Defending Policy Pay Decisions

Companies contracting with the federal government are subject to audits by the OFCCP (Office of Federal Contract Compliance Programs) to ensure there is no pay discrimination occurring. Procedures have changed recently on how those audits should be conducted. Fines and bad public relations are obvious consequences of failing such an audit. Ultimately, government contracts can be terminated, which can have devastating financial results.

The OFCCP rescinded two guiding documents from the 2006 Compensation Standards and Voluntary Guidelines that address pay discrimination by federal contractors and issued Directives 307 and 310 effective as of February 28, 2013 and July 22, 2013 respectfully. Of the two rescinded documents, the first is called Interpreting Nondiscrimination Requirements of Executive Order 11246 With Respect to Systemic Compensation Discrimination (“Compensation Standards”), and the second is called Voluntary Guidelines for Self-Evaluation of Compensation Practices for Compliance with Nondiscrimination Requirements of Executive Order 11246 (“Voluntary Guidelines”).

The OFCCP states in its Frequently Ask Questions that “these documents significantly constrained OFCCP’s ability to investigate pay discrimination to the full extent permitted by law and did not accomplish their stated goals of making OFCCP compensation enforcement activities more consistent with other federal laws and more focused on systemic discrimination.”

“With the rescissions, the OFCCP will use exactly the same standards that courts use to evaluate pay discrimination claims brought by individual workers or classes of workers, the U.S. Equal Employment Opportunity Commission, and the Department of Justice – standards that already apply to federal contractors in all other contexts. OFCCP will align its enforcement activities with Title VII and related case law. This alignment will enable OFCCP to protect workers, monitor contractors’ compliance with their non-discrimination obligations, and avoid subjecting contractors to rules that differ from what courts say. Rescinding the narrow and highly limited Compensation Standards and Voluntary Guidelines will allow OFCCP’s compensation enforcement to reflect existing Title VII law, just like in all other areas where OFCCP reviews contractor compliance with Executive Order 11246, such as hiring, promotion or termination.”

OFCCP issues Directive 307 effective on February 29, 2013

SUBJECT: Procedures for Reviewing Contractor Compensation Systems and Practices

PURPOSE: To outline the procedures for reviewing contractor compensation systems and practices during a compliance evaluation.

BACKGROUND: OFCCP is issuing this Directive in support of its ongoing policy commitment to address pay discrimination by federal contractors and subcontractors. This Directive specifies the procedures OFCCP field investigators use for reviewing contractor compensation systems and practices. It clarifies and improves OFCCP procedures in further support of the agency’s efforts to align pay discrimination enforcement with longstanding principles under Title VII of the Civil Rights Act of 1964 (Title VII).

This Directive is part of a larger assessment of OFCCP’s compensation enforcement practices. In 2010, President Obama created the National Equal Pay Task Force, bringing together the Department of Labor (DOL), the Equal Employment Opportunity Commission (EEOC), the Department of Justice, and the Office of Personnel Management to collectively address pay discrimination under their enforcement mandates. The Director of OFCCP, a member of the Task Force, committed OFCCP to review and revise its enforcement guidance and practices to more effectively address compensation discrimination under Executive Order 11246.

This Directive provides clarity and transparency regarding OFCCP practices for all phases of a compliance review. The Directive sets forth in detail procedures for Compliance Officers (COs) to follow in reviewing contractor compensation systems and practices. In keeping with Title VII principles, COs must be able to use a variety of investigative and analytical tools in conducting evaluations. This Directive provides guidance regarding how to apply OFCCP’s case-specific approach to addressing all types of compensation discrimination.

OFCCP DEFINITIONS: To ensure consistency in implementation, the following terms are defined:

  • Base pay – Includes only the designated salary or wages for a position or job title. “Non-base pay compensation” also includes all other forms of compensation such as bonuses, commissions, overtime, and perquisites. (See Compensation.)
  • Cohort Analysis – A comparison of the treatment of similarly situated individuals or small groups of applicants or employees.
  • Comparators – Similarly situated employees who are outside of the protected class of the individual to whom they are being compared to determine whether a compensation disparity exists.
  • Compensation – Includes any payments made to, or on behalf of, an employee as remuneration for employment, including but not limited to salary, wages, overtime pay, shift differentials, commissions, bonuses, vacation and holiday pay, retirement and other benefits, stock options and awards, and profit sharing.
  • Control – In a statistical analysis of compensation, using controls is a way of accounting for potential explanations of pay differences. For example, controlling for education accounts for the effect of education on any differences in pay.
  • Factors – Elements which are proposed to explain differences in employee compensation under a contractor’s compensation system and practices. Factors may be used as controls in a regression analysis or evaluated in a cohort analysis.
  • Pay Analysis Group – A group of employees (potentially from multiple job titles, units, categories and/or job groups) who are comparable for purposes of the contractor’s pay practices. Regression analysis may be performed on different types of pay analysis groups. A pay analysis group may be limited to a single job or title, or may include multiple distinct units or categories of workers. A pay analysis group may combine employees in different jobs or groups, with statistical controls to ensure that workers are similarly situated.
  • Similarly Situated Employees – The determination of which employees are similarly situated is case specific. Relevant factors in determining similarity may include tasks performed, skills, effort, level of responsibility, working conditions, job difficulty, minimum qualifications, and other objective factors. Employees are similarly situated where they are comparable on the factors relevant to the investigation, even if they are not comparable on others.
  • Summary Data – Compensation data that involves averages or other summaries of worker pay by job title, pay grade, job group, or other category.
  • Systemic Discrimination – A pattern or practice of discrimination or an identified employment practice with disparate impact. OFCCP defines a systemic discrimination case as meeting one of two criteria: (a) the case addresses a measurable pattern of discrimination (either based on findings from a regression analysis or based on any other appropriate aggregate analysis of compensation data); or (b) the case addresses an identified practice applicable to multiple employees that results in pay discrimination (such as a practice of steering employees who are members of a protected class toward lower paying jobs at hire). There is no specific numeric threshold used to define a systemic case.

