The Office of Federal Contract Compliance Programs (OFCCP) recently issued Directive 2018-05, a compensation-related directive that OFCCP touts as part of its effort to be more transparent to government contractors. This new directive replaces prior guidance regarding compensation discrimination evaluations and clarifies OFCCP's approach to these evaluations. Directive 2018-05 does not create new legal rights or requirements, nor does it change legal rights or requirements. Rather, it is intended to provide guidance to both government contractors and OFCCP regarding enforcement of and compliance with regulations governing compensation discrimination. Directive 2018-05 applies to all OFCCP reviews scheduled on or after August 24, 2018, and it applies to open reviews to the extent they do not conflict with OFCCP guidance or procedures existing prior to the effective date.

The directive reaffirms that eliminating compensation discrimination is a "key enforcement priority" for OFCCP. The directive provides that OFCCP’s focus is on resolving compensation disparities that "were the result of systemic discrimination, whether pattern or practice discrimination, disparate impact discrimination, or both." According to the directive, when OFCCP believes there are indicators of systemic compensation discrimination, it will evaluate the contractor's compensation system as a whole, including by reviewing policies and practices, and interviewing experts and employees on compensation issues. The directive states that, "[i]n determining which cases to pursue, OFCCP will be less likely to pursue a matter where the statistical data are not corroborated by non-statistical evidence of discrimination unless the statistical evidence is exceptionally strong."

The directive explains that OFCCP looks for compensation discrimination by comparing the compensation of similarly situated employees. OFCCP defines similarly situated employees as "those who would be expected to be paid the same based on: (a) job similarity (e.g., tasks performed, skills required, effort, responsibility, working conditions and complexity); and (b) other objective factors such as minimum qualifications or certifications." OFCCP then determines whether similarly situated employees are paid appropriately by: (1) developing pay analysis groupings (PAGs) of comparable employees; and then (2) statistically controlling for further structural differences among members of the PAG and individual employee characteristics related to pay determinations. OFCCP lists that it may consider, for example, the division or location in which an employee works, the employee's length of service with the contractor, prior education and experience. The directive provides that in the absence of information about a contractor's compensation system, OFCCP will do its preliminary analysis using either EEO-1 or AAP job groups, as long as those groups are "reasonable," meet regulatory requirements, and are sufficiently large to allow for meaningful statistical analysis.

The directive lays out the following four principles OFCCP is supposed to follow in its statistical analysis:

• Use multiple linear regression analysis to evaluate information during or subsequent to the desk audit to minimize false positive and false negative results
• Separately analyze base pay and total compensation, and, if necessary, components of compensation (e.g., bonus, commission, overtime, shift differentials)
• Transform salary to the log of salary in the regression model to account for potentially different pay distributions within PAGs
• Analyze statistical outliers for indicators of potentially inappropriate pay analysis groupings

The directive further states OFCCP will implement three practices to facilitate transparency, consistency and resolution of discrimination findings through conciliation. First, OFCCP will notify contractors in writing of any preliminary compensation disparities at the conclusion of the desk audit. Second, OFCCP will attach to any Pre-Determination Notice the individual level data necessary for the contractor to replicate the PAGs and regression analysis. Lastly, OFCCP will include representative from OFCCP's Branch of Expert Services in conciliation process as necessary to clarify the analysis and answer questions about the process and assumptions made.

What Does This Mean for Contractors?

While OFCCP's focus on compensation discrimination is nothing new, the directive underscores some points that contractors can use to strengthen their position in an audit. We recommend that contractors do the following:

• Review existing compensation policies. OFCCP will expect to see written documentation explaining how compensation is set and what factors are considered in doing so. Make sure you have a policy explaining how compensation is determined, and that the policy lists specific factors affecting compensation but also preserves flexibility in considering other legitimate factors that may affect pay decisions.
• Identify internal compensation experts. Larger contractors may have employees whose sole responsibility is overseeing compensation issues, but smaller contractors may largely leave compensation decisions up to individual managers. It is important that someone within the organization is able to clearly articulate how compensation decisions are made in the organization as a whole.
• Document, document, document. Compensation decisions should be recorded so that they are justifiable in an audit. OFCCP sometimes seizes on the fact that no one within an organization can explain why one employee got a larger raise than another employee several years after the fact to infer discrimination—had the decision-maker within the organization identified the reason for each decision contemporaneously with the decision, any disparities would be easier to explain.
• Conduct a pay equity audit. Contractors should be monitoring employee compensation internally to stay ahead of any potential issues. We recommend using inside or outside legal counsel to direct the audit in order to maintain attorney/client privilege. Some basic analysis of similarly situated employees (such as those with the same job title) can likely be handled internally, but it is prudent to also periodically conduct a statistical analysis using an expert statistician who can model the type of analysis performed by OFCCP in an audit.