Federal Contractors to Get Greater Scrutiny of Pay Practices

Compliance officers at federal contractors are in for a rude awakening, thanks to a crackdown on pay discrimination practices that threatens to drastically expand the scope of compensation audits.

The Office of Federal Contract Compliance Programs—the Department of Labor division responsible for ensuring federal contractors' compliance with Equal Employment Opportunity laws—is mulling the development of a controversial new compensation data collection tool that would help the OFCCP identify discriminatory pay practices at contractors. The OFCCP said in its semi-annual regulatory agenda for 2014 that it plans to issue a related notice of proposed rulemaking this month.

Already, the OFCCP has received considerable pushback on the idea. The bulk of the 2,441 public comments it received in response to its advanced notice of proposed rulemaking issued in August 2011 on the compensation data collection tool have derided the idea. The common concern expressed by those in the federal contracting community is that the new tool threatens to impose significant new compliance burdens on the way that compensation data would need to be collected, maintained, and reported to the OFCCP.

Among contractors' chief concerns is that the new rules expand what gets included in compensation. “The range of what they're counting as compensation is extremely broad,” says Rebecca Springer, counsel in the labor and employer group of law firm Crowell & Moring. The new rules could define compensation to potentially include, for example, base salary, W-2 earnings, commissions, stock options, health and retirement benefits, and other perks.

More Intense Compensation Audits

The OFCCP's regulatory agenda also hints at the data collection tool playing an important role in the OFCCP's “establishment-specific, contractor-wide, and industry-wide analyses.” Using such data to perform compensation audits across a contractor's multiple establishments would be a “significant change,” says Springer.

The expanded scrutiny will mean federal contractors will undergo “more intense audits of their compensation policies and practices,” says Andrew Turnbull, an associate in the employment and labor practice group of law firm Cooley. As a result, federal contractors need to have their “finger on the pulse of their compensation,” he says.

“We've seen a number of clients who have come to us that really don't understand their compensation,” Turnbull adds. “They're not looking at it. They're not auditing it.” That could pose a real problem in the event of an OFCCP audit, or if they face a private right of action for compensation discrimination, he says.

“Even for contractors who understand their compensation, and have good practices and policies in place, they'll still have to do a really rigorous job at explaining their compensation practices,” says Turnbull. Recordkeeping burdens also would increase if contractors are expected to readily produce proof of all the factors they use to determine compensation.

Another common criticism is that a generic one-size-fits-all tool for collecting compensation data would serve little predictive value for identifying discrimination given the various factors that each individual contractor weighs to determine compensation.

“It's hard to imagine that there is any effective way to gather data that gets to the question of whether there is true discrimination without it being unbelievably burdensome on contractors,” says Springer.

A Fishing Expedition?

Some fear that the potential new rules on reporting compensation data amount to a fishing expedition with no clear purpose. “Everybody is skeptical of this new tool,” says Turnbull. “We're not really sure that it's going to do what OFCCP wants it to do.”

“Even for contractors who understand their compensation, and have good practices and policies in place, they'll still have to do a really rigorous job at explaining their compensation practices.”

—Andrew Turnbull,

Counsel,

Crowell & Moring

Their skepticism may be well-founded, say employment lawyers. Prior to proposing a compensation data collection tool, the OFCCP has a long history of failed attempts at identifying systemic pay discrimination in the federal contracting industry.

Since 2006, of the more than 25,500 compliance evaluations the OFCCP has conducted, only seven ended with a finding of systemic pay discrimination. “They're not finding a lot of discrimination, and I think that surprises them,” says Betsy Lewis, a partner in the employment and labor practice group of law firm Cooley.

Turnbull puts it more bluntly: “They're drilling a dry hole,” he says. 

Representatives of the federal contracting industry agree that the OFCCP is hunting for a problem that doesn't exist. “AGC is not aware of, and would be surprised to hear of, pay disparities in the construction industry,” says Tamika Carter, director of construction HR for The Associated General Contractors of America.

The OFCCP, however, does not see it that way. The fact that they're not finding a lot of compensation discrimination means to them that “they must be doing something wrong,” says Lewis. As a result, under a new compensative directive that took effect in February 2013, the OFCCP expanded the analytical methods it uses to investigate pay discrimination by federal contractors and sub-contractors.

In issuing the directive, the OFCCP at the same time rescinded its interpretive standards for pay discrimination issued in 2006. According to the OFCCP, the old interpretive standards “applied a cookie-cutter approach, regardless of the industry, types of jobs, issues presented, characteristics of workers, or available data.”

AGC COMMENTS

Below is an excerpt from the AGC comment letter denying that a data collection tool is needed.

Echoing a recent letter submitted jointly on this subject by the Equal Employment Advisory Council on behalf of several industry organizations, including AGC of America, AGC notes that President Obama, in his recent jobs speech to a joint session of Congress stated that “[w]e should have no more regulation than the health, safety and security of the American people require. Every rule should

meet a common sense test.” This ANPRM makes the assumption that the need for a new compensation data collection tool has already been established, of which AGC respectfully disagrees.

OFCCP already collects compensation data from thousands of contractor establishments each year, and there is nothing in the agency's enforcement procedures and compliance data to suggest that the current laws and enforcement mechanisms are failing to achieve their

stated objectives.

Furthermore, a compensation data collection tool is not necessary for the construction industry since compensation for federal contracting construction employers is heavily regulated by the Davis-Bacon Act. As a result, construction employers are required to sign and submit, under penalty of perjury, weekly certified payrolls detailing the identification of the workers, their job classifications, hours worked and rates of pay. Since DOL (via OFCCP) already collects data from federal contractors that identifies each worker's race and gender, and DOL also establishes and regulates the pay rates of these same workers (via the Wage and Hour Division's enforcement of the Davis-Bacon Act), is another such rigorous process to provide the same information also required?

Source: AGC.

Such standards set forth investigation procedures that were too rigid, OFCCP stated. Under the new standards, the OFCCP applies a case-by-case approach to pay discrimination issues, using a range of investigative and analytical tools.

These new standards essentially give the OFCCP “free reign to analyze your compensation in any way that they want,” says Turnbull. He adds that it's still unclear how the compensation data collection tool would work with the OFCCP's compensation auditing practices.

Proactive Measures

At this stage, it's still too early to know for sure what the data collection tool will look like. In the meantime, however, “contractors should review and comment on the notice of proposed rulemaking when it comes out to ensure that they express any issues or cost burdens associated with the implementation of the proposed tool,” says Jillian Volkmar, an associate in the employment and litigation group of law firm Wiley Rein.

“They should also consider conducting a self-audit of their compensation data and compensation practices with outside counsel, so it's protected by attorney-client privilege, to identify and resolve any potential compensation discrimination exposure issues,” Volkmar adds. That means federal contractors and sub-contractors should conduct a statistical analysis of their compensation data to identify potential vulnerabilities that can be resolved prior to an audit, she says.

Springer says the end goal should be to ensure that compensation policies and procedures are consistently applied. One area of vulnerability, for example, is where minority and female workers earn less than their male workers that don't appear to be supported by the sort of factors that typically affect pay—such as job type, level of experience, and education.

Compensation policies and procedures should further be well-documented. Additionally, Volkmar adds, “contractors should ensure their managers are trained on the importance of well-documented pay decisions.”