On February 28, 2013, the U.S. Department of Labor's Office of Federal Contract Compliance Programs (OFCCP) rescinded two enforcement guidance documents on pay discrimination from 2006 and replaced them with a new Directive 307, Procedures for Reviewing Contractor Compensation Systems and Practices. In rescinding and replacing the 2006 guidance documents, which OFCCP stated "limited OFCCP’s ability to conduct full investigations and use every enforcement tool at its disposal to combat pay discrimination," OFCCP is signaling a continued shift toward more aggressive enforcement efforts targeting pay discrimination by federal government contractors and subcontractors.
Old Compensation Guidances Formally Rescinded
In January 2011, OFCCP published a Notice of Proposed Rescission that signaled its intent to rescind two Bush-era enforcement guidance documents: Interpreting Nondiscrimination Requirements of Executive Order 11246 ("Compensation Standards") and Voluntary Guidelines for Self-Evaluation of Compensation Practices for Compliance with Nondiscrimination Requirements of Executive Order 11246 ("Voluntary Guidelines"). The Compensation Standards described the procedures OFCCP generally would follow when issuing a notice of violation for pay discrimination. The Voluntary Guidelines contained a procedure that contractors could follow to demonstrate compliance with their obligations to evaluate their compensation systems and practices for fairness, and created a "safe harbor" in OFCCP compliance evaluations for contractors who used the procedure. However, OFCCP determined that the Compensation Standards and Voluntary Guidelines unnecessarily restricted OFCCP in its ability to investigate pay discrimination because they narrowly defined the types of evidence and issues OFCCP could consider when evaluating and addressing contractor pay policies and practices.
New Directive 307: Procedures for Reviewing Contractor Compensation Systems and Practices
Directive 307 provides detailed guidance regarding the investigation procedures used by OFCCP in compliance evaluations, which did not appear in the 2006 guidance documents. The new directive identifies eight steps or procedures that OFCCP will follow when investigating compensation data and information during a compliance evaluation. These procedures are:
Conducting Preliminary Analysis of Summary Data (if necessary or appropriate)
The Directive confirms that OFCCP's preliminary analysis, standing alone, is not evidence of discrimination. Instead, the "results of the preliminary analysis may indicate where further review of compensation data is warranted and assist OFCCP in prioritizing investigative resources." However, the results of the preliminary analysis will not be used "to limit further compensation data requests or to define the compensation issues OFCCP may pursue in later stages of a compliance evaluation."
At this stage, OFCCP will assess quantitative and qualitative factors. Examples of quantitative factors listed in the Directive are: the size of average pay difference based on race and gender; the size of the largest average pay difference within AAP job groups, or the contactor's existing salary band or pay grade system; the number of job groups or grades where average pay differences based on race or gender exceed a certain threshold; and the number of employees affected by race- or gender-based average pay differences within job groups or grades.
Examples of qualitative factors listed in the Directive are: compliance history, OFCCP or EEOC complaints, anecdotal evidence, potential violations involving other employment practices, and data integrity issues.
Conducting an Analysis of Individual Employee-Level Data
At this step of the process, contractors are required to submit data regarding individual employees. If that data is maintained in electronic form, it must be submitted in "a complete, readable and usable electronic form upon request." If OFCCP determines that there is evidence of potential pay discrimination, or that more data or information is needed, OFCCP may conduct an on-site investigation.
Determining the Approach from a Range of Investigative and Analytical Tools
The Directive lists "three key questions" that must be answered in every case: Is there a measurable difference in compensation on the basis of sex, race or ethnicity? Is the difference in compensation between employees who are comparable under the contractor's wage or salary system? Is there a legitimate (i.e., nondiscriminatory) explanation for the difference?
Examples of investigative and analytical tools identified in the Directive are: analysis of workforce data and contractor compensation policies and practices; interviewing personnel and employees; examining payroll and Human Resource Information Systems; conducting non-statistical analyses, such as comparative and/or cohort analysis; and conducting statistical analyses, such as regression analysis.
