United States: OFCCP Issues New Directive For Analyzing Compensation During Audits

Editor's note:

Andrew Turnbull will discuss this new Directive and its impact on OFCCP audits during his October 3, 2018 co-presentation with Welch Consulting, The Compensation Conundrum: OFCCP Comp Audits In An Evolving Pay Equity Landscape. Register to participate via webinar or in person in MoFo's Northern Virginia office.

On August 24, 2018, the Office of Federal Contract Compliance Programs ("OFCCP" or the "Agency") released Directive 2018-05, Analysis of Contractor Compensation Practices During a Compliance Evaluation (the "Directive"), rescinding Directive 2013-03 (referred to as Directive 307) and providing for more transparent and consistent standards when analyzing contractors' pay. Unlike the open-ended and vague approach under the Obama administration's Directive 307, OFCCP's new Directive requires OFCCP's pay analysis to mirror contractors' compensation systems and provides contractors more clarity on how the Agency will review compensation. While the Directive is a step in the right direction, it is too early to tell how this Directive will actually impact compensation audits.

Background on Directive 307

On February 28, 2013, OFCCP issued Directive 307, rescinding it previous compensation guidelines in favor of an open-ended process for reviewing contractors' compensation practices. Directive 307 provided for a case-by-case approach using a range of analytical tools and required compliance officers (COs) to group employees into Pay Analysis Groups ("PAGs"). While Directive 307 defined PAGs as "group of employees who are comparable for purposes of the contractor's pay practices," it allowed COs to group into PAGs employees who were not similarly situated under Title VII principles, such as AAP job group or EEO-1 category. Because Directive 307 lacked clear guidance on the statistical methodology OFCCP would employ to analyze pay decisions or how it would treat legitimate, nondiscriminatory factors, contractors were unable to effectively conduct their own pay analyses. In practice, OFCCP also tended to rely exclusively on statistical evidence to issue findings of discrimination under Directive 307, sometimes without allowing contractors to provide possible nondiscriminatory reasons for pay differences.

Directive 2018-05

The Directive acknowledges that "contractors lack[ed] the clear guidance Directive 307 intended to give." Through the new Directive, OFCCP aims to rectify this issue by: (1) clarifying and providing transparency to contractors about OFCCP's approach to compensation audits; (2) improving consistency and efficiency during compliance evaluations; and (3) providing guidelines to allow contractors to conduct their own self-evaluations of their compensation practices.

Similarly Situated Analysis Groupings

The Directive slightly changes the controversial use of PAGs under Directive 307. Although OFCCP will continue to use PAGs, its analysis will be based on similarly situated groups of employees that "mirror" the contractor's compensation system. 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 will use the following process when comparing similarly situated employees for indicators of systemic discrimination:

  • Develop PAGs of comparable employees; and
  • Statistically control for structural differences among members of the PAG (e.g., division, business unit, product line, location) and individual employee characteristics relevant to the contractor's pay determinations (e.g., tenure, prior experience, education, grade level, etc.).

OFCCP says that it will use information about the contractor's compensation hierarchy and job structure to develop "meaningful PAGs." For example, an "IT contractor may base its job structure on job family or job function, and OFCCP may further control for the next level or functional hierarchy." If the contractor does not provide OFCCP with information on its job structure or hierarchy, OFCCP may conduct its preliminary analysis using EEO-1 or job groups.

After analyzing pay data for systemic discrimination, OFCCP may conduct comparative analyses of small groups (usually less than 30 incumbents according to OFCCP) of similarly situated employees for discriminatory pay practices. OFCCP will also look for possible promotion or steering issues if there is concentration based on sex, race, or ethnicity across PAGs or in particular job titles.

Statistical Methodology

In a stark departure from Directive 307, the new Directive identifies the statistical methodology OFCCP will use to investigation contractors' compensation. The Directive instructs investigators to generally apply the following principles when analyzing contractors' pay data:

  • Use multiple linear regression analysis, and, in "rare instances," use non-statistical analysis, such as cohort analysis, where the PAGs are very small;
  • Separately analyze base pay, total compensation, and, if necessary, other items of compensation, such as bonuses;
  • Create a salary log in the regression model to account for different pay distributions within PAGs; and
  • Analyze statistical outliers for indicators of inappropriate PAGs.

