On August 6, 2014, the Office of Federal Contract Compliance Programs (OFCCP) released a Notice of Proposed Rulemaking (NPRM) requiring federal contractors and subcontractors with 100 or more employees to submit an annual Equal Pay Report. The new report will supplement the Equal Opportunity Report, EEO-1. It will also include summary information on compensation paid to employees—as contained in the Form W-2, “Wage and Tax Statement”—by sex, race, ethnicity, and specified job categories. In addition, the new report will include other data points such as hours worked, and the number of employees. This compensation data collection tool was published in response to President Obama’s April 8, 2014 presidential memorandum calling for proposed regulations to be published within 120 days. OFCCP issued the proposed Equal Pay Report and Instructions, in addition to a Supporting Statement, which the agency released on August 11, 2014.

The proposed rule imposes burdensome, multiple reporting requirements on contractors. Significantly, OFCCP intends to use the data to prioritize contractors for compliance evaluations by “focusing on federal contractors that have potentially discriminatory compensation differences” when compared to an “objective industry standard” (as determined by OFCCP). However, the proposed Equal Pay Report provides little useful information regarding potential compensation discrimination or industry standards.

Who Must File

The proposed rule applies to prime contractors (including construction contractors) and first tier subcontractors (including construction subcontractors of any tier) who are required to file EEO-1 Reports, have more than 100 employees, and have a federal contract, subcontract, or purchase order amounting to $50,000 or more lasting for at least 30 days (including modifications).

Requirements of Equal Pay Report

The proposed Equal Pay Report contemplates requiring covered federal contractors to submit the following information:

  • the total number of workers within each EEO-1 job category by race/ethnicity and sex (race and sex designations and job categories are the same as in the EEO-1 report);
  • the total W-2 wages for all workers for the calendar year in each EEO-1 job category broken down by race/ethnicity and gender; and
  • the total hours worked in the calendar year for all employees in each EEO-1 category by race/ethnicity and gender.

Individual employee pay data will not be required.

The NPRM requires that contractors file a separate report for each establishment, regardless of size, including the headquarters location. Unlike the EEO-1 report, a consolidated pay report is not required.

Reporting Period

OFCCP is proposing an annual reporting window of January 1 to March 31. The data in this report would be based on W-2 earnings for the prior calendar year (January 1 – December 31) for all employees included in the contractor’s EEO-1 report for that year, which will generally align with the time period covered under a contractor’s W-2 filings.

Web Portal

OFCCP plans to design a web-based portal for covered contractors to report and maintain compensation information. OFCCP indicates that the web portal would be protected by applicable government information technology security standards where contractors key in their data electronically or upload their forms into the system using the standard formats provided by OFCCP.

Practical Implications—Burdensome and Multiple Reporting Requirements

The biggest practical impact of the new requirements on contractors will be collecting, managing, analyzing, and reporting compensation information for hundreds or even thousands of employees. The magnitude of the task is increased by the fact that the reporting dates and reporting periods for the EEO-1 report and the proposed Equal Pay Report differ. Under the NPRM, contractors will be required to prepare twice as many reports and prepare them at two different times of the year—September for the EE0-1 Report and March for the Equal Pay Report.

Contractors will also have to reconcile the data for the reports. There will be employees on the September EEO-1 report who are not on the payroll on December 31, but they will still need to be included in the annual Equal Pay Report. Similarly, there will be employees on the December 31 payroll who were not hired until after the EEO-1 report was prepared. These employees are not included on the Equal Pay Report. The instructions to the report clarify that contractors should, “Include all full-time and part-time employees who were included in your most recent EEO-1 report for the reporting year. Do not include employees who were not covered in the EEO-1 Report.”

This multiple-reporting obligation will be especially burdensome for multi-establishment employers. Unlike the EEO-1 report, which gives contractors the option of filing an establishment list identifying the address and total employment for locations with fewer than 50 employees, multi-establishment contractors must complete a Headquarters Equal Pay Report and a separate Establishment Equal Pay Report for each establishment regardless of the establishment’s size or number of employees.

Moreover, simple human error can have significant consequences. Small companies may be relying on manual input and reconciliation of data. Large companies may have sophisticated technology, but they typically rely on many different Human Resources Information System (HRIS) users to enter large amounts of information and keep current with numerous transactions that occur daily. This is especially significant since contractors will be required to certify the accuracy of the report and can be subject to the full range of OFCCP sanctions for incorrectly reporting data.

The Requested Compensation Data Does Not Provide Relevant Information on Potential Compensation Discrimination

  1. Summary W-2 compensation data is misleading

According to OFCCP, the Equal Pay Report will enable OFCCP to direct its enforcement resources toward federal contractors whose summary data suggests potential pay violations. However, W-2 compensation data alone provides little insight into pay discrimination. W-2 compensation does not take into account significant factors that influence pay such as education, previous experience, seniority, performance rating, shift differentials, and bonuses paid based on performance or pre-existing performance metrics, all of which can be legitimate nondiscriminatory reasons for pay differentials.

In addition, W-2 wages differ in part because of benefits choices employees make. If health and welfare benefits are included, the person who receives company-provided benefits may appear to make more than the individual who is eligible for coverage through his or her spouse and opts not to use company-provided insurance.

If commissions and productivity bonuses are included in the analysis, contractors could be flagged for pay discrimination even though the difference could be because of employees’ actions (or non-actions), not a decision by the employer.

The summary W-2 compensation data leads to inconsistencies simply because every employee reported on the September EEO-1 report is unlikely to have worked the same amount of time the previous year. Those who did not work a full year may appear to have lower pay when in fact they worked fewer hours/less time.