Directive 310: On July 22, 2013, the Office of Federal Contract Compliance Programs (“OFCCP” or the “Agency”) released Directive 310 to provide guidance on how the Agency will calculate back pay in discrimination cases.  This new Directive is just one in a string of directives OFCCP has released over the last several years revealing the Agency’s aggressive posture for ferreting out discriminatory practices during audits.

Back pay is generally awarded to an individual or class of individuals whenever there is a finding that discrimination resulted in loss of compensation or benefits to that individual or class of individuals According to the new Directive, OFCCP will be using two models to calculate back pay: the formula and individual relief models.  The Agency will have complete discretion on which model to apply to a particular discrimination charge.

OFCCP will generally use the formula relief model whenever it is “unrealistic to attempt to compute individual losses with accuracy.”  Generally, this will be used whenever there is alleged discrimination against a class of five or more individuals.  In formula relief cases, OFCCP will include individuals in a class based on them being similarly-situated to one another even if there is no “evidence they were specifically discriminated against.”

OFCCP will use either the shortfall method or the averaging method for calculating the appropriate amount of back pay in formula relief cases.  The shortfall method will be employed in instances where the number of individuals in the class exceeds the number of job opportunities, such as in hiring or promotion situations.  OFCCP will determine the back pay award under the shortfall method by calculating the “difference between the actual number of persons in the non-favored group that were selected” for the employment opportunity and “the number expected to have been selected” for that opportunity.

OFCCP will use the averaging method in compensation discrimination or glass ceiling cases.  Under this method, OFCCP will determine the back pay amount by the average or typical difference in pay between the favored and non-favored group.  For example, the OFCCP will compare the average salary of men to the average salary of women in a given position.  The difference between the salary disparities is the back pay to be awarded to each female in the class.  OFCCP indicated that it would use regression models and other tools to calculate the average or typical estimate of pay disparities for the total class.

OFCCP will use the individual relief model when the class size is small (e.g., five members or less), the duration of the liability period is short (e.g., less than six months), and there is sufficient documentation to trace the lost earnings for each class member.  The Agency will calculate back pay using the individual relief method by tracing the pay history of the favored individuals and comparing it to the lost pay and benefits of the alleged victim(s).

The new Directive sends a strong signal that OFCCP intends to continue aggressively pursuing monetary penalties against contractors whenever contractors’ practices reveal potential indicators of discrimination.  Over the last several years, OFCCP has issued a string of initiatives focused on the Agency conducting in-depth audits of contractors’ practices to ferret out potential discrimination or compliance violations.  Recently, OFCCP issued a statement announcing that it will be intensely reviewing contractors’ compensation practices during audits.

As a result of these initiatives, it is imperative for contractors to analyze their selection and compensation practices to make certain they are free of indicators of discrimination.  If contractors uncover indicators of discrimination during their internal assessments, they should immediately take action to eliminate the discriminatory practices or procedures or thoroughly document the legitimate, nondiscriminatory reasons explaining those indicators.

Since it is known that the OFCCP and EEOC will be utilizing similar compensable factors regression line analysis, it seems prudent for organizations to utilize the combination of internal job valuing systems and external market pay analyze pay practices and potential systemic pay discrimination indicators.

Be Pro-active! Regularly review compensation equity between men and women and between minorities and non-minorities in similarly situated positions to be sure there is a business argument for differences in salary. Compensation equity analysis is an OFCCP hot button; by the time you get your audit letter, it is too late to analyze the data! Make compensation equity part of your annual salary planning process. Complete a salary equity analysis to be able to defend any salary disparities.

Utilize a proven compensable factors job evaluation system that helps to differentiate similar situated employees groups by determining interval job values based on non-gender bias factors and validate the internal pay policy structure and job position values with market pay studies and analysis.

SAAS Technology associated with job evaluation and salary administration programs is improving and these systems are providing efficient means for proactive compensation analysis by protected class groups (Gender, Age, and Race).

A fully integrated job valuing system allows for the development of consistent, comprehensive and compliant job descriptions that are prepared, collaborated and reviewed in an electronic database system. This database software allows for background job valuing for efficient internal job classification and ranking processes. The system should have the ability to communicate with HRIS and payroll system to upload employee information and offer a repository for market pay comparisons and analysis by job position. For pay equity compliance, the system should offer pay analysis scatter gram graphs to identify potential pay discrimination issues for protect class groups and the ability to formulate and evaluate internal pay policy “what if’s”, budgeting options and other key employee, division and company pay decisions.