A high-ranking D.C. Corrections Department employee, who recommended that the agency award a contract that paid $2.2 million to a local consulting firm, received $616 every two weeks from the company while she was on the city government payroll, according to interviews and invoices.

Four other Corrections Department employees received checks from the contractor, PSI Associates, under an arrangement that city officials said was approved by James F. Palmer, who headed the corrections agency until December 1986.

Corrections officials said the payments were justified as an inducement for the five employees to leave their jobs with the D.C. school system and help run the so-called Specter Initiative -- a $41 million federally funded program sponsored by Sen. Arlen Specter (R-Pa.) to teach and train inmates.

Former city administrator Thomas M. Downs said the payments to Margaret G. Labat, assistant director for educational services, were cut off after he told Palmer to "bring her salary down to a defensible level." It is unclear how long Labat received the funds, but with biweekly payments of $616 her salary would have increased by $16,016 a year to an annual figure of $71,257 -- more than Palmer was paid.

D.C. Council member Betty Ann Kane (D-At Large), who heads the committee that oversees city contracting, said the payments from PSI constitute "a real conflict. You are not to receive money from somebody who is doing business with the city . . . . If they wanted to pay these people more, they should have just paid them more by increasing the grade levels or reclassifying the positions."

PSI was the lead contractor for the Specter Initiative and received about $2.2 million in business from the corrections agency from 1984 to 1986, agency records show.

As head of educational services, Labat was responsible for administering the contract, according to George Gaudette, who was in charge of management services under Labat.

Investigators from the U.S. Government Accounting Office uncovered the PSI payments during an audit of the Specter Initiative expenditures. The GAO has turned over information about PSI, including documents showing the payments, to the U.S. attorney's office, according to sources familiar with the inquiry.

A city official, who asked not to be identified, said the receipt of payments from PSI may violate city employee conduct regulations, which bar an employee from accepting anything of value from a contractor doing business with the employee's agency. Violations of the regulations can be punished by dismissal.

City officials said it is unclear whether the arrangement might violate the city's conflict-of-interest law, which bars a public official from using his or her position for financial gain. An official said a key issue is whether the intent of the payments was to gain improper influence.

Elizabeth A. Abramowitz, PSI's president, declined to comment about the contract or the payments. Labat, who returned to her job as a D.C. public schools official after about three years with the corrections agency, did not return phone calls to her office. Palmer could not be reached for comment.

Top corrections officials became interested in hiring Labat and contracting with PSI in late 1983, according to Patricia Taylor, the agency's first assistant director for educational services, and others familiar with the program.

Palmer and other top corrections officials were under growing pressure from Specter to begin training inmates and believed that Labat and PSI could get the program moving, according to three former and current corrections officials.

Taylor said in a recent interview that in November 1983, Palmer ordered her to meet with Labat -- then an assistant D.C. school superintendent for adult education -- to discuss the Specter Initiative. Taylor said Labat was supposed to help her find District teachers who could be hired to teach the inmates.

Labat, according to Taylor, was "insistent" that the corrections agency contract with PSI to hire the teachers. Taylor said that Palmer was urging her to review an unsolicited proposal that PSI had submitted to the agency and that he was insisting that "we get the program off the ground immediately" -- statements she said she interpreted as pressure to hire PSI.

Labat wrote in a memo to then-city School Superintendent Floretta D. McKenzie that she was recommending to Palmer and Taylor "a sole-source justification to hire PSI . . . . My experiences with this organization have been quite positive."

Over the objections of Taylor and an agency procurement officer, PSI received a $200,000 no-bid contract in December 1983 that was later substantially increased.

In March 1984, four months after the PSI contract was awarded, Labat replaced Taylor as assistant director of educational services. Downs said corrections officials agreed to pay Labat the salary she received from the school system and all her benefits. At the time, Labat's school system salary was $55,241.

Downs said he assumed that Labat would be paid at the level of a DS-15, the salary set for the position she was assuming. But he said Palmer and Labat negotiated a written contract under which she was to be paid substantially more, in part through PSI.

It was unclear why city officials authorized PSI to help pay the salaries. Said Gaudette, "I really don't know why it was done that way. I think it was expeditious. You didn't have to go through the red tape" of reclassifying the employees' position.

Agency records show that PSI submitted its invoices to Labat for approval, listing the employees' payments under the heading "salary differential."

PSI invoices show biweekly payments ranging from $54 to $414 to David Scott, a correctional investigator; Marlene Bingham, an administrative officer; Esther Keith, a personnel coordinator, and Gaudette.