On August 24, 2018, the Office of Federal Contract Compliance Programs (OFCCP) rescinded Directive 3071 and its Obama-era procedures for reviewing contractor compensation systems and practices, and replaced it with a new directive under which OFCCP’s approach to compensation analysis is clarified and constrained.2 Although the new directive does not include a hoped-for safe harbor provision for contractors that undertake robust internal compensation audits and adjust compensation based on their findings, it does provide significant guidance to both OFCCP compliance officers and federal contractors about how compensation analysis will be approached and what contractors can expect.

Background

In early 2013, OFCCP issued Directive 307, which rescinded the 2006 Compensation Standards and Voluntary Guidelines, which had previously guided OFCCP’s assessment of contractor compensation compliance. According to Directive 307, the 2006 guidance restricted OFCCP’s ability to fully investigate pay discrimination, and its rescission was designed to improve OFCCP’s ability to combat pay discrimination. Directive 307 prescribed a more open-ended approach to compensation analysis, permitting investigation using a range of analytical tools and pay analysis groups based on the facts of each specific investigation.

Earlier guidance had instructed OFCCP to analyze contractor compensation practices based on similarly situated employee groupings based on four factors: (1) similarity of work; (2) levels of responsibility; (3) skills needed to perform the job; and (4) qualifications needed to perform the job. By contrast, Directive 307 permitted aggregation of individuals in jobs with very different duties, qualification requirements, and levels of responsibility into pay analysis groupings. These groupings were to be formed on a case-by-case basis based on compliance officers’ assessment of which groups of employees were “comparable for purposes of the contractor’s pay practices.”

Under Directive 307, there also was no provision requiring OFCCP to account for the influence of legitimate, nondiscriminatory factors to explain pay differences. Contractors could not predict the pay analysis groupings OFCCP would employ, which limited their ability to perform meaningful self-audits. In addition, OFCCP’s heavy reliance on statistical significance alone left contractors with little recourse where compensation differences were based on bona fide factors other than discrimination. In these respects, Directive 307 was widely criticized by the contractor community as supporting findings contrary to well-established Title VII law regarding appropriate analyses of compensation.

As of August 24, 2018, OFCCP has rescinded Directive 307 and issued new guidance in order to:

  1. Clarify and provide additional transparency regarding OFCCP’s approach to compensation evaluations;
  2. Provide clarity to contractors that wish to conduct meaningful pay equity self-analysis; and
  3. Improve the consistency and efficiency of compensation analyses during compliance evaluations.

OFCCP’s New Standards

OFCCP’s new directive applies to all compliance evaluations scheduled on or after August 24, 2018, as well as open reviews to the extent the current guidance does not conflict with OFCCP guidance or procedures in place prior to August 24.

Under the new directive, compensation analysis must be performed based on similarly situated analysis groupings (SSAGs) based on job similarity (e.g., tasks performed, skills required, effort, responsibility, working conditions and complexity) and other objective factors, such as minimum qualifications or certifications. OFCCP will assess similarly situated employees by first developing pay analysis groupings (PAGs), which may span multiple job titles, units, categories, and groups. However, OFCCP has clarified that PAGs will be based on contractors’ compensation hierarchies and job structures when such information is reasonable and verifiable. If compensation structure data is not available, OFCCP will assess pay equity using either EEO-1 or AAP job groupings, provided they too are reasonable, meet the regulatory requirements, and are of sufficient size to conduct meaningful statistical analysis.

Once PAGs are identified, OFCCP will then statistically control for structural differences among positions and individual employee characteristics related to the contractor’s pay determinations. Specifically, OFCCP indicates its compensation analyses will control for such organizational differences as division, business unit, product line, and location, and such individual employee variables as tenure, experience, education, full-time status, and pay grade level.

OFCCP has also detailed principles that will guide its statistical methodology and modeling, and a procedure to increase transparency and meaningfully communicate and conciliate findings during the audit process. First, at the conclusion of the desk audit, OFCCP will notify the contractor in writing of the general nature of any preliminary compensation disparities it intends to investigate further through additional information requests or onsite review. Second, OFCCP will now attach to any Pre-Determination Notice (PDN) for preliminary discrimination findings the individual-level data necessary for the contractor to replicate the PAGs and regression results. This will provide the contractor with a formal opportunity to offer a nondiscriminatory explanation for the purported pay disparities. Both the PDN and the contractor’s response will be reviewed by the national office. If OFCCP ultimately uses a different regression analysis to support a subsequent Notice of Violation (NOV), then such analysis will be attached to the NOV. Finally, OFCCP will involve representatives from its Branch of Expert Services in the conciliation process where necessary to clarify the statistical analysis that has been performed or answer appropriate questions about the process and assumptions used to calculate back pay.

Contractor Takeaways

OFCCP’s new compensation analysis directive provides contractors with a degree of clarity and predictability lacking in recent years. This should inform contractors’ annual internal compensation review and potentially result in a more extensive internal compensation analysis designed to predict OFCCP’s approach and address any potential disparities before an OFCCP compliance evaluation is commenced.

Contractors should undertake in-depth review of their pay groupings, which, if designed correctly, should be adopted outright by OFCCP under the new directive, which requires job structures and compensation hierarchies to be utilized to formulate pay analysis groupings where they are available. In this way, contractors have an opportunity not only to predict OFCCP’s approach, but to actually pre-establish the confines of a compliance evaluation’s compensation analysis – as long as they formalize and follow their own compensation hierarchies and job structures.

Never have the risks of unmonitored compensation practices been so apparent, nor the benefits of robust internal pay equity evaluations been so great. Not only can meaningful internal analysis reduce the likelihood of a finding of pay disparity by OFCCP, but it may also provide contractors with an affirmative defense under local pay equity laws, and set them up for success in defending against claims under Title VII, the Equal Pay Act, and state and local pay equity laws. However, contractors should involve counsel to protect certain aspects of internal pay equity analyses from discovery in subsequent litigation or agency review.