OFCCP to Put Contractors' Compensation Systems Under a New Microscope

In recent months, various agencies tasked with enforcing federal labor and employment laws have been a hotbed of activity — publishing guidance memoranda, enforcement directives, and the like. The Office of Federal Contract Compliance Programs (OFCCP) is no exception.

On February 28, 2013, the OFCCP rescinded the June 2006 Systemic Compensation Standards and Voluntary Guidelines for Self-Evaluation of Compensation Practices and issued OFCCP Directive 307  titled, “Procedures for Reviewing Contractor Compensation Systems and Practices.” Although it has received much press, at its core, Directive 307 simply states that the OFCCP:

1. Will continue to investigate compensation discrimination by federal contractors
2. Will use Title VII’s case-by-case approach to investigate compensation discrimination and prosecute federal contractors with violations
3. Will use various investigation techniques, including comparisons of individual pay differences, statistical analyses of class compensation disparities, and interviews of employees, to “tailor the compensation investigation” to the facts of the particular case
4. May go onsite if the contractor refuses to supply requested compensation data to the OFCCP

With regard to the particular procedures that the OFCCP will use in assessing a federal contractor’s compensation data, Directive 307 indicates that the contractor will be asked to provide compensation data as part of the initial desk audit scheduling letter. The compliance officer will then typically:

1. Conduct a preliminary analysis of the contractor’s summary compensation data
2. Analyze individual employee-level data
3. Use “a range of investigative and analytical tools” to determine the best approach for investigating compensation disparities
4. Evaluate “all employment practices that may lead to [c]ompensation disparities,” including differences in base pay, differences in job assignment or placement, differences in training, earnings, or advancement opportunities, and differences in compensation “add-ons” such as bonuses
5. Create its own pay analysis groups of “comparable” employees in order to investigate “systemic, small group and individual discrimination”
6. Test and evaluate the various factors identified by the contractor as relevant to the contractor’s compensation decisions before deciding which factors will be used for the analysis
7. Conduct additional onsite and offsite analyses (including employee interviews and requests for additional data), where necessary

Directive 307 also makes it clear that “the order in which these procedures occur may vary based on the facts and circumstances of each review. At any stage in the process, OFCCP may determine, based on the evidence, that it is appropriate to close the review or may determine that further review is warranted.”

Many of the investigation techniques and procedures described in Directive 307 have already been used by the OFCCP during recent years and therefore are not necessarily “new.” However, the OFCCP’s current approach to compensation analysis (now made explicit by Directive 307) will likely continue to increase costs for those contractors who are audited by the OFCCP.

For instance, contractors will be forced to evaluate the pay groups created by the OFCCP and argue for modification of groups that contain dissimilar employees. Additionally, contractors will have to provide legitimate, non-discriminatory reasons for nearly all pay differences. Finally, as the OFCCP manipulates and analyzes compensation data in a variety of ways and using various techniques, contractors will likely be asked to respond to multiple supplemental data requests over an extended period of time.

In light of these additional costs and burdens, in advance of an audit or upon receiving notice of an audit by the OFCCP, contractors should take the following actions (in conjunction with inside or outside counsel) to prepare for the OFCCP’s eventual compensation analysis:

1. Review job groups and identify smaller groups of similarly situated employees within those groups
2. Identify pay disparities within job titles and begin compiling information regarding the legitimate, nondiscriminatory reasons for those pay disparities
3. Examine employment practices related to hiring, training, promotion, and bonuses to see whether there are any practices that may affect compensation and/or explain compensation disparities
4. Prepare for a lengthy audit process and budget defense costs accordingly

By taking these steps in advance of an audit (or during the very early stages of an audit), contractors will be better able to properly defend against the more burdensome compensation investigations that appear likely in light of Directive 307.