6 Ways to Defend Against Compensation Discrimination Claims

A Review of The OFCCP’s Compensation Directive 307

The Heat is On!

Since the February 27, 2013 release of the latest iteration of the OFCCP’s stated procedures for investigating compensation discrimination (i.e., Directive 307 – effective February 28, 2013), there has been no shortage of webinars, blogs, and warnings from consultants and attorneys alike, providing insights into how this new directive will impact employers, and what they should do to get ahead of the inevitable tidal wave of compensation enforcement activity. Of course, if you’ve been around long enough, you will recognize this “heat” as being very similar to 2006, when the original Standards[1] andGuidelines[2] were first released. When that happened, many consultants and attorneys (present company included) went on the speaking circuit pontificating about how the “compensation sky was falling” and how employers had better start preparing for “compageddon.”

Fast forward several years and it became abundantly clear that this forecasted apocalypse didn’t occur. “Why not?” you may ask. The answer is multi-faceted and really came down to just a few key issues: 1) systemic compensation investigations are inherently time and resource-intensive and can take years to reach a resolution (and the OFCCP needs success/performance metrics “now”), and 2) the OFCCP is/was already very good at investigating adverse impact in hiring (in fact, it has long-been their bread-and-butter). So, given the historical precedent, can employers anticipate the same false-start this time around?

[1] Interpreting Nondiscrimination Requirements of Executive Order 11246 With Respect to Systemic Compensation Discrimination. Fed. Reg. 71. No. 116 (Part VI)
Voluntary Guidelines for Self-Evaluation of Compensation Practices for Compliance With Nondiscrimination Requirements of Executive Order 11246 With Respect to Systemic Compensation. Fed. Reg. 71. No. 116. (Part V)

Not a Chance!

What employers need to understand is that the OFCCP cannot allow itself to fail this time. It’s simply not acceptable to have large increases in both budget and staff (~$84M and 575 FTEs to ~$105M and 755 FTEs since 2009, respectively[1]), and not show that the money was well-spent (i.e., commensurate increases in enforcement metrics). Couple this with the Obama Administration’s continued focus on the “pay gap,” the signing of the Lilly Ledbetter Equal Pay Act, the creation of the Equal Pay Enforcement Task Force, the focus on compensation enforcement in the OFCCP’s congressional budget justification documents, and anyone can start to see the “writing on the walls.”

So now that it’s clear things have to be different this time around, what exactly are the primary components of the new Directive and how are they different from what contractors have been subject to in audits over the past few years? Well, to anyone who has been “lucky” enough to have been involved in an audit recently, the Directive is going to appear awfully familiar. The reason is that the Agency has already been following the investigative strategy outlined in the Directive (with only a few notable, and substantive, exceptions, which we will discuss in detail later). The Directive itself simply served to codify the investigative approach as well as “put the final nail in the coffin” of the Standards and Guidelines.

[1] Congressional Budget Justification: Office of Federal Contract Compliance Programs. FY 2011, 2012, 2013

Primary Components of the New Compensation Directive

According to the Directive, when investigating compensation, the Compliance Officer (CO) will:

  • Conduct a preliminary analysis of summary data
  • Conduct an analysis of individual employee-level data
  • Determine the approach from a range of investigations and analytical tools
  • Consider all employment practices that may lead to compensation disparities
  • Develop pay analysis groups
  • Investigate systemic, small group, and individual discrimination
  • Review and test factors before accepting factors for analysis
  • Conduct onsite investigation , offsite analysis, and refinement of the model

To the casual reader, the Directive, as written, appears to be a well-thought-out, step-by-step manual on how to properly investigate compensation disparities. Of course compensation discrimination isn’t simply a systemic issue. And yes, the OFCCP should be able to investigate individual differences, as well as have a number of different analytical tools at their disposal. With only a few exceptions (most notably being the extremely controversial latitude of the OFCCP to create their own Pay Analysis Groups) the Directive is very straightforward. That being said, the problem is not in how the Directive is written. The problem is how it will be enforced.

It is important to reiterate that by-and-large, the Directive simply codifies what the OFCCP is already doing in audits. The Agency is already investigating compensation disparities systemically (if possible), in small groups, and on an individual cohort-level basis. If this is, in fact, the case, then what’s the big deal? The big deal is the pressure they are under this time to “get it right,” and, as a result, the contractor community should expect a significant number of audits to focus on compensation. This is necessary to not only demonstrate the Agency’s commitment to the Administration’s priorities, but also to achieve measurable results with respect to their enforcement responsibilities (i.e., obtaining conciliation agreements with contractors). At the end of the day, this all leads to the same question, “What should conscientious and law-abiding organizations do to be proactive and to identify/rectify problem areas within their own organizations?”

Here are six recommendations.

[1]Investigations will be led (at least initially) by Compliance Officers, many of whom will likely not have the necessary training and experience to properly and efficiently guide what will undoubtedly be complex compensation investigations. District/Regional/National Agency personnel will be, at times, involved, but the initial determination regarding whether and how to investigate deeper and make additional data/information requests will be spearheaded by the CO. On this note, it is important for readers to understand that the skills necessary to perform proper, efficient, and ultimately meaningful compensation analyses take years to amass.

