The Office of Federal Contract Compliance Programs issued three Directives this past Friday, August 24. The first, effective immediately, rescinds the Obama Administration’s Directive on investigating compensation practices. The second describes an initiative for recognizing contractors with superior compliance programs, and the third explains that contractors will soon need to annually certify that written affirmative action plans have been prepared.
Analysis of Contractor Compensation Practices During a Compliance Evaluation – Directive 2018-05
In furtherance of its recent assurance of more transparency, the OFCCP rescinded Directive 307 issued by prior Director Patricia Shiu and replaced it with a new Directive “to outline standard procedures for reviewing contractor compensation practices . . . and emphasize . . . compliance by contractors through proactive self-auditing.” This new Directive applies to compliance reviews scheduled on or after its effective date of August 24. In addition, its principles apply to existing reviews to the extent that they do not conflict with the Agency’s prior guidance.
The purpose of the Directive is threefold: to “(1) further clarify and provide additional transparency to contractors about OFCCP’s approach to conducting compensation evaluations; (2) support compliance and compensation self-analyses by contractors under applicable law, and OFCCP regulations and practices; and (3) generally improve compensation analysis consistency and efficiency during compliance evaluations.” The OFCCP says that it is providing a more transparent view of its approaches to determining which employees are similarly situated, how to develop pay analysis groupings, and the actual statistical analyses and models that the Agency uses.
The OFCCP’s first step in analyzing a contractor’s compensation data is to develop “pay analysis groupings” (PAGs) of comparable employees. These will include similarly situated individuals “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.” This is substantially the same as the definition of “similarly situated employees” in Directive 307.
After developing PAGs, the OFCCP will “control for further structural differences,” such as location, department, and business unit, and also for individual differences, such as seniority, performance, or grade. Again, this does not appear to signal a significant departure from Directive 307 and continues a practice that has drawn objections to the OFCCP’s analysis of overly broad groupings of employees. Instead of comparing only truly similarly situated individuals, or those employees who are not only performing similar work, but are also working in the same facility, or under the same conditions, or whose pay is derived from the same budget, the OFCCP includes potentially dissimilar workers in its PAGs and then attempts to control for the differences.
However, the OFCCP says that it will accept the PAGs developed by the contractor if the structure and design are reasonable and verifiable. Thus, contractors have an opportunity to influence the Agency’s analysis by proactively developing PAGs and providing that structure with submission of compensation data during the desk audit. If a contractor fails to provide such information, the OFCCP will conduct its preliminary analysis using EEO-1 codes or job groups where feasible.
Where this new Directive significantly departs from the old is the drawing of the curtain to reveal the details behind the statistical methodology that the OFCCP uses when analyzing compensation. Some of the information is not new or surprising, such as its use of multiple regression analysis or its analysis of the different components of compensation separately. But the thorough outline of the steps and processes of its statistical model, including the control variables used – which is too technical and detailed to include in this article – is new. This information will help contractors more accurately predict the results that the OFCCP will obtain and may also allow for more accurate independent self-audits, which is one of the Agency’s objectives.
In addition to outlining the statistical methodology that the OFCCP will use in evaluating compensation during a compliance evaluation, the Directive states that the Agency “will be less likely to pursue” cases of pay discrimination where the statistical analysis is not supported by “exceptionally strong” non-statistical evidence. Examples of non-statistical evidence upon which the OFCCP may rely include evidence of discriminatory remarks or attitudes, examples of “differential treatment,” and the extent to which compensation decisions are based on discretion or subjectivity.
Another important provision of the Directive recounts the Agency’s commitment to understanding the contractor’s own views and interpretations of its compensation system. The OFCCP assures that, if it does find disparate impact in its analyses, it will first seek to fully understand the contractor’s information relevant to compensation, and “will work collaboratively with the contractor to understand any defense that a policy or practice that caused the disparate impact is job-related and consistent with business necessity, and will fully consider supporting evidence the contractor provides.” Of course, that does not mean that the OFCCP will agree with the contractor’s analyses or interpretations, but contractors should appreciate the assurance that the information will be considered seriously.
