift may, actually or in perception, improperly influence the employee's performance by creating a real or perceived conflict of interest.

Therefore, an analysis of whether the Widely Attended Gathering Exemption applies to a particular event is a fact-driven inquiry into how many people will be at an event, who they are, what the purpose and nature of the event is, and the cost of the event. All of these factors must then be balanced against any real or perceived conflicts of interest. Large companies who frequently host such events should seek OGE or agency approval before the event. Many agencies publish pre-approved Widely Attended Gatherings on their Web site:

Gifts Based on Personal Relationships

Government employees commonly exit or retire from government service and work for contractors, leaving friends and colleagues with whom they have traditionally exchanged gifts. Such gifts are still allowable and are reviewed on the basis of the context and history of the giving.

Some of the factors examined are the nature of the friendship, the value of the gift, who paid for it (employee or the company), whether or not there is reciprocity, and the like. For example, two college friends are now in a government employee-prohibited source relationship. If they have exchanged modest gifts annually for the past 10 years--paid for with their own personal funds--and continue to do so, no violation is likely to be found.

At the other end of the continuum, two friends who start a gift-giving "tradition" after entering a contractor's employment or a tradition that is unilateral or disproportionate would not likely meet the requirements for exemption.

The same factors are reviewed when addressing gifts from family members. Generally, there will be few problems in this area, but again, history, reciprocity, amount, and the nature of the relationship are the major factors that are reviewed.

Reduced Fees from a Professional Organization and Discounts

Reduced fees from professional organizations and discounts, where membership either is or is not related to government employee status, are applicable exceptions. Professional organizations, such as state bar associations, often offer discounts to government employees. A hotel chain may offer discounts for government employees, as might AAA, travel agents, or airlines. When these discounts are applied across the board evenly, as available to either all individuals, or all government employees, they are acceptable.

Other Exceptions

There are numerous others in addition to these exceptions. Because each exception is both legally complex and fact-driven, you should refer to the full text of the exceptions found at 5 CFR 2635.204 et seq and refer to the "FAQ" scenarios that are provided at (18) See the sidebar on page 25 for a list of these exceptions.


If you believe you may have inadvertently violated the rules, seek the advice of your ethics officer or in-house counsel. If you have given or received a gift, the easiest way to remedy the situation is to return the item if possible, or pay market value, and always document the transaction. Certain perishable items may be donated, shared, or destroyed. But you should always seek advice and approval of your ethics officer and document your actions, so there is a clear paper trail of your actions. (19)

There are steep penalties and ramifications for a violation. Even small-dollar violations can be referred for investigation. Depending on the circumstances, these transactions may be actionable under a variety of related regulations, such as anti-kickback rules and anti-bribery statutes. (20)

Penalties can be severe, including termination for the individuals and fines for the company. In 1998, a popular California winery paid $150,000 in fines and other penalties for making $374 in improper gratuities to a federal employee. Add to this the legal fees, the internal resources to handle the problem, and the possible career implications for the individuals involved, and it is obvious that the consequences are not worth the risk.


Even if a gift falls into an exception, no government employee is ever obligated to accept it. Good judgment dictates that conservatism and caution be used when accepting any gift from a prohibited source. When in doubt, politely decline, consult your ethics officer, and document your actions to minimize potential problems.

Contractors should ensure that they train all of their employees on the rules, especially new hires who may be coming from commercial industry. Similarly, they must be conservative in any transactions, consult counsel or ethics officers, and document all actions for future review.

Solid knowledge of and adherence to these rules will ensure that the regulatory intent of keeping the public's trust in government employees and contractors is maintained.


1. The legislative and judicial branches have their own rules, with exceptions allowing gifts of up to $100 in certain circumstances. See Senate Ethics Manual, Chapter 3, Rule 35.1(a)(2); and Judicial Conference Committee on Codes of Conduct. This article focuses on the rules and exceptions that pertain to the employees of the executive branch.

2. Executive Order (EO) 12674 (1989) revoked EO 11222 (1965) and EO 12565 (1986). EO 12674 was further amended by EO 12731 (1990).

3. 5 CFR 2635.203(f).

4. 5 CFR 2635.203(d)(1) et seq.

5. 5 CFR 2635.203(b)(1).

6. 5 CFR 2635.203(b)(2).

7. 5 CFR 2635.203(b)(3).

8. 5 CFR 2635.203(b)(4).

9. 5 CFR 2635.203(b)(5).

10. 5 CFR 2635.203(b)(6).

11. 5 CFR 2635.203(b)(7).

12. 5 CFR 2635.203(b)(8).

13. 5 CFR 2635.203(b)(9).

14. 5 CFR 2635.203(c).

15. There are numerous other exclusions and fact specific scenarios. For a complete list of scenarios and FAQ-type examples, see and the examples cited 5 CFR 2635.204).

16. See 19 Mar 96 DOD/GC-SOCO memo (subject: "DOD Employee Participation in Sporting Events, and Information Paper by the Army Standards of Conduct Office" and "Free Attendance at Seminars, Conferences, and Similar Functions") dated August 13, 1998.

17. This is a maximum dollar amount, not per person; if your spouse or guest also comes, the gift cannot exceed $285 for both of you ($142.50 each).

18. See pamphlets and booklets at

19. v5 CFR 2635.205(a)(1).

20. See anti-kickback rules at 41 USC [section]51-58 and anti-bribery statutes at 18 USC [section]201.

RELATED ARTICLE: What Is a Gift or Gratuity?

Anything of value, whether tangible or intangible, including:

* Meals,

* Travel,

* Entertainment,

* Loans,

* Discounts,

* Tickets to events,

* Promotional items (e.g., shirts, hats, golf balls, toys),

* Cash awards or gift certificates, and

* Any other material goods (e.g., TVs, luggage, tools).

RELATED ARTICLE: Other Exceptions Detailed at 5 CFR 2635.204 et seq

* Social invitations from other than a prohibited source,

* Gifts based in connection with a ship launch or roll-out ceremony,

* Speaking and other similar engagements,

* Gifts from foreign governments,

* Gifts accepted under statutory authority of 31 USC [section]1353 (specifically for travel and expenses related to official duties),

* Awards or honorary degrees,

* Scholarships and grants,

* Gifts in connection with employment discussions,

* Meals or refreshments in a foreign area,

* Events sponsored by state or local government or civic organization,

* Gifts from a political organization,

* Outside business activities of employee,

* Outside business activities of employee's spouse,

* Free attendance at training by a nonprofit organization,

* Discounts to members when membership is not related to government employment (e.g., AAA travel discounts are available to all AAA members, regardless of government status),

* Discounts to members of an organization where membership is related to government employment (e.g., Disney's Military Stars and Stripes discount passes), and

* Gifts to the president or vice president.

About the Author

GLENN SWEATT, ESQ., CPCM, is general counsel for Environmental Chemical Corporation in Burlingame, California. He has 13 years of government contract law experience and is a member of the California State Bar. He is affiliated with the NCMA Golden Gate Chapter and is a speaker at other chapter events. Send comments on this article to
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Author:Sweatt, Glenn
Publication:Contract Management
Geographic Code:1USA
Date:Aug 1, 2004
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