[2] Yes, we said it. Burden. Contractors by-and-large try to do the right thing. They might not like enforcement but they see it as a necessary burden for the greater good. What they have a problem with is “inefficient, unfocused, and unrealistic” enforcement characterized by voluminous data/document requests (e.g., “send us all data, with all factors, for all employees…and we need it by Friday”).

6. Document, Document, Document

Better documentation, primarily in the areas of starting salary and the performance appraisal process, will be helpful no matter which analytical approach the Agency takes.

5. Review Your Compensation System(s)

“Pay Grade Theory” is back on the table. In short, pay grade theory is the belief that organizations take it upon themselves to equate jobs by grouping them into pay bands and/or grades, making them combinable for analysis purposes (even though employees may have dramatically different duties, skills, qualification, and responsibilities, etc.). Understanding that this will be the OFCCP’s initial analytical strategy, it would benefit organizations to review their grades/bands in light of this fact.

4. Proactively Investigatate “Pay Analysis Groups” (PAGs)

While impossible to predict if: 1) your organization is going to be audited, 2) the OFCCP is going to deeply investigate compensation, and 3) where/how the OFCCP will decide to create PAGs (if any), employers with high-volume, homogenous positions across multiple locations should still pay particular attention (e.g., Cashiers at a big-box retailer, Customer Service Reps, etc.).

It is not a stretch of the imagination to see the Agency attempt to roll-up these employees into a single analysis using the employer’s own claims of “standardized pay policies/practices” as the justification.

3. Proactively Investigate Distribution of Opportunities (which can lead to differences in pay)

A new frontier outlined in the Directive is the investigation of the distribution of opportunities. This approach is not foreign to EEOC and Title VII investigations. However, up to this point, it has not been a strategy widely (if at all) utilized by the OFCCP. The belief (and rightly so), is that if salaries are the only factor investigated, rampant discrimination in the distribution of opportunities (that lead to disparities in compensation) can go largely unnoticed.

Is there a glass ceiling? Do only whites and/or men receive the “good routes?” Do only men work the high paying shift? Is the vast majority of the “high potential” list white and/or male? Do most training opportunities go to one group as opposed to another?

The list of positive “opportunities” where discrimination may be hidden is long and unique to each and every organization, and it would be wise for organizations to analyze these decisions.

2. Conduct Proactive Statistical Analyses

The best defense is a good offense. In this case, the best defense against an OFCCP audit or other compensation-related investigation is to be proactive, be your own worst critic, and find and rectify as many potential issues as you can while conducting analyses under attorney-client privilege.

Identifying issues proactively, behind the curtain of attorney-client privilege, offers many advantages. First, it avoids the negative press associated with a public announcement of discrimination. Second, it helps to (potentially) avoid the time-consuming, lengthy, and expensive process of defending oneself throughout the audit/litigation. Third, it allows the organization to address the identified issues when and how it chooses. Lastly — and perhaps most importantly from a financial perspective — it often allows the organization to avoid back-pay and/or punitive damages which can often dwarf any current pay adjustments.

1. Conduct Proactive Qualitative Analysis

In cases where statistically significant pay disparities have been observed, it is absolutely necessary for employers to then carefully evaluate data/information that was not included in the statistical analysis.

This type of analysis is commonly referred to as a “cohort” or “file-by-file” analysis. Often there is a rational, job-related reason why employees are paid differently, but that information didn’t make it into the statistical analysis. At the end of the day, no employer should concede to a claim of discrimination (or make compensation adjustments for that matter) without “turning over every stone.”

Under Pressure

A close read of the Directive, coupled with an understanding of how the OFCCP has already been investigating compensation over the past few years, will lead most to the conclusion that not much has changed. While this may be true, this notion is missing the point.

The true impact of the Directive is not in what it says, but in the tremendous amount of pressure it puts on the Agency to succeed. This single factor alone will lead to a dramatic increase in the focus on compensation, with an equally dramatic increase on the burden for employers to defend themselves in the face of what will undoubtedly be an onslaught of data and document requests (both relevant and irrelevant). Under this pressure, Federal contractors may be tempted to conciliate simply to “see it all go away.” However, be warned that this too is likely part of the “unwritten” compensation Directive — to “start big and see what sticks.” The Agency is going to be emboldened by the new Directive and, as a result, will (likely) be more than willing to take novel issues such as broad Pay Analysis Groups to trial simply to establish precedence. Good. Bad. Indifferent. It is this precedence that will help to define the playing field for enforcement efforts to come.

Originally, when the Notice of Proposed Rulemaking (NPRM) rescinding the 2006 compensation Standards and Guidelines was announced, contractors cried, “How will we know how the OFCCP is going to investigate compensation?” Well, we got our answer. It just may not be what we wanted to hear.

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