New directive outlines audit procedures and evaluation standards that will likely lead to extensive compensation audits and increased allegations of pay and job assignment discrimination.

On February 26, the Office of Federal Contract Compliance Programs (OFCCP or the agency) issued a directive[1] outlining new enforcement procedures and standards to address systemic compensation discrimination. At the same time, OFCCP published a final notice of rescission of the agency's 2006 compensation standards.[2] In rescinding the 2006 compensation standards, OFCCP rejected the comments of employer organizations and law firms,[3] which argued that the 2006 standards generally took reasonable, judicially approved approaches to the assessment of compensation discrimination under Title VII.

This development will significantly impact employers that are federal contractors and subcontractors subject to OFCCP compliance audits. Contractors should consider taking proactive steps to assess their compensation data through a privileged risk assessment in order to develop a strategy for managing this new, substantial audit risk.

New OFCCP Enforcement Standards

The new enforcement standards reflect a perspective that favors plaintiffs on several critical issues regarding proof of systemic pay discrimination. In that regard, under the new standards, OFCCP may do the following:

• Relax comparability standards and authorize comparisons of employees who work in different jobs and have different job duties
• Sanction aggregate regressions that do not control for otherwise legitimate factors that arguably might be tainted by discrimination
• Eliminate any requirement that OFCCP have anecdotal evidence along with statistical evidence to support a finding of systemic pay discrimination

Although these changes alone are likely to increase the prospect of a finding of systemic pay discrimination in routine audits, the directive also allows OFCCP auditors to conduct broad investigations into a host of other areas that theoretically impact compensation and that fall outside of OFCCP's traditional review process. These areas include the following:

• Territory and account assignments that may lead to differences in commissions
• Overtime assignments that lead to differences in overtime pay
• Assignment of employees to jobs, which OFCCP indicates it will assess through regression models that do not control for job classification
• Discrimination in performance reviews, training, and other practices that may impact compensation
• Scrutiny of pay factors for potential disparate impact, which OFCCP will argue imposes an obligation on contractors to conduct validation studies and consideration of lesser discriminatory alternatives

Additionally, while the new directive encourages auditors to broaden their compensation-related reviews, it contains virtually no guidance for OFCCP investigators to follow when auditing contractor pay practices. Rather, the directive provides investigators with broad discretion to examine a wide array of contractor practices and to make case-by-case judgments on how to proceed in any given audit. The directive states the following:

Investigation of potential compensation discrimination presents complex and nuanced issues. The choice of the best approach for a case depends upon the underlying facts, the available data, and the contractor's compensation system and practices. As such, OFCCP takes a case-by-case approach to analyzing compensation issues.

Implications

Going forward, contractors should expect to experience significant variations in how OFCCP will approach the issue of systemic compensation discrimination in carrying out compliance reviews under Executive Order 11246.

To the extent that the new directive does suggest any predictable approach to or standard assessment of a contractor's compensation practices, it appears that the agency will begin with a broad, aggregate regression analysis, including "large groups of employees" across many different jobs in a single model. If the initial aggregate regression results show statistical disparities, OFCCP will then conduct a further investigation to develop support for the aggregate model, including a review of compensation policies and interviews of compensation managers and other personnel. If the initial results do not show statistical differences, OFCCP will conduct a similar assessment on smaller subsets of the workforce. Finally, if no differences emerge in any of these approaches, OFCCP may ultimately conduct individualized cohort assessments, which have been commonplace in OFCCP audits in the last two years.

The issuance of the new enforcement directive is a major development that has significant potential consequences for government contractors, especially contractors employing large numbers of employees. In particular, OFCCP is much more likely to make a finding of systemic pay or job assignment discrimination during routine audits. Again, contractors should consider conducting a privileged risk assessment of their compensation practices and their impact to develop a strategy to address this significant new risk.

Morgan Lewis will issue further guidance on the new directive to assist contractors in their effort to understand the implications of these new standards. Additionally, Morgan Lewis attorneys Robert J. Smith and William E. Doyle, Jr. will discuss the major implications of the new OFCCP enforcement standards in a complimentary webinar on March 14, 2013. To register for this webinar, please visit here.

[1]. View Directive 307 here.

[2]. See Notice of Final Rescission, Interpreting Nondiscrimination Requirements of Executive Order 11246 With Respect to Systemic Compensation Discrimination, 78 Fed. Reg. 13,508 (Feb. 28, 2013), available here.

[3]. Morgan Lewis submitted comments to OFCCP on these issues.