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The Office of Federal Contract Compliance Programs announced earlier this week its new procedures for reviewing contractor compensation systems and practices. These much anticipated changes will go into effect today and provide the OFCCP with broad discretion in analyzing a contractor's compensation. The changes announced by the Agency have two major components: rescission of previous guidance documents, and an "explanation" for future compliance.

Rescission of the Standards and Voluntary Guidelines

The OFCCP has officially rescinded the following two guidance documents: Interpreting Non-Discrimination Requirements of Executive Order 11246 With Respect to Systemic Compensation Discrimination ("Standards") and The Voluntary Guidelines for Self-Evaluation of Compensation Practices for Compliance with Executive Order 11246 With Respect to Systemic Compensation Discrimination ("Voluntary Guidelines"). Both the Standards and Voluntary Guidelines have been in effect since 2006. The Standards provided specific analytical procedures to be followed by the OFCCP when analyzing compensation. The Voluntary Guidelines provided a way for contractors to self-evaluate their pay practices. In rescinding these two guidance documents, the OFCCP specifically noted that the guidance documents were too narrow in focus and hindered the OFCCP's ability to conduct a meaningful investigation. The guidance documents will continue to be in effect for any OFCCP review scheduled, open or otherwise pending as of today.

The OFCCP's New "Guidance" on Compensation

In place of the rescinded guidance, the OFCCP has provided an "interpretation" so that contactors will be aware of the standards that the Agency will rely upon when conducting compliance evaluations. The OFCCP's stated goal with respect to compensation analysis is to ensure its enforcement practices address all forms of pay discrimination and to "vigorously investigate and identify compensation discrimination consistent with Title VII principles." To achieve this goal, the OFCCP has given itself significant discretion in identifying the compensation information to be analyzed, determining the proper method of analysis, and concluding that compensation discrimination has occurred.

The OFCCP will now consider five principles when reviewing contractor pay practices:

(1) determine the most appropriate and effective approach from a range of investigative and analytical tools; (2) consider all employment practices that may lead to compensation discrimination; (3) develop appropriate pay analysis groups; (4) investigate large systemic, smaller unit and individual discrimination; and (5) review and test factors before including them in analysis.

In Directive 307, the OFCCP explains that a compensation review will proceed as follows:

1) The Agency will conduct a preliminary analysis of summary data if necessary or appropriate. Technically, this step has not changed and will still require a contractor to submit summary compensation data in response to an initial scheduling letter. The OFCCP has indicated that it will continue to review this summary data to determine areas for further review. The OFCCP specifically notes that this preliminary analysis has limited use for making ultimate determinations of discrimination and that the Agency "does not use preliminary analysis of summary data to limit further compensation data requests or to define the compensation issues OFCCP may pursue in later stages of a compliance evaluation." This language indicates that the OFCCP is reserving broad discretion to determine when additional compensation data must be provided by a contractor. Additionally, in the Frequently Asked Questions, the OFCCP notes that it is still considering revisions to the standard scheduling letter that would require individual compenstion data.

2) The second stage of the compensation review will include an analysis of the individual compensation data provided by the contractor. The OFCCP will assess whether the data is complete and in a useful format, and has specifically reserved the right to "request additional information if it is needed."

3) The third step in the compensation analysis is for the OFCCP to determine the "best approach," based on the circumstances of the particular case and using a range of unspecified investigative and analytical tools. In every case, the OFCCP intends to determine (a) whether there is a measurable difference in compensation on the basis of sex, race or ethnicity; (b) whether the difference is between employees who are comparable under the contractor's wage or salary system; and (c) whether there is a legitimate, non-discriminatory explanation for the difference. The OFCCP does not say how it will make the determination or the level of difference that will warrant further inquiry. In fact, Directive 307 states that "upon finding any compensation disparities (differences)" the government will further investigate. The "further investigation" could include analysis of workforce data and contractor compensation policies and practices, employee interviews, review of payroll and human resource information systems, non-statistical analyses, such as comparative or cohort analysis, and statistical analyses, such as regression analysis.