Contractor Recognition Program – Directive 2018-06
The OFCCP is bringing back an award system for contractors and plans to develop a program “to recognize contractors with high-quality and high-performing compliance programs and initiatives.” A previous award program was scrapped years ago, but the OFCCP now concludes that rewarding contractors for going above and beyond is worthwhile for the following reasons:
It would support “proactive compliance by contractors” regardless of whether they are being audited.
Contractors would be “encouraged” by recognition of premier non-discrimination practices.
The contracting community “could benefit from research or case studies on best or model compliance practices.”
The OFCCP’s compliance assistance that is premised on other businesses’ practices is more likely to be supported by contractors.
The OFCCP does not provide any details about the recognition program, but states that the agency plans “to highlight specific contractor programs and initiatives that are innovative, have achieved demonstrable results, and that could be taught or incorporated into contractor peer mentoring programs.” The OFCCP notes that recognizing mere compliance is not its objective; rather, the award “would be for contractors who are innovative thought leaders among their peers for achieving diverse and inclusive workplaces.”
Although the OFCCP provides no timetable for rolling out this recognition program, we should expect specifics soon, as the government fiscal year draws to a close. Any award from an enforcement agency is well-earned and highly valued, so contractors should get ready to brag about their state-of-the-art practices for advancing diversity and inclusion.
Affirmative Action Program Verification Initiative – Directive 2018-07
In an effort to combat what it views as lackluster compliance by contractors, the OFCCP will soon require all covered contractors and subcontractors to verify their compliance on an annual basis. Although this is not an entirely new premise, the effect on contractors may be significant.
During roughly 2001 through 2006, the EO Survey required contractors to certify that they had an affirmative action plan in place, putting pressure on contractors to ensure that their AAPs were in effect when the EO Survey was submitted. In addition, the federal System for Award Management requires contractors to certify annually that they have developed and have “on file” an affirmative action plan compliant with Executive Order 11246 or that they have not previously had covered contracts, though it is not clear whether there is any mechanism in place to monitor responses. Finally, the OFCCP’s regulations also contain a provision authorizing the OFCCP to require contractors to submit summary information to the agency annually. The OFCCP has not previously taken advantage of this regulatory authority.
The OFCCP surmises that many federal contractors do not adhere to the regulations requiring written AAPs. The Agency’s conclusion is based on the fact that 85 percent of contractors fail to submit timely AAPs after receiving a Scheduling Letter. In addition, the OFCCP acknowledges that it is unable to audit more than a very small portion of contractors each year.
The OFCCP has not provided specifics about the new certification requirement but notes that the “verification would initially take the form of OFCCP review of a certification, followed by potential compliance checks, and could later take the form of annual submissions of AAPs to OFCCP for review.” The Agency has also indicated that it intends to incorporate the verification (or lack thereof) into its methodology for scheduling contractors for compliance evaluations. In other words, contractors who do not certify are more likely to selected for a compliance evaluation. This increases the OFCCP’s chances of finding deficiencies in the audits that it does conduct. It also will “help ensure there are no ‘free-riders’ that benefit from participating in the federal procurement process while not bearing the corresponding cost of AAP compliance based on the current likelihood that they will not be listed (and potentially receiving an inequitable advantage over law abiding contractors).”
The Directive provides that the OFCCP will develop a comprehensive program that includes the following:
Annual certification of compliance with AAP requirements
Use of certification as criteria in scheduling methodology of compliance evaluations
Compliance checks conducted by the OFCCP
A requirement that contractors provide a “proffer of the AAP” if they ask for an extension of time to submit the AAP during a compliance evaluation
Systems to collect and review AAPs provided by federal contractors
Stay tuned for more information on this topic. Contractors who may not be fully compliant should take advantage of this lead time to review policies, practices, and procedures, and to develop compliant written AAPs.