And Now More Disclosure Requirements for Federal Contractors – Employee Compensation

by McCarter & English, LLP
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Federal contractors and subcontractors that have 100 or more employees and a federal contract, subcontract or purchase order exceeding $50,000 should pay close attention to a new rule proposed by the Department of Labor’s ("DOL") Office of Federal Contract Compliance Programs ("OFCCP"). Just weeks after President Obama issued an Executive Order requiring certain contractors and subcontractors to self-report violations of labor laws, including wage-and-hour laws, the new proposed rule will require contractors and subcontractors to report total W-2 earnings paid as of the end of each calendar year, aggregated by gender, race, ethnicity and job category. The OFCCP plans to protect contractor compensation information from disclosure to the extent the information is exempt from the Freedom of Information Act. The OFCCP currently has a practice of not releasing contractor data when the contractor is still in business and the contractor indicates that the data is confidential and sensitive. The OFCCP does not anticipate disclosing any information that would reveal a contractor’s pay standards or an individual’s compensation.

The proposed rule seeks to amend 41 CFR 60-1.7 by requiring federal contractors and subcontractors to supplement their Employer Information Report ("EEO-1 Report") with information summarizing the compensation paid to employees by sex, race, ethnicity and specified job categories. The OFCCP believes this information will be a "critical tool for eradicating compensation discrimination." Currently, contractors and subcontractors are not required to disclose compensation information. However, under the proposed rule, disclosure will be mandatory and could lead to compliance evaluations or other enforcement actions.

The proposed rule will create a new report for contractors and subcontractors called the "Equal Pay Report." The Equal Pay Report will likely replace the EEO-1 Report and collect information previously reported on the EEO-1 Report as well as the new compensation data. According to the DOL, the OFCCP will analyze the data and "direct its enforcement resources toward federal contractors whose summary data suggests potential pay violations." See http://www.dol.gov/ofccp/EPR.html.

While it is still unclear exactly how the OFCCP will use the data in enforcing laws against compensation discrimination, the OFCCP anticipates it will develop "objective industry standards" as tools for comparing contractor pay gaps. The industry standards will be based on information derived from the Equal Pay Reports as well as other labor market data. In the summary of the proposed rule, the OFCCP takes note of the fact that some combinations of job category and demographics will not have sufficient information for industry standards due to the number of workers in that job category. The OFCCP anticipates publicly publishing the industry standards to encourage contractors and subcontractors to voluntarily align their compensation practices and policies with the industry standards and deter discriminatory conduct.

While contractors and subcontractors with pay standards that differ from the industry standards will not automatically be the targets of enforcement action, the OFCCP will prioritize and schedule compliance evaluations based on this information. Therefore, the likelihood of being audited will correlate directly with how much a contractor’s pay standards differ or vary from industry standards. The OFCCP will concentrate its enforcement efforts on contractors and subcontractors found to be outside the permissible variance. The proposed rule will in effect force contractors and subcontractors to bring their compensation policies in line with industry standards or face an audit.

During the contract bidding process, federal contractors and subcontractors will have to disclose their compliance with filing the Equal Pay Report. Voluntary disclosure of noncompliance with the new filing requirements may preclude contractors and subcontractors from the bidding process and open the door for further enforcement action.

The proposed rule follows a Presidential Memorandum issued on April 8, 2014, when President Obama directed the DOL to develop a proposal for the collection of compensation data. President Obama noted that lack of reliable data on employee compensation has hindered enforcement of the federal laws, including Executive Order 11246, prohibiting bias in pay based on sex and race. The proposed rule seeks to address the shortage of compensation information.

Contractors and subcontractors should take note that Executive Order 11246 was recently amended to add the terms "sexual orientation" and "gender identity." Additionally, the OFCCP has issued new enforcement protocols requiring compliance evaluation to include investigations of discrimination based on sexual orientation and gender identity. Prior to the amendment to Executive Order 11246, sexual orientation and gender identity were not protected classes under federal law.

The comment period for the proposed rule ends on November 6, 2014. The OFCCP is particularly interested in comments regarding contractor and subcontractor implementation costs for conducting self-assessments as well as costs for reporting compensation data. Contractors and subcontractors will likely need to implement new policies and systems for collecting and reporting the requested data. The OFCCP will develop a web-based process for filing the information electronically as well as a process for requesting an exemption for electronic submission. Federal contractors and subcontractors should evaluate their compensation policies to ensure that their compliance with the proposed reporting requirements will not open the door to increased compliance evaluations.

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