Background
On February 28, OFCCP released its Directive 307, entitled “Procedures for Reviewing Contractor Compensation Systems and Practices.” At the same time, OFCCP finalized the rescission of the compensation guidelines that had been issued in 2006. (All of these documents are available on our website at http://www.hranalytical.com/documents.html.) OFCCP decided to rescind its previous compensation guidelines and introduce Directive 307 in order to give itself additional flexibility to assess compensation issues. Under Directive 307, OFCCP compliance officers are instructed to give scrutiny to any potential disparities in employee pay. The directive makes it clear that there is no single way that compliance officers are required to investigate possible compensation discrimination. This is a departure from OFCCP’s previous compensation guidelines, which suggested that the agency and federal contractors should use multiple regression analyses and other statistical tools to identify compensation disparities.
OFCCP’s new directive states that OFCCP may use the following procedures to evaluate contractor compensation data and information during a compliance review:
- Conduct a preliminary analysis of summary data (if necessary or appropriate)
- Conduct an analysis of individual employee-level data
- Determine the approach from a range of investigative and analytical tools
- Consider all employment practices that may lead to compensation disparities
- Develop what the agency refers to as “pay analysis groups”
- Investigate systemic, small group, and individual discrimination
- Review and test factors before accepting the factors for analysis
- Conduct an onsite investigation, offsite analysis, and refinement of the model
Under the previous compensation guidelines, OFCCP had suggested that it would focus its compensation evaluations on similarly situated employee groups (SSEGs). While these SSEGs were somewhat ill-defined, it was clear that OFCCP was focused on situations where there were large enough groups of employees whose compensation could be analyzed using various statistical tools. OFCCP intended to use these tools to determine whether there was systemic discrimination in compensation. Directive 307 makes it clear that OFCCP will continue to review compensation to determine whether there is any systemic discrimination. OFCCP has created a new type of grouping called a pay analysis group (PAG) that replaces SSEGs. A PAG is basically defined as a group of employees who are comparable for purposes of an employer’s pay practices. Directive 307 indicates that a PAG may “include multiple distinct units or categories of workers...[and] may combine employees in different jobs or groups.”
While OFCCP is still interested in finding systemic discrimination, the agency is now interested in situations involving individuals and small groups as well. In order to conduct these analyses involving individuals and small groups, OFCCP compliance officers will attempt to find similarly situated employees. The directive states that relevant factors which compliance officers are to consider in determining whether employees are similarly situated may include “tasks performed, skills, effort, level of responsibility, working conditions, job difficulty, minimum qualifications, and other objective factors.”
In most of its compensation analyses in the last ten years, OFCCP has generally restricted its investigations to differences in base pay. The agency has consistently indicated during this time that it has interest in all forms of employee compensation, but it appears that the agency has rarely asked for these additional forms of compensation during compliance reviews. Under Directive 307, compliance officers are instructed to consider all forms of compensation. Compensation is defined in the directive as “any payments made to...an employee...including...salary, wages, overtime pay, shift differentials, commissions, bonuses, vacation and holiday pay...stock options...and profit sharing.” Contractors are not required to submit information on these various forms of compensation at the start of a compliance review, but compliance officers are allowed to request this information as they see fit during their analyses.
Directive 307 also encourages compliance officers to move beyond an isolated examination of pay and determine whether there are any employment practices that have a discriminatory effect on pay. The directive states that compliance officers “should examine employee access to opportunities affecting compensation, such as: higher paying positions, job classifications, work assignments, training, preferred or higher paid shift work, and other opportunities. The [compliance officer] should also examine policies and practices that unfairly limit a group's opportunity to earn higher pay, such as ‘glass ceiling’ issues, and access to overtime hours, pay increases, incentive compensation, and higher commission or desired sales territories.”
What Does This Mean for Federal Contractors and Subcontractors?
Directive 307 has caused much concern among federal contractors and subcontractors because OFCCP expects that this directive will provide greater latitude to compliance officers and will provide greater access to compensation-related information. OFCCP clearly believes that the implementation of Directive 307 will result in a significant increase in findings of compensation discrimination and a significant increase in back pay awards that are collected from companies for compensation disparities.
Our take is somewhat different. First, it is important to note that despite the agency’s significant interest in compensation since at least 1998, including its expanded interest in compensation during the last four years, OFCCP has found very little compensation discrimination during compliance reviews. The number of alleged victims of compensation discrimination who have received back pay settlements is minuscule, especially in comparison to the number of applicants awarded back pay after a finding of hiring discrimination during a compliance review.
Second, OFCCP’s Directive 307 is much like the compensation guidelines issued in 2006 in that the directive simply announces current agency practice rather than providing significant new guidance. When OFCCP issued its compensation guidelines in 2006, the agency was already routinely using multiple regression analyses in its efforts to find systemic discrimination in compensation. Currently, OFCCP is requesting (though not necessarily receiving) extensive compensation-related data and information in order to determine whether there is discrimination involving individuals, small groups, or larger groups. OFCCP has basically been ignoring the 2006 compensation guidelines for the last four years while it has tried numerous approaches discussed in Directive 307 to find compensation discrimination.
Third, Directive 307 provides very little effective guidance to compliance officers or federal contractors. For example, there is no clear definition of what constitutes “similarly situated” employees or which employees should be included in a pay analysis group. (Pay analysis groups in that sense are almost identical to the nebulous similarly situated employee groups that were introduced in the 2006 compensation guidelines.) There is also no clear direction on how much of a disparity must exist for a compliance officer to find that there may be compensation discrimination. Finally, there is no guidance on what specific tool should be used in any particular circumstance to evaluate compensation.
Fourth, OFCCP has had very little success in using statistical tools or other analyses to directly find disparities in compensation. However, we recommend that federal contractors and subcontractors consider how their promotion practices, training opportunities, field assignments for sales employees, and other employment practices may affect compensation. The one area where Directive 307 may suggest a problematic change involves the directive’s instruction to evaluate employment practices that may have an impact on compensation.
In summary:
- We do not believe that Directive 307 is the revolutionary change that OFCCP and some others in the contractor community are suggesting it is. Directive 307 is essentially just a reiteration of current OFCCP practice in regard to investigating compensation.
- We do not believe that OFCCP will suddenly begin to find extensive compensation discrimination by using the provisions of Directive 307. There is a serious question as to how much compensation discrimination actually exists, and OFCCP has shown few results after years of striving to find this illusive compensation discrimination.
- We DO believe that companies should continue to review their compensation practices to ensure that they are prepared for questions during OFCCP reviews. Whether or not OFCCP has actually been finding compensation discrimination, it is clear that the agency intends to ask even more questions about compensation related decisions, practices, and policies.
- We DO believe that companies should examine various employment practices to determine whether and how they have an effect on compensation.
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