Pittsburgh-based Cowden Associates, Inc., (“Cowden”) the leading independent actuarial, compensation and employee benefits consulting firm in the tri-state region and Leech Tishman, a firm dedicated to providing full-service commercial legal services to individuals, businesses, and institutions jointly drafted Compliant Compensation Practices for Federal Contractors.

Companies that hold government contracts must be able to substantiate that their compensation programs promote pay equity for minority and female employees. Last year, the Office of Federal Contract Compliance Programs aggressively enforced this mandate, and has indicated it will continue this focus. A contractor whose compensation program is deemed discriminatory will face substantial sanctions, including orders that it retroactively pay employees to correct for any deficiencies.

An OFCCP investigation of potential compensation discrimination includes a review of hiring, promotions, training, and other employment opportunities, along with basic salary and bonus structures. An employer has a duty to periodically evaluate its own compensation practices, and in order to demonstrate compliance, it may volunteer to undertake a self-audit. A contractor can avoid producing its methodology or disclosing its findings by performing a compensation self-evaluation that it asserts is subject to attorney-client privilege and/or attorney work product doctrine. Benefits flow from following this approach:

  • An “as-if” review will be completed and indicate issues that could arise in an OFCCP audit and be addressed beforehand;
  • The risk assessment allows the contractor to identify employees who may have been misclassified, data discrepancies and other problems that would make it easier for OFCCP or a plaintiff’s lawyer to demonstrate statistically significant pay disparities;
  • The documentation receives the best inoculation possible to protect it from discovery, lessening the possibility of its being effectively utilized by plaintiffs.

These precautions will not eliminate the possibility of the OFCCP conducting a full-blown audit; however, the data gathered during the pre-audit phase and the way that its testing is constructed, should prove most valuable in demonstrating compliance to regulators. Elliot Dinkin, President & CEO of Cowden Associates, who has had extensive experience with the OFCCP and assisting clients in constructing compliant compensation systems says, “We have found that marrying a compensation consulting firm with actuarial expertise with legal counsel experienced in the anti-discrimination statutes places the employer in the best position to withstand heightened regulatory scrutiny.”

“Federal contractors who do not subject their compensation practices to this level of analysis knowingly or negligently risk a pay day for their employees down the road that could threaten their ability to do business with the government,” adds Steve Irwin, a partner with Leech Tishman, who regularly guides clients in complying with their obligations as federal contractors.

When an employer is selected for audit, typically the OFCCP will seek to answer three questions:

  • 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 non-discriminatory explanation for the difference?

Determining a proper approach for complying with the requirements:

The starting point for this process is the engagement of legal counsel having intimate familiarity with OFCCP guidelines and other affirmative pay practices, as well as a complete understanding of the company’s organization and operations. Legal counsel then retains external consultants to assist in this process and monitor work to preserve the veil of privilege. Working together, this team mimics the OFCCP’s two-step protocol to analyzing whether the contractor’s pay practices support compliance with federal standards:

  • The Creation of ‘Similarly Situated Employee Groups’ (SSEGs) – This standard groups similarly situated employees for purposes of comparing contractor pay decisions, concentrating on the similarity of the work performed, the levels of responsibility and the skills and qualifications for the positions under review.
  • The Use of Multiple Regression Analysis – This statistical tool enables the team to determine whether there are any significant differences in compensation by gender and/or race that are not explained by legitimate, permissible factors.

A complete “as-if” review will be conducted in a similar fashion to an OFCCP investigation. Specifically, the analysis will examine job descriptions to consider whether employees in an employer’s pre-existing groupings, such as pay grades or other job groups, are in fact similarly situated. Others factors considered include skill levels, prior experience, education requirements, other functional units of the employer, employment status (e.g., full- or part-time) and compensation status (e.g., union, nonunion, hourly, salaried or commission).

Ultimately, subjecting the employees in these SSEGs to this analysis will reveal “outliers,” where pay is outside a pre-determined statistical deviation. These outlier results will lead to additional investigations that should be completed to determine if pay differentials can be explained by legitimate considerations. Undergoing this analysis enables a federal contractor to anticipate where it is vulnerable and to develop the factual foundation for a compelling defense.

By undertaking a good faith effort to root out illegal pay disparities, correct them, and avoid recurrence, a federal contractor not only helps avert potential penalties and even private litigation but helps foreclose the loss of existing government contracts or the sanction of being declared ineligible for the award of such contracts in the future.