Compensation at Federal Contractors to Go Under the Lens

Come next year, compliance officers at federal contractors will have more than the complex government project bidding process to worry about.

The Office of Federal Contract Compliance Programs (OFCCP), a division of the Department of Labor that oversees compliance programs at federal contractors, issued an advance notice on Aug. 10 announcing that it will launch a new compensation data collection program, which some say is, in effect, a reinstatement of the Equal Opportunity survey implemented during the Clinton Administration in the late 1990s and discontinued in 2006. The full proposal will be issued in October.

Back then, EO forms went to more than 50,000 federal contractors annually, requiring an average of 21 work hours to complete. Contractors were given 45 days to submit the paperwork. In the Aug. 10 notice, the OFCCP said its expectation with the new program is to improve the agency's ability to identify and curb pay discrimination.

Plans for the proposed data collection program are still in the initial stages. At the moment, the OFCCP is soliciting comments from federal contractors to determine which group of contractors should be included in the review and the type of data the agency should collect. The agency says it is too early to say what the collection form will look like or what method the agency will use to collect data. The OFCCP is likely to require specific data sets to be submitted electronically.

The OFCCP does say the tool will be used primarily as a screening mechanism to identify contractors whose pay practices warrant further investigation; it may also design the tool so that contractors can use it to conduct self-assessments of their compensation decisions.

In the notice, the OFCCP may use the data to generate insights into potential problems of pay discrimination at the establishment level. The agency will then conduct additional investigations should the data show signs of unjustified income disparities among a contractor's workforce.

“The proposed data tool could be a game-changer, not only to the department's efforts to combat pay discrimination, but also in helping businesses better assess how they are doing when it comes to being good, equal pay employers,” says Patricia Shiu, director at OFCCP. According to Shiu, female workers in the United States earned an average of 80 cents for every $1 earned by their male counterparts; that disparity grows wider among females in minority groups. 

The program is not expected to replace the OFCCP's current review process. The agency conducts an average of 4,000 contractor reviews a year for compliance with three equal employment opportunity regulations: Executive Order 11246, Section 503 of the Rehabilitation Act of 1973, and the Vietnam Era Veterans' Readjustment Assistance Act. The Executive Order prohibits pay discrimination practices among federal contractors and sub-contractors in employment practices, while the other two regulations forbid compensation discrimination against individuals with a disability or covered veterans, respectively.

The Aerospace Industries Association says it is currently soliciting feedback from members on the program.

“The proposed data tool could be a game-changer, not only to the department's efforts to combat pay discrimination, but also in helping businesses better assess how they are doing when it comes to being good, equal pay employers.”

—Patricia Shiu,

Director,

OFCCP

Cara Crotty, partner at law firm Constangy, Brook & Smith, says the program will likely resemble the rescinded Equal Opportunity survey format. “The OFCCP may revert back to a survey-type of mechanism, like the rescinded EO survey, requiring contractors to submit information regardless of whether they are the subject of a compliance review or not,” she says.

The current practice is that contractors must submit a summary of information on employee compensation to the agency, Crotty says. If a federal contractor is subject to a compliance review, only then will the OFCCP obtain access to more detailed compensation data.

Crotty adds that the OFCCP has routinely followed up with contractors if the summary data indicated potential compensation disparities. “They are currently trying to change the itemized listing for the scheduling letter, to require submission of this detailed information at the front end of the audit process,” she says.

If the new program does follow the format of the EO program, that will be bad news for government contractors, says Deena Jenab, partner at law firm Husch Blackwell. The EO survey “caused a lot of complications to federal contractors in the past while not achieving the objective of identifying pay discrimination practices,” she says.

Although it is too early to tell how the proposed rule will be implemented, Jenab says the potential burden for federal contractors is high.  “Right now [the OFCCP] is using a formula where a $2,000 pay difference will trigger an establishment audit,” she says.

OFCCP PROPOSAL

The following excerpt from the OFCCP discusses the proposed tool that aims to provide insights into pay discrimination:

The purpose of the proposed new tool

is to provide insight into potential

problems of pay discrimination by

contractors that warrant further review

or evaluation by OFCCP or contractor

self-audit. Accordingly, it is envisioned

primarily as a screening tool, although

it may also have research value. The

tool would allow OFCCP to effectively

and efficiently identify supply and

service contractors whose compensation

data indicates that further investigation

is necessary to ensure compliance with

the non-discrimination requirements of

the Executive Order and would provide

contractors with a self-assessment tool

that may be used periodically to

evaluate the effects of their employee

compensation decisions. The data

collected through this tool may be used

to identify contractors for compensation

focused reviews as well as full

compliance reviews. Women still earn

only 77 cents for each dollar earned by

a man. The wage gap is even greater for

women of color: non-Hispanic white

women make 75 cents for every dollar

earned by a non-Hispanic white man,

while African-American women make

62 cents and Latinas make 53 cents for

every dollar earned by a non-Hispanic

white man. Potentially nondiscriminatory

factors can explain some

of these differences. Even so, after

controlling for differences in skills and

job characteristics, women still earn less

than men. Some scholars find that

these differences can be explained, to

some extent, by differences in education

and prior labor market experience.

Others identify job segregation as an

important cause of the pay gap.

Ultimately, the research literature still

finds that an unexplained gap exists

even after accounting for potential

explanations. Moreover, research

literature finds that the narrowing of the

pay gap has slowed since the 1980's.

To the extent that these factors, such as

type of job or amount of continuous

labor market experience, are also

influenced by discrimination, the

‘‘unexplained'' difference may

understate the true effect of

discrimination. In addition to the

gender pay gap, scholars have found

race and ethnicity-based pay gaps that

put workers of color at a disadvantage.

As a result, eliminating compensation

discrimination by Federal contractors

has been, and continues to be, a priority

issue for OFCCP.

Source: OFCCP Advanced Notice of Proposed Rulemaking.

The danger of a compensation data collection tool is the significant number of “false positives” resulted from its use, Crotty says. “Unless each contractor can submit relevant data in a way that makes sense for its company, the tool will probably find disparities all over the place.”

In most instances, the disparities can be explained by legitimate, non-discriminatory factors such as time in job, education, performance history and other factors, Crotty says. “It will result in wasted time and resources for both the government and the contractor in researching disparities that legitimately occur.”

Creating a generic tool that can effectively analyze compensation practices at all government contractors is probably impossible, Crotty says. “The contracting community is very opposed to the OFCCP's proposal.”

What to Expect Next?

According to Crotty, a final rule isn't likely to be announced until early 2012. But companies shouldn't wait to conduct a diligent review of their annual compensation practices and pay levels. “Hopefully, the agency will realize that this proposed tool will not be an efficient use of resources and abandon the idea altogether,” she says.

Meanwhile, Jenab says contractors should study the advance notice and formulate comments to highlight the potential problems the agency should take into account before designing the data collection tool. “For now, contractors should be consistent with their compensation plan and pay practices and examine their pay scale annually,” she says.