Considering All Employment Practices That May Lead to Compensation Disparities
In addition to examination of a contractor's compensation system, including base pay and non-base pay data, OFCCP will examine:
Employee access to opportunities affecting compensation, including higher paying positions, job classifications, work assignments, training, preferred or higher-paid shift work, and other opportunities;
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, higher commission or desired sales territories; and
Any observed differences in pay, other earnings or benefits, job assignment/placement, training/advancement opportunities, differences in opportunities to increase compensation or other unexplained differences.
Developing Pay Analysis Groups
The Directive discusses the development of "pay analysis groups" used to test for statistical significance (using regression analysis) on large groups of employees, including groups that are larger than individual job titles and AAP job groups. A pay analysis group is defined as "a group of employees (potentially from multiple job titles, units, categories and/or job groups) who are comparable for purposes of the contractor's pay practices." Examples of elements used by OFCCP to develop pay analysis groups are: the particular industry, the types of jobs and compensation at issue, the contractor’s actual compensation practices and available data.
Investigating Systemic, Small Group and Individual Discrimination
The Directive reinforces OFCCP's focus on small group and individual discrimination, in addition to systemic discrimination, and includes a flow chart-type illustration regarding its examination of these three differing scopes of discrimination.
With respect to determining which employees are similarly situated for the purpose of investigating small group or individual discrimination, the Directive states that the following factors are among those that may be considered: tasks performed, skills, effort, level of responsibility, working conditions, job difficulty, minimum qualifications and other objective factors.
Reviewing and Testing Factors Before Accepting the Factors for Analysis
The Directive clarifies that OFCCP will not simply accept a contractor's representation regarding what factors are considered in its compensation system, but will "evaluate whether the factors are implemented fairly, consistently applied, and relevant to the contractor's compensation practices before accepting them as appropriate for inclusion in the analytical model and/or comparative analysis." In testing the factors identified by the contractor, OFCCP will determine if the contractor's data is complete and accurate, if the factor is relevant to compensation in terms of the contractor's policy and how it was applied, whether the factor was consistently applied by the contractor and whether using the factor presents adverse impact issues.
Conducting Onsite Investigation, Offsite Analysis and Refinement of the Model
Once the first seven steps are complete, the OFCCP investigator, statistical analyst and the Regional Solicitor of Labor will decide on a preliminary analytical model, and give the contractor an opportunity to provide any additional information it would like OFCCP to consider. If the additional information resolves or explains any pay disparities, the investigation is closed. Otherwise, if an onsite review has not yet been conducted, OFCCP will determine whether an onsite review is needed, and OFCCP will finalize its analytical model based on information obtained through the onsite review or from the contractor. From there, it will determine whether there are findings of compensation discrimination.
It is important to note that while OFCCP will seek anecdotal evidence of pay discrimination during compliance evaluations, the Directive states that OFCCP "will investigate and remedy compensation discrimination regardless of whether individual workers believe they are being underpaid, or whether OFCCP has any anecdotal evidence." This is a departure from OFCCP's recent past practice, in which anecdotal evidence was an essential component of any finding of pay discrimination.
What Does This Mean for Employers?
With limited exceptions, OFCCP's new compensation directive will apply to all OFCCP compliance evaluations scheduled on or after February 28, 2013, while the 2006 guidance documents will apply to OFCCP compliance evaluations scheduled, open or otherwise pending as of February 28.
The Directive provides significant insight into the processes and procedures that will be used by OFCCP during compliance evaluations moving forward, providing much-needed information to contractors who have weathered an increased number of compliance evaluations and a renewed focus on compensation discrimination with a limited understanding of how OFCCP would be conducting investigations into compensation practices. However, it appears to lack transparency in other regards, most notably with respect to the statistical thresholds OFCCP will use when examining contractor compensation data, including to determine whether to proceed with an analysis of a contractor's individual compensation data based on summary data provided at the desk audit stage of a compliance evaluation.
OFCCP compensation inquiries remain those most fraught with risk for contractors, as a finding of pay discrimination can lead to significant back pay liability to classes of employees. The new directive further illustrates OFCCP's renewed focus in this area, and highlights the importance of contractors closely examining their compensation systems and practices to identify and address any potential pay disparities before OFCCP does in a compliance investigation. Where questions arise in the course of a contractor's self-evaluations, these companies may also wish to consult with legal counsel to determine what their potential risks and liabilities are, and how best to address them.