OFCCP'S New Directive On Compensation Reviews

March, 2013

What Contractors Can Expect