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New Federal Compliance Procedures to Investigate Compensation Practices

The Office of Federal Contract Compliance Programs (OFCCP) recently announced the rescission of two 2006 guidance documents related to the evaluation of compensation practices of government contractors: (1) Interpreting Nondiscrimination Requirements of Executive Order 11246 With Respect to Systemic Compensation Discrimination ("Compensation Standards"), 71 Fed. Reg. 35124, and (2) Voluntary Guidelines for Self-Evaluation of Compensation Practices for Compliance with Nondiscrimination Requirements of Executive Order 11246 ("Voluntary Guidelines"), 71 Fed. Reg. 35114. See 78 Fed. Reg. 13508.

The Compensation Standards described the analytical procedures the OFCCP would follow when issuing a notice of violation for systemic pay discrimination, and the Voluntary Guidelines contained a set of procedures contractors could choose to follow to show compliance with the OFCCP's regulatory self-analysis requirement. The OFCCP withdrew these guidance documents finding that neither "proved workable or effective in practice." 78 Fed. Reg. 13509.

The OFCCP has replaced the two withdrawn guidance documents with Policy Directive 307, Procedures for Reviewing Contractor Compensation Systems and Practices. Pursuant to Directive 307, the OFCCP will now use a case-specific and flexible approach to investigate alleged pay discrimination, as compared to the more restrictive procedures contained in the withdrawn guidance documents. Directive 307 takes a more expansive view of how the office should analyze compensation practices when investigating alleged instances of systemic compensation discrimination by allowing the use of any analytic procedures it deems appropriate in a case-specific determination, rather than requiring the use of a particular analysis for all cases. The OFCCP's modifications to the way it is looking at and analyzing compensation practices could lead to an expansion in the types of enforcement tools used by the office, as well as increased findings of systemic pay discrimination among federal contractors.

Background

The OFCCP enforces the contractual obligations of affirmative action and equal employment opportunity required of federal contractors. The office administers and enforces Executive Order 11246, 3 CFR, 1964-1965 Comp., p. 339; Section 503 of the Rehabilitation Act of 1973, 29 U.S.C. §793 (Section 503); and the Vietnam Era Veterans' Readjustment Assistance Act of 1974, 38 U.S.C. §4212 (VEVRAA).

Employers with federal contracts of more than $10,000 in any 12-month period are subject to the non-discrimination and affirmative action provisions related to race, color, sex, national original, and disabilities, and those employers with 50 or more employees and contracts of more than $50,000 in any 12-month period are required to maintain written affirmative action plans. See 41 C.F.R. §60-1 and 41 C.F.R. §60-741. Employers with contracts of more than $100,000 in any 12-month period are subject to the nondiscrimination and affirmative action requirements related to veterans, and such employers with 50 or more employees are required to maintain a written affirmative action program. See 41 CFR §60-300. The OFCCP estimates that nearly one quarter of American workers are employed by a company that does business with the federal government and is subject to its regulations.

For companies found to have violated the OFCCP's regulatory requirements, sanctions can include the cancellation of current federal contracts and debarment from entering into future contracts until all discriminatory activities have been corrected. See 41 C.F.R. §60-1.27. The office may also seek remedies for victims of discrimination, including back pay and benefits, salary adjustments and nonmonetary relief including modifying policies and practices, or providing training opportunities, work assignments, promotions or job placements. See 41 C.F.R. §60-1.26. According to the OFCCP, it has recovered $30 million in financial remedies on behalf of 50,000 victims of discrimination since 2009. See FY 2013 Congressional Budget Justification, Office of Federal Contract Compliance Programs 13, available at http://www.dol.gov/dol/budget/2013/PDF/CBJ-2013-V2-10.pdf.