4) The fourth step is for the OFCCP to consider all employment practices that may lead to compensation disparities. Such an evaluation will include the OFCCP's examination of employee access to opportunities affecting compensation including higher paying positions, job classifications, work assignments, training, preferred or higher paid shift work. The OFCCP will also examine policies and practices that unfairly limit a group's opportunity to earn higher pay, such as "glass ceiling" issues, and access to overtime hours, pay increases, incentive compensation, and higher commissions or more-desirable sales territories. In keeping with its broad discretion, the Directive specifically states that the OFCCP "may investigate any observed differences in pay, other earnings or benefits, job assignment/placement, training/advancement opportunities, differences in access to salary increases or add-ons, such as bonuses." The OFCCP provided several examples of differences relating to compensation that could warrant additional review and investigation, such as "women hired into entry-level grocery store positions are disproportionately assigned to the bakery department. Men are assigned to the meat department where pay and promotion opportunities are better," and "African-American sales workers are disproportionately assigned to territories with less potential."

5) After the OFCCP has reviewed the data and information submitted by the contractor as discussed above, the OFCCP will develop "pay analysis groups." A pay analysis group will be used by the government to test for statistical significance in large groups of employees. Unlike the previous procedures used, these groups will not be based on job title or AAP job group code. Instead, a pay analysis group is defined as a group of employees who are comparable for purposes of the contractor's pay practices. This could potentially include employees from multiple job titles, units, categories, or job groups.

Once the OFCCP has identified its pay analysis groups, a regression analysis may be performed on these groups, with appropriate statistical controls for title and level within the pay analysis group as appropriate. In addition, the OFCCP will develop pay analysis groups that will evaluate broader pay differences based on protected class status that cannot be explained by neutral job-related factors such as assignment, placement or classification. The OFCCP has specifically said that it may use various pay analysis groups and conduct different types of statistical analysis or testing to determine whether discrimination exists, and that this analysis can be conducted at the desk audit phase. The OFCCP may proceed to an onsite investigation even before conducting this analysis.

6) After the OFCCP analyzes the pay analysis groups, regardless of the outcome, the OFCCP may then analyze the data for systemic, small-group, or individual discrimination. Specifically, the OFCCP will be looking for discrimination involving specific job titles, particular units, or locations. Individual or small-group pay disparities will typically be analyzed under the disparate treatment theory of discrimination. The government will conduct a comparative or cohort analysis to examine the treatment of similarly situated individuals or group of applicants or employees. The determination of who is similarly situated is case-specific based on tasks performed, skills, effort, level of responsibility, working conditions, job difficulty, minimum qualifications and other objective factors.

7) The OFCCP says that it will review and test factors affecting compensation to determine whether the factors are implemented fairly, consistently applied, and relevant to the contractor's compensation practices. This step is an apparent attempt to provide the OFCCP with complete discretion to accept or reject factors as it sees fit, and to craft the analysis as it feels appropriate.

8) After completing the previous steps, the OFCCP will decide on the preliminary analytical model and provide the contractor with an opportunity to provide additional relevant information. If the OFCCP considers it necessary, it will conduct an onsite audit to include interviews with the contractor's employees, and collection of other relevant data. The OFCCP specifically reserves the right to further define its analytical model at this stage of the analysis based upon information received at the onsite.

What Does This Mean to You?

The rescission of the 2006 guidance documents and Directive 307 will result in several significant changes for contractors. We recommend that contractors do the following:

• Analyze compensation data based on job group, job title, salary grade (if appropriate), unit, or any other large grouping that may fit the OFCCP's definition of a pay analysis group.

• Review the company's policies and practices as they relate to promotion, hiring, compensation, employee evaluations and pay increases, and other similar practices which may have an impact on compensation.

• Analyze the impact of the company's decisions regarding practices that may unfairly limit a group's opportunity to earn higher pay, including access to overtime hours, incentive compensation, commissions and preferred shift differentials.

• Make certain that managers and recruiters are trained on these issues and understand the importance of providing equal employment opportunity in all aspects of employment.

Notwithstanding the OFCCP's stated intention to provide transparency and guidance to contractors, Directive 307 and the accompanying documents do not provide any clearly identifiable method for a contractor to analyze its compensation data to ensure compliance with Executive Order 11246. The OFCCP has clearly stated its intention to retain full discretion to analyze the compensation in any manner it feels appropriate to discover discrimination. In light of this, contractors should conduct a thorough review of all compensation practices from both a micro and a macro level.

If you would like to discuss the OFCCP's rescission of the 2006 guidance, the new guidance, or compensation analysis in general, please contact any member of Constangy's Strategic Affirmative Action Practice Group or the Constangy attorney of your choice.

Other Resources

Department of Labor Press Release

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