During her keynote speech at the National Industry Liaison Conference on August 4, 2010, Office of Federal Contract Compliance Programs (OFCCP) Director Patricia Shiu announced that OFCCP would rescind its 2006 standards entitled “Interpreting Nondiscrimination Requirements of Executive Order 11246 with Respect to Systemic Compensation Discrimination” (“Standards”) and “Voluntary Guidelines for Self-Evaluation of Compensation Practices for Compliance with Executive Order With Respect to Systemic Compensation Discrimination” (“Voluntary Guidelines”). This action was recommended previously in July 2010 by the White House’s National Equal Pay Enforcement Task Force, which was created to implement President Obama’s State of the Union message about “crack[ing] down on violations of equal pay laws.” And now action is being taken.

Earlier this week, on October 25, 2010, OFCCP sent a Notice to the Office of Information and Regulatory Affairs (OIRA), part of the Office of Management and Budget (OMB), which was titled “Notice of Proposed Rescission, Interpreting Nondiscrimination Requirements of Executive Order 11246 With Respect to Systemic Compensation Discrimination and Voluntary Guidelines for Self-Evaluation.” While the title of the Notice was released, the content was not.

By sending the Notice to OMB, OFCCP has taken a necessary step in the process of rescinding its Compensation Standards and the Voluntary Guidelines. OIRA has responsibility for reviewing drafts of final and proposed agency regulatory actions before they are published in the Federal Register. This process can take days or months, so it is unclear when this Notice of Proposed Rescission may be published.

2006 Standards and Guidelines

OFCCP’s 2006 Standards provided methods for OFCCP evaluation of federal contractors’ and subcontractors’ compensation practices. The Standards include (1) a determination of employees who are “similarly situated” based on work performed, levels of responsibility, and skills and qualifications involved in the job positions; and (2) use of multiple regression analysis. Under the Standards, OFCCP also assesses anecdotal evidence of compensation discrimination.

The Voluntary Guidelines attempt to motivate contractors and subcontractors to follow them by providing that OFCCP will deem a contractor in compliance with its obligation to evaluate its compensation systems for race- or gender-based disparities if the contractor’s self-evaluation method follows the Guidelines. A self-evaluation method complies with the Voluntary Guidelines if (1) it creates similarly situated employee groupings (SSEGs); (2) the contractor attempts to produce SSEGs large enough for statistical analysis; (3) the contractor annually performs statistical analysis on the SSEGs, and multiple regression analysis is required for populations of 500 or more employees; (4) the contractor investigates any statistically significant compensation disparities; (5) the contractor retains all related documents and data; and (6) the contractor gives all documents and data to OFCCP during an audit.

As a practical matter, due to the cost and complexity of conducting multiple regression analysis, many mid-size and smaller contractors have not adopted the optional methodology set forth in the Voluntary Guidelines. Of those contractors who have utilized multiple regression analysis, the vast majority have not shared their self-evaluation with OFCCP during compliance evaluations.

What This Means For Contractors

For the federal contractor and subcontractor community, this action highlights the general uncertainty surrounding current compliance standards that will be used in reviewing compensation during OFCCP audits. It appears that OFCCP may depart from its practice of deeming multiple regression analysis the gold standard for analyzing pay, but it is unclear what methodology or methodologies may be used instead. Multiple regression remains a good practice for many employers who wish to review pay equity, particularly those with larger work forces, even outside the context of OFCCP compliance.

Contractors should consult with counsel to discuss the best approaches for pay equity analysis generally and for OFCCP compliance purposes.