Rescission of 2006 Guidance

In January 2010, President Barack Obama launched the National Equal Pay Task Force through which the OFCCP has been working with the Department of Labor, the Equal Employment Opportunity Commission, the Department of Justice, and the Office of Personnel Management to address pay discrimination under its enforcement mandate. The goal of the task force is to ensure that the federal agencies responsible for addressing claims of alleged pay discrimination increase their effectiveness by collaborating, sharing information, and coordinating enforcement and policy initiatives. Through this task force, the OFCCP committed to reviewing and revising its enforcement guidance and practices to address compensation discrimination more effectively. The office assessed the Compensation Standards and Voluntary Guidelines pursuant to this review. See 78 Fed. Reg. 13509. It provided numerous reasons regarding its decision to withdraw these guidance documents to support its conclusion that the Compensation Standards and Voluntary Guidelines were "inconsistent with the Task Force's goals of improving enforcement" of compensation discrimination. Id.

The Compensation Standards dictated the use of a specific analytical procedure that the OFCCP was required to use in determining whether a contractor had committed a violation in all systemic compensation discrimination cases, regardless of industry, data available, types of jobs at issue, or the particular characteristics of the workers at issue. Id. Under the Compensation Standards, the OFCCP was required to use multiple regression analyses to test for pay disparities within narrowly defined groups of workers defined by job category, and had to have anecdotal evidence to establish a systemic compensation violation, "except in unusual circumstances." Id.

Pursuant to the Compensation Standards, the OFCCP did not look for pay differences based on alleged discrimination in job assignments, unequal access to promotions, or unequal access to better paying jobs or opportunities. Id. Similarly, the Voluntary Guidelines prescribed specific analytic procedures a contractor could follow to conduct the self-analysis of his pay practices required by 41 C.F.R. §60-2.17(b)(3). Id. The OFCCP would deem compliant any contractor whose self-evaluations "reasonably met" the procedures dictated by the Voluntary Guidelines, even if other analytic approaches would, according to the OFCCP, reveal systemic compensation discrimination. Id.

In the Notice of Final Rescission, the OFCCP laid out its rationale for withdrawing the two guidance documents. The office found that under the Compensation Standards, it could establish a violation only where there were statistically significant compensation disparities among highly specified groups of employees, which the office said made testing for larger discrimination patterns across job groups more difficult. Id. at 13511. The OFCCP stated that its allegedly narrow focus of the Compensation Standards created both technical and substantive barriers to enforcement. Id.

The OFCCP also found that these restrictions were at odds with Title VII and with established case law regarding compensation discrimination, which it said does not require the use of any particular analytic means of demonstrating compensation discrimination, nor the requirement of anecdotal evidence. Id. The OFCCP stated that the ostensibly narrow focus of the guidelines limited its ability to conduct full investigations and use every enforcement tool at its disposal to combat alleged pay discrimination, because, for example, it believes that analyses within job categories cannot address the situation where an employer channels specific types of workers into lower-paying jobs. Id.

The OFCCP's stated reasons underlying the rescission of the Voluntary Guidelines are very similar to those regarding the Compensation Standards. The OFCCP found that the Voluntary Guidelines were "overly narrow, inconsistent with Title VII principles and fail[ed] to address the variety of potential types of pay discrimination." Id. at 13517. Additionally, the office stated that deference afforded to contractors under the "reasonably meets" standard could prevent it from addressing alleged compensation discrimination. Id.

Policy Directive 307

Policy Directive No. 307 replaces the withdrawn guidance documents and, according to the OFCCP, applies Title VII principles to review contractor compensation systems and practices to detect instances of compensation discrimination. Directive 307 describes the new investigation procedures, under which the OFCCP will consider all practices that it believes may cause pay disparities in violation of Title VII and will use all available evidence to evaluate contractor compliance with OFCCP regulations.

Pursuant to Directive 307, the OFCCP will: (1) conduct a preliminary analysis of summary data; (2) conduct an analysis of individual employee-level data; (3) determine the appropriate approach from a range of investigative and analytical tools; (4) consider all employment practices that may lead to compensation disparities; (5) develop pay analysis groups; (6) investigate systemic, small group, and individual discrimination; (7) review and test factors before accepting the factors for analysis; and (8) conduct onsite investigations, offsite analyses and refine the model. See Directive 307 at 4.