  1. Reporting pay by EEO-1 category is not helpful

Reporting pay by EEO-1 category is not helpful and OFCCP knows it. In 2006, when announcing that it was rescinding the notorious former Equal Opportunity Survey (which also collected compensation data from contractors), the agency specifically noted that compensation data provided by EEO-1 category has “no relation to the determination of systemic discrimination . . . and is not a useful tool for enforcement purposes.” 71 Fed. Reg. 53037 (Sept. 8, 2006).

Specifically, reporting pay by EEO- 1 category does not provide relevant information on pay because contractors properly include employees with many different functions in the same broad EEO-1 category. For example, the EEO-1 instruction booklet provides that accountants, lawyers, computer programmers, and engineers, along with many other job titles with special certifications (such as human resources managers) are included in the same EEO-1 category of Professionals. These positions require widely different levels of skill, education, and expertise, and, thus, summary or aggregate compensation comparisons cannot predict any potential for discrimination in pay at a single company, among peer companies (as determined by OFCCP), or even within the same industry. Each of the 10 EEO-1 reporting categories reflects similarly diverse job titles and occupations.

In addition, first-line supervisors are frequently categorized for EEO-1 purposes with the employees they supervise, but generally receive higher pay. Thus, the compensation of a supervisor of either gender or any race or ethnicity when compared with the compensation of a large, diverse group of lower-paid individuals in the same EEO-1 category could be viewed as a “false positive” indicator of discrimination by OFCCP.         

Because pay data will be reported on a broad EEO-1 category basis, OFCCP cannot use the data to assess compensation of similarly-situated employees. The data likewise cannot be subjected to a meaningful statistical analysis, and the data collection itself ignores the myriad nondiscriminatory factors that may influence compensation.

OFCCP and outside experts determined that the former EO Survey failed to accurately predict which federal contractors were likely to be engaging in pay discrimination. There is no reason to believe that this new compensation reporting tool will be any more useful in evaluating contractors' compensation practices.

Accuracy and Utility of Proposed Objective Industry Standard Is Questionable

OFCCP has stated that it will use compensation data provided by contractors to create industry compensation standards, which can then be used as benchmarks for both the OFCCP and the contractor community. This one-size-fits-all approach to collecting compensation data is highly questionable. The agency is looking to establish a “norm” for compensation within an industry; however, compensation and benefits professionals who participate in market surveys for compensation know that no two jobs are exactly alike. Even within the same industry, the methods used to determine compensation and the components of total compensation vary widely. In addition, the aggregate data will not reflect different corporate compensation philosophies where each company has an option to lead, match, or lag their respective markets.

The Questionable Benchmarks Will be Used to Target Contactors for Compliance Evaluations

Individual company data submitted on the proposed Equal Pay Report would not in itself result in any sanction or adverse action against a contractor for pay discrimination, according to OFCCP. However, OFCCP proposes to aggregate each contractor’s summary data with those of peer employers by industry to construct “objective” industry standards or benchmarks. (Of course, the aggregated data will have the same W-2 and EEO-1 category shortcomings already described for the individual summary reports.) OFCCP would then compare each contractor’s summary statistics to the relevant objective industry standard. OFCCP plans to publish the aggregate information based on pay data collected from the Equal Pay Report, but the data will not be specific to any particular contractor. The data could include ranges or averages by industry, labor market, or other groupings.

These questionable benchmarks will be part of the methodology used to prioritize which contractors will be selected for OFCCP audits. This OFCCP practice of using the Equal Pay Report to focus the agency’s enforcement efforts could potentially impede upon OFCCP’s obligation to select contractors for audit based on neutral administrative criteria.   Of course, after repeatedly announcing in the NPRM, press releases, and published Questions and Answers that the data will be used to prioritize compliance evaluations, the agency gives a brief nod to due process in the NPRM stating, “Consistent with the Fourth Amendment standard of neutrality, OFCCP will continue to apply a variety of criteria to its decisions to select contractors for review that go beyond the scope of the Equal Pay Report data.” Time will tell how the OFCCP actually uses the Equal Pay Report and benchmarks.

Significant Unaddressed Privacy Concerns

OFCCP says that it will protect the raw summary compensation data submitted by contractors and subcontractors from disclosure “to the maximum extent permitted by law.” Yet, once the data is submitted, employers do not have a guarantee that the data will not be disclosed inadvertently, intentionally, or otherwise. OFCCP believes that the Freedom of Information Act (FOIA) would exempt the disclosure of contractor data if it can be shown that (1) the contractor is still in business, (2) the data is confidential and sensitive, and (3) the release of data would subject the contractor to commercial harm. Unfortunately, however, FOIA does not specifically provide an exemption for compensation information and, for now, it is unclear whether existing exemptions would actually shield contractors’ pay data. 

Contractors’ Equal Pay Reports, much like EEO-1 reports, also could be required to be disclosed to plaintiffs’ attorneys for use in civil litigation. Finally, in an era where data security breaches of even top secret government documents are reported on a regular basis, the idea that the compensation data of high profile companies would be made publically available is certainly not out of the question.

Comments Due by November 6, 2014

The proposed Equal Pay Report will have a significant impact on federal contractors. The Report is burdensome, appears to be of little utility, and could have significant privacy and compliance evaluation selection consequences. In sum, the contractor community should participate in the rule-making process and be heard on these significant issues.

Comments on the NPRM may be submitted by using any of the following methods:

  • The federal eRulemaking portal has a web page dedicated to the proposed requirement to report summary data. Follow the instructions for submitting or uploading comments.
  • Comments of six pages or less may be submitted via facsimile at (202) 693-1313.
  • Comments may be submitted via mail to the following address: Debra A. Carr, Director, Division of Policy and Program Development, Office of Federal Contract Compliance Programs, Room C-3325, 200 Constitution Avenue, N.W., Washington, D.C. 20210.

All comments must be received on or before November 6, 2014.