Every year, the federal government audits contractors and subcontractors for data showing that they aren’t engaging in pay discrimination. But companies are often mystified as to whether they’re presenting their pay data analysis right according to the government.
That pay data audit process might have gotten a little less opaque thanks to some new guidance the Office of Federal Contract Compliance Programs handed down last month. On Aug. 24 the OFCCP, which oversees contractors’ compliance with the government’s affirmative action requirements, issued Directive 2018-5, which aims to make the agency’s audit process more transparent and consistent. This comes after the OFCCP issued other guidance earlier this year including a directive explaining how it selects contractors for audit. Local attorneys who work with contractors on pay equity issues say the directive is another sign the OFCCP is making good on its recent promises of better transparency and clarity.
Among other illuminating details in Directive 2018-5, the OFCCP described the reasoning it uses when evaluating the compensation data it receives from contractors it audits, including how it weighs statistical and anecdotal evidence of possible pay disparities. The directive also offered guidance on how contractors can conduct their annual self-audits more meaningfully “so that they can proactively identify and address issues with their compensation practices.” The new directive rescinds Directive 307, the OFCCP’s 2013 guidance on the topic.
Executive Order 11246, signed back in 1965, requires contractors to “ensure that applicants are employed, and … treated during employment, without regard to their race, color, religion, sex, sexual orientation, gender identity, or national origin.”
Affirmative action plans outline the steps the employer takes to ensure the racial and gender demographic of its workforce reflects that of the populations it hires from and that it doesn’t have pay disparities by race or gender among employees. Federal contractors and subcontractors must adhere to AAP requirements if they have 50 or more employees and a contract worth $50,000 or more.
Until recently, contractors didn’t have much direction on how they should present their compensation analysis to the OFCCP for a compliance audit. Under Directive 307, the OFCCP gave companies a wide berth for deciding how they might crunch the numbers and group employees together, but that free rein came at the expense of clarity: oftentimes companies weren’t sure if the government would approve of or understand their model.
“I think it is a challenge for contractors to understand … if they’re doing it in an acceptable manner,” said Laura Mitchell, a principal at Jackson Lewis in Denver whose employment practice focuses on contractor compliance and affirmative action requirements.
Mitchell said the new directive is helpful in explaining some of the OFCCP’s reasoning, particularly in the ways the agency groups employees together in the pay analysis, which she said is “one of the biggest rubbing points” for companies in the process. The agency explains how it might weigh the factors that affect the statistical modeling, such as control variables and employee performance data.
Contractors still have some leeway in how they can acceptably form their pay analysis groupings, as the OFCCP will, to an extent, try to adopt the company’s model in evaluating the compensation data. But if the contractor doesn’t sufficiently articulate its methodology to the OFCCP when submitting the data, the agency will default to its own methodology in determining whether pay disparities exist. “Companies need to understand how their compensation systems work and be able to explain that to the OFCCP,” Mitchell said.
Also, companies need to be sure that if they claim to the OFCCP there are no pay disparities, their data supports that conclusion, Mitchell said. “The government won’t just take the contractor’s word for it,” she added. For example, companies might say they pay for performance and that factor alone is what might account for any systemic difference in pay among groups. “But a lot of times we see that’s not actually the case, the top performers aren’t actually getting paid more,” Mitchell said.
Sue Schaecher, a partner at labor and employment law firm Fisher Phillips’ Denver office, said Directive 2108-05 is more evidence that the OFCCP’s claims of seeking greater transparency are more than just talk. “I think it is helpful, it’s certainly a step in the right direction.”
Schaecher noted, however, that while 2018-05 rescinds previous guidance in Directive 307, it doesn’t entirely roll back the OFCCP’s audit guidelines to pre-307 conditions. For example, before 307, the agency required not just statistical evidence, but also anecdotal evidence to support a finding of pay disparity. The OFCCP can still find a pay equity violation without anecdotal evidence to back up that conclusion, Schaecher said. According to the directive, the agency is less likely to pursue a contractor’s violation in that instance, but “there may be factors … which explain why OFCCP was unable to uncover anecdotal evidence during its investigation despite the strength of the statistical evidence of systemic compensation discrimination.”
Working with the OFCCP to show pay equity compliance may be just one more obligation a federal contractor must adhere to in order to do business with the government, “but it’s part of the deal,” Schaecher said.
— Doug Chartier