The key feature of Directive 307 is that the OFCCP will now employ a flexible, fact-specific approach aimed at identifying and remedying all forms of compensation discrimination in a manner the office believes to be consistent with Title VII. Investigations under Directive 307 will now allow the OFCCP to take a much broader approach in assessing alleged systemic discrimination as compared to the withdrawn guidance documents, and can include an assessment of whether there exists either a pattern and practice of discrimination, or an employment practice that allegedly has an adverse impact.

Rather than the focus on job category contained in the Compensation Standards, Directive 307 states that the determination of which employees are similarly situated is case-specific and may be determined based on different criteria for different analyses. Id. at 9. Additionally, the OFCCP will no longer be required to use a multiple regression analysis, but can instead use the full panoply of analytical tools, including non-statistical analyses, such as a cohort analysis. Id. at 2. Finally, while the OFCCP will seek anecdotal evidence, Directive 307 does not require the OFCCP to have anecdotal evidence in order to find a violation. Id.

Data Collection Tool

The OFCCP's decision to withdraw the Compensation Standards and Voluntary Guidelines came within a short period after it announced its decision to issue rules with regard to its proposed Compensation Data Collection Tool. On Dec. 21, 2012, the OFCCP published its 2013 Unified Agenda of Regulatory and Deregulatory Actions which lays out the office's regulatory agenda for 2013. The regulatory agenda is a listing of all the regulations the OFCCP expects to have under active consideration for promulgation, proposal, or review during the coming six- to 12-month period.

The Regulatory Agenda includes a statement that the OFCCP plans to issue a Notice of Proposed Rulemaking in June 2013 to release its Compensation Data Collection Tool. Regulatory Agenda 83. The goal of the Compensation Data Collection Tool is to allow the OFCCP to target which employers to pursue for further investigation, as currently, the OFCCP can identify alleged pay disparities only in companies subject to an audit. Regulatory Agenda 82-83.

The OFCCP decided to move forward with this initiative despite criticism levied by the National Academy of Sciences (NAS). In August 2012, the NAS issued a report on the collection of compensation data and found that federal government agencies did not have a clear plan as to how to collect and use any such compensation information, failed adequately to measure the costs to employers associated with collecting this information, and failed to develop the means properly to ensure the confidentiality of the information collected. National Research Panel of the Academies, Collecting Compensation Data from Employers, available at http://www.nap.edu/catalog.php?record_id=13496.

Many commentators have been surprised by the OFCCP's decision to forge ahead on this initiative in the face of these public admonitions, but such actions are consistent with the office's focus on investigating systemic compensation discrimination, as discussed above.

Conclusion

With the rescission of the Compensation Standards and Voluntary Guidelines and implementation of Directive 307, the OFCCP has significantly broadened the scope of its investigations into the compensation practices of government contractors, and has created standards that it believes are consistent with those applied in Title VII cases. The OFCCP will take a far more aggressive approach in evaluating compensation practices, which can include the use of a broader array of analytic tools to determine whether a compensation disparity exists, along with an investigation into employment policies that the office believes may cause a compensation disparity.

Given the new investigative tools available to the OFCCP under Directive 307, any federal contractors who have relied on the Compensation Standards and Voluntary Guidelines should re-evaluate their approaches to regulatory compliance. Accordingly, as a prophylactic measure contractors may wish to begin conducting self-assessments consistent with these directives as a way of avoiding possible regulatory sanctions by the OFCCP.

Jeffrey S. Klein and Nicholas J. Pappas are partners at Weil, Gotshal & Manges. Patricia Wencelblat, an associate in the employment litigation practice group, assisted in the preparation of this article.

Reprinted with permission from the April 1, 2013 edition of the New York Law Journal © 2013 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

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