The Directive identifies variables OFCCP will use as controls in its regression model, including controls for race/ethnicity, tenure, education, prior experience, job level/grade, market salary surveys, and performance. The Agency will test all variables and exclude those that it determines are tainted by discrimination.

Anecdotal Evidence Considered

The Directive moves away from the Agency's nearly exclusive reliance on statistics by requiring a "holistic review" of contractors' compensation practices, including reviewing contractors' compensation policies, interviewing contractors' pay experts, and considering contractors' EEO and diversity and inclusion policies. The Directive states that 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" or OFCCP is unable to uncover anecdotal evidence during its investigation, such as biased statements, examples of differential treatment, or contradictory information about the contractor's compensation practices. While OFCCP is not waiving its right to pursue claims purely based on statistics, contractors will now have an opportunity to challenge statistical findings by OFCCP that are not supported by anecdotal evidence.

Transparency

Continuing with OFCCP's recent commitments to transparency, the Directive requires OFCCP to provide contractors with certain information about its compensation analysis so they can assess the Agency's findings. The Directive requires OFCCP to:

  • provide written notice of "the general nature of any preliminary compensation disparities that warrant further information requests or onsite review," such as "[c]ompensation policies and practices with respect to women in production, sales, and management";
  • provide contractors with the "individual-level data necessary for the contractor to replicate the PAGs and regression results" when OFCCP issues a Pre-Determination Notice ("PDN"); and
  • make its statisticians and labor economists available during the conciliation process "as necessary" to answer questions about its process and assumptions it made in calculating back pay.

Although contractors will now have a better sense of the types of pay disparities OFCCP is investigating, these preliminary indicators will not limit the scope of OFCCP's review or investigation into other areas.

Confidentiality of Pay Data

To address concerns about the confidentiality of contractors' pay data, the Directive clarifies that contractors concerned with revealing pay data can use alphabetic or numeric coding or use an index for pay or pay ranges that are consistent with the ranges assigned to each job group, although contractors will need to provide full access to all information if OFCCP conducts an onsite. OFCCP also said that it does not release pay data while audits are open and will provide contractors with a notice and an opportunity to object before releasing their pay data in response to Freedom of Information Act requests.

Effective Date and Applicability to Current Audits

The Directive applies to all compliance evaluations scheduled on or after August 24, 2018. For compliance evaluations opened before August 24, OFCCP will apply the standards in the Directive to "the extent they do not conflict with OFCCP guidance or procedures prior to the effective date" of the Directive.

Practical Implications

Contractors should not interpret the new Directive to signal that OFCCP will relax its investigation of pay claims. Instead, the Directive highlights that elimination of pay discrimination remains "a key enforcement priority" that OFCCP will continue to vigorously investigate during audits and seek significant remedies where it determines there are unexplained pay disparities based on race or gender.

Although it provides contractors with more clarity and predictability of how OFCCP will review compensation, the Directive retains some of the problematic aspects of Directive 307. For example, COs will still have discretion to lump into PAGs employees who may or may not be similarly situated, despite the Directive instructing COs to follow the contractor's job structure. The Directive also fails to provide some important details. For example, although OFCCP plans to provide information about its disparity findings, whether OFCCP will provide the actual data contractors need to replicate the regression model OFCCP used to find discrimination or just provide the results of the regression with some minor details for how PAGs were developed is unclear

It is yet to be seen how these standards will actually be applied by the COs running the day-to-day audits. In the meantime, contractors should continue conducting proactive, privileged self-analysis and align those analyses with the guidelines in the Directive. Conducting proactive and privileged analysis will not only allow contractors to forecast potential issues that may arise during OFCCP audits, but also potentially allows contractors to remediate issues before an audit begins and create defenses for possible claims under the Equal Pay Act and the growing patchwork of state and local pay equity laws.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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