Compliance officers at federal contractors will be pleased to hear about a new directive that relaxes the standards by which contractors’ compensation practices will be evaluated during compliance audits, along with promising more transparency and consistency.
The Office of Federal Contract Compliance Programs—the Department of Labor division responsible for ensuring federal contractors’ compliance with Equal Employment Opportunity laws—has released its long-awaited Directive 2018-05, outlining the OFCCP’s standard procedures for reviewing contractor compensation practices during a compliance evaluation. The procedures established in this directive apply to all OFCCP reviews that were scheduled on or after Aug. 24.
“Pay discrimination by federal contractors is unlawful, and its elimination is a key enforcement priority for the agency,” the OFCCP stated. “OFCCP, however, can only audit a small proportion of all contractor establishments per year. Therefore, facilitating proactive compliance is an important component in achieving this objective. This new directive will support the agency’s efforts to eliminate pay discrimination through both enforcement and compliance.”
The new directive rescinds controversial Directive 307, issued in 2013 under the Obama Administration, which had received a great deal of flak from the contractor community for its lack of guidance on how exactly the OFCCP assessed contractors’ pay practices. Specifically, Directive 307 used pay analysis groupings (PAGs) to review compensation practices, which are vaguely defined as a group of employees, “who are comparable for purposes of the contractor’s pay practices.”
PAGs are troubling from a compliance standpoint, because the OFCCP can apply a case-by-case approach to pay discrimination issues, using a range of investigative and analytical tools. “This left a lot of open compliance questions for contractors who were trying to analyze their pay practices in order to make sure that they would get the same results as the OFCCP in the event of an audit and that those results would end in a finding of no violation,” says Meredith Shoop, co-chair of the OFCCP’s practice group at law firm Littler.
“It resulted in a fair degree of confusion and disagreement,” Shoop adds. Dell, Google, Humana, JPMorgan, Oracle, and State Street are just a few companies that have entered into multi-million-dollar settlements or litigation battles with the OFCCP to resolve pay practice disputes, with astronomical compliance and legal costs.
The OFCCP expressed concern that “contractors lack the clear guidance Directive 307 intended to give,” and so the purpose of the new directive is to provide “greater transparency, consistency, and efficiency in compliance evaluations,” the agency said.
“What contractors will need to do is continue to be proactive in their approach. Don’t wait until an audit to look at your compensation practices.”
Andrew Turnbull, Of Counsel, Morrison Foerster
As part of this effort, the new guidance explains how the OFCCP will identify employee groupings for pay analysis purposes. It only slightly, however, amended its controversial use of PAGs whereby analyses on “similarly situated employees” will now “mirror” the contractor’s compensation system, the OFCCP said. The OFCCP defines similarly situated employees as those who “would be expected to be paid the same based on job similarity (e.g., tasks performed, skills required, effort, responsibility, working conditions, and complexity) and other objective factors such as minimum qualifications or certifications.
The OFCCP said it will design its analysis based on the “compensation hierarchy and job structure” provided by the contractor, so long as the OFCCP deems that structure to be reasonable. “In determining reasonableness, OFCCP may review whether employees within each job group are under a similar compensation system and have a similar job function.”
If the contractor does not provide the OFCCP with information on its job structure or hierarchy, or if the OFCCP believes the contractor’s job structure or hierarchy is not reasonable, the agency may conduct its preliminary analysis using EEO-1 categories, or some other grouping that does not adhere to Title VII principles. This means the OFCCP still has enough wiggle room to take a case-by-case approach in grouping employees for the purposes of analyzing pay disparities. “It is a step in the right direction from the previous directive, but it’s not a significant win for contractors,” says Andrew Turnbull, of counsel at law firm Morrison Foerster.
The OFCCP will continue to focus on evidence of systemic discrimination, but whereas the OFCCP used to rely nearly exclusively on statistical evidence to issue findings of discrimination, it will now also take into consideration anecdotal evidence. The OFCCP said it will “seek to fully understand the contractor’s compensation system, policies, and practices through interviews with the contractor’s subject-matter experts and employees and a holistic review of the contractor’s EEO and diversity and inclusion policies.”
Where anecdotal evidence of discrimination does not support the statistical data, the OFCCP will be “less likely to pursue a matter,” the agency said, “unless the statistical evidence is exceptionally strong.” The OFCCP might also decline issuing a finding of discrimination if it cannot find anecdotal evidence during its investigation—such as biased statements, examples of differential treatment, or contradictory information about the contractor’s compensation practices.
From a compliance standpoint, the OFCCP said it also intends to support contractors’ self-analyses of compensation practices. Existing regulations already require, at a minimum, that self–audits specifically assess whether race or gender-based compensation disparities exist, that self–audits occur periodically, and that results are reported internally to management. “OFCCP believes that fulsome guidance will further support contractors’ ability to conduct meaningful self-audits so that they can proactively identify and address issues with their compensation practices,” the agency said.
Moving forward, contractors can expect greater transparency and more opportunities to challenge any findings not supported by anecdotal evidence. At a desk audit’s conclusion, the OFCCP will first notify the contractor in writing of the general nature of any preliminary compensation disparities that warrant further information requests or onsite review.
Additionally, the OFCCP will now attach to any Pre-Determination Notice (PDN) the individual-level data necessary for the contractor to replicate the PAG’s results. The PDN provides the contractor a formal opportunity to offer a non-discriminatory explanation for the OFCCP’s preliminary findings prior to a finding of a violation.
“It gives contractors an opportunity to better understand where OFCCP is coming from if they think they found a problem in their compensation system,” Shoop says.
“What contractors will need to do is continue to be proactive in their approach,” Turnbull says. “Don’t wait until an audit to look at your compensation practices.” He recommends the following compliance measures:
Review compensation practices to check for pay disparity issues. Assess compensation policies to see who currently reviews compensation. Limit discretion as much as possible, and ensure pay practices keep within the scope of the company’s compensation practices.
Ensure job titles and job descriptions are accurate. Often, disparity findings in a compensation audit can be the result of contractors not having good job titles for their positions, or the contractor does not have good job descriptions to distinguish different titles. Two employees in two different divisions may have a software engineer title, for example, but perform very different job functions. “Because they have the same title, however, OFCCP may take the approach that they should be grouped together for purposes of a compensation analysis and end up finding disparities that don’t need to be there,” Turnbull says.
Keep adequate documentation in the event you need to defend a pay discrimination claim. “Often, contractors do not maintain proper documentation to explain why certain employees are being paid a certain way, or they look at certain factors for making compensation decisions, but don’t have that readily available in the event they have to do a proactive pay analysis or defend their compensation decisions,” Turnbull says. “Having that data readily available at your fingertips is important.”
The OFCCP’s directive comes at a time when more states are enacting pay equity laws, including Hawaii, Delaware, New York, Massachusetts, Oregon, California, Vermont, Connecticut, and Washington, to name a few.
Thus, it’s imperative for contractors to assess their compensation practices not just for the purposes of preventing an OFCCP pay discrimination finding, but also staying in compliance with the patchwork of state and local laws. Shoop says, “I believe we are going to see more robust internal compensation reviews performed in connection with affirmative action planning.”