OFCCP Proposes New Rules For Evaluating Pay Discrimination And Contractor Self-Audits

The Office of Federal Contract Compliance Programs (OFCCP) has recently published two proposed guidelines which, if made final, will significantly change the landscape for evaluating whether the compensation practices of government contractors comply with Executive Order 11246. The first proposal, Interpreting Nondiscrimination Requirements of Executive Order 11246, is intended to plainly set out the OFCCP’s official standards regarding systemic compensation discrimination. The second proposal, Guidelines for Self-Evaluation, is intended to provide contractors with practical assistance in developing their own self-audits.

Significantly, these new proposals do away with the previously used, and much maligned, pay grade theory. The OFCCP will now apply a statistical analysis to "Similarly Situated Employee Groupings."

Further, the OFCCP proposes two alternatives by which government contractors can complete their mandatory annual self-audits. In the first alternative, the contractor conducts a self-audit with the expectation that the methodologies and results will be explained to the OFCCP during a compliance review. If, during a compliance review, the OFCCP finds that the methodologies and results reasonably conform to the new Guidelines for Self-Evaluation, the OFCCP will give deference to the self-audit and consider the contractor’s compensation practices in compliance with the Executive Order. If the contractor’s procedures are only marginally in compliance with the Guidelines for Self-Evaluation, the OFCCP will advise the contractor to modify the following year’s self-audit procedures and give the contractor conditional compliance based on the stipulation to do so.

The other alternative, labeled Alternative Compliance Certification, is designed to assist contractors who are concerned that they will lose the legal privileges attached to a self-audit if the self-audit is disclosed to the OFCCP. Rather than conducting a self-audit with the expectation that the methodologies and results will be reported to the OFCCP, the contractor instead certifies in writing that it has performed a self-audit. Under this approach, if the OFCCP does perform a compliance review at a later date, no deference will be given to the analyses used in the contractor’s self-audit. Instead, the OFCCP will perform a full compensation investigation.

In order to comply with Executive Order 11246, government contractors are required to analyze and evaluate their compensation systems in order "to determine whether there are gender-, race-, or ethnicity-based disparities." 41 CFR 60-2.17(b)(3).

Until publication of the proposed guidelines, government contractors have not been given any official guidance for conducting an analysis of their compensation systems for compliance with E.O. 11246.

Up to this point in time, the OFCCP was unofficially analyzing contractor compliance using the pay grade theory. Under the pay grade theory, the average pay of women and minorities within a contractor’s pay grade or salary level is examined. It is assumed that if the contractor has placed the employees in the same pay grade, the jobs are similar enough for a salary comparison. This is true even if the jobs are vastly different. Differences found in mean or median averages between men and women or minorities and non-minorities in the same pay grade (after accounting for two or three possible causes, such as time in grade, performance, or past experience) result in a finding of pay discrimination. This method does not distinguish between statistically significant and statistically insignificant differences and allows contractors very little opportunity to explain any apparent pay disparities.

In the preamble to the proposed guidelines, the OFCCP abandons the use of the pay grade theory. The preamble notes that the pay grade theory does "not comport with Title VII standards" and "constitute[s] the comparable worth theory of compensation discrimination which has been widely discredited by the courts."

As discussed below, rather than comparing employees of the same pay grade as done in the pay grade theory, the OFCCP has proposed comparing the pay of employees in "Similarly Situated Employee Groupings" (SSEGs).

New Approaches to Self-Audits

The OFCCP now proposes two alternatives by which contractors can complete their self-audits. One approach that affords no legal privilege to the methodologies and results of the self-audit and another which, at least potentially, immunizes the methodologies and results of the self-audit from discovery by an opposing party in any subsequent litigation.

