The Office of Federal Contract Compliance Programs (OFCCP) issued a new Directive broadening the methods it will use to investigate compensation discrimination by employers who hold federal government contracts or subcontracts. OFCCP intends to apply a flexible case-by-case approach that can uncover multiple forms of compensation discrimination. In issuing the new Directive, OFCCP at the same time rescinded pay discrimination standards published in 2006 because the agency believed they limited its full investigation authority. The new Directive became effective February 28, 2013, and is available here.

Even prior to issuing the new Directive, combatting compensation discrimination had become a major OFCCP initiative in recent years. In 2011, 20 percent of OFCCP compliance evaluations that resulted in conciliation agreements involved pay discrimination, compared with 14 percent in 2010 and 4 percent in 2009, according to an OFCCP spokesperson who also reported that OFCCP recovered US$1.6 million in back pay and salary adjustments in 2011. The new Directive signals a still more aggressive pursuit of compensation issues by OFCCP and will present increased burdens and risks for covered employers during compliance reviews.

Key points in the new Directive include:

  • At the start of a compliance review, OFCCP’s preliminary analyses will focus on data by Affirmative Action Plan job groups, or existing pay grades, levels or bands, and on the size and frequency of average differences as well as numbers of employees affected. OFCCP did not announce fixed measurements that will be used at this stage. 
  • After the preliminary analyses, OFCCP will often ask contractors to identify the factors used in making compensation decisions, for copies of compensation policies and procedures, and for individualized data on some or all employees, in order to conduct a more complete review from the start.
  • The investigation can be much broader in scope than in the past, including examining non-base pay data, such as overtime pay, incentive compensation, bonuses and commissions, in addition to salary, and examining  job assignments, training and advancement opportunities that affect pay. In order to evaluate these issues, OFCCP can make additional, successive data requests and can decide to go on-site for investigation, including interviews.
  • A variety of tools to analyze compensation disparities will be used. Investigators can look for systemic large group discrimination, small group discrimination and individual discrimination, using regression analysis, cohort analyses, or other means that OFCCP believes compare similarly situated employees. Compliance officers will consult with their supervisors, OFCCP statistical analysts, the Regional Solicitor of Labor, and possibly with the National Office, to decide which investigative or analytical tools will be used, based on the facts of the case.
  • OFCCP will test any factors identified by the contractor to explain compensation differences. The agency will examine whether the proposed explanatory factors are complete, accurate, relevant as a predictor of pay, and consistently applied. If a factor causes adverse impact, the investigator can look for evidence of any best practices to reduce adverse impact.
  • Ultimately, if the agency believes discrimination has occurred, it will issue a Notice of Violation, which will trigger a process for potential resolution through a conciliation agreement and potential enforcement proceedings if the matter is not resolved.

More information concerning OFCCP’s new Directive is available here: Fact Sheet and FAQs

OFCCP’s approach to compensation investigations will present further challenges for employers who are the subject of OFCCP audits. Compensation differences can be difficult to explain for a variety of reasons, including that compensation levels usually result from cumulative decisions made over time, and data concerning some of the relevant factors often are not readily available on an employer’s database or well-organized in other records. The new procedures increase the likelihood of disputes over how compensation should be analyzed and what the results of an analysis mean. They also effectively increase record-keeping burdens as contractors will be expected to readily produce proof of the factors used to determine compensation, and contractors themselves will want evidence bolstering their compensation justifications. 

OFCCP already expects covered employers, as part of ongoing affirmative action efforts, to evaluate their compensation and other personnel practices for potential disparities related to race or gender, although the agency does not require any particular methodology for self-evaluation of pay. The new Directive makes it particularly timely for federal government contractors and their legal counsel to consider conducting a self-audit of compensation and related record-keeping practices, attempting to apply potential OFCCP methodologies, in order to determine if improvements are warranted, prior to an actual compliance review.

The OFCCP prohibitions on discrimination are imposed upon contractors through the equal opportunity employment contract clauses. This change in OFCCP investigation policy claims to not impact the rights of contractors and is immediately applicable without contract modification.