Self-Audit Prepared with the Expectation that Methodologies and Results Will Be Provided to the OFCCP

Under the non-privileged alternative, the contractor prepares a self-audit with the expectation that, during a compliance review, the methodology and results will be provided to the OFCCP. Although contractors remain free to conduct the self-audit using any method they find appropriate for examining their pay practices, during a compliance review the OFCCP will deem the contractor compliant with E.O. 11246 if the self-audit reasonably meets the Guidelines for Self-Evaluation. In order to meet the Guidelines for Self-Evaluation, the self-audit must conform to the following:

• Employees who perform work that is "similar in content, responsibility, and requisite skill and qualifications" must be placed into respective SSEGs.
• Each SSEG should contain "at least 30 employees overall, and contain five or more incumbents who are members of the following pairs: male/female or minority/non-minority." In addition, SSEGs should contain at least 80 percent of the workforce at a given location.
• The contractor must annually perform some type of statistical analysis which evaluates the pay comparison between the employees in the SSEG. The statistical analysis must account for "factors that legitimately affect the compensation of the members of the SSEGs under the contractor’s compensation system, such as experience, education, performance, productivity, location, etc."
• At any location at which the contractor has 250 or more employees in the work force, the statistical analysis performed by the contractor must be a multiple regression analysis. A separate multiple regression analysis must be employed for each SSEG and the contractor is free to attempt to identify all factors which may influence salary for representation in the regression analysis as independent variables.
• If a statistically significant compensation disparity is found by the self-audit, the contractor must adequately explain whether such a statistical disparity is due to legitimate factors or otherwise is not the product of unlawful discrimination. If the statistical disparity cannot be explained, the contractor must provide appropriate remedies. The OFCCP does not provide contractors with guidance on what would be an appropriate remedy other than to say that the contractor may have to make adjustments based on both current and prior disparities.
• The contractor must contemporaneously create and maintain for a period of two years the data and statistical analyses necessary to document its findings and any remedies. Further, all of the documentation must be made available to the OFCCP in a compliance review.

If the OFCCP conducts a compliance review of the contractor and concludes that the self-audit is only marginally reasonable in meeting the Guidelines for Self-Evaluation, the OFCCP may suggest in writing that the contractor make prospective modifications to its self-audit procedures. The contractor will be given conditional compliance based on its agreement to make these changes. If, during a future compliance review, the OFCCP determines that the contractor has not made the suggested changes to its self-audit procedures, the contractor’s self-audit system will no longer be deemed to comply with E.O. 11246.

Alternative Compliance Certification

Recognizing that some contractors are concerned that by disclosing their self-audits to the OFCCP they may waive attorney-client privileges, the agency has proposed a completely novel approach to compliance certification - Alternative Compliance Certification.

Under this approach, the contractor does not conduct a self-audit with the expectation that the methodologies and results will be reported to the OFCCP. Instead, the contractor has a "duly authorized officer of the contractor" certify in writing and under penalty of perjury that, at the direction of counsel, the contractor has performed a compensation self-audit. Further, the contractor must certify that legal counsel has advised the contractor that the self-audit analyses and results are subject to the attorney-client privilege and/or the attorney work product doctrine.

This approach, while seemingly preferable, does have certain drawbacks. First, if the OFCCP does perform a compliance review of the contractor’s compensation system at a later date, unlike the case where the contractor prepares its self-audit with the expectation of providing the methodology and results to the OFCCP, the compliance review will be done without regard to the contractor’s own analyses or results. Second, it remains an open question whether simply signing a certification stating that the analyses required by the OFCCP have been performed will actually protect the underlying methodologies and results from discovery.

Impact on Contractors

While the new OFCCP proposals offer overall positive changes, many contractors will initially find it difficult to conform to the Guidelines for Self-Evaluation. Contractors who are required to perform a multiple regression analysis (those with 250 or more employees at the location) must obtain information on the variables which contribute to salary - such as education, experience, and performance - for each employee. This information is often not readily available in human resources databases and instead must be retrieved from the actual personnel file of each employee.

It is critical that counsel be involved in the self-audit process in order to protect the process by the attorney-client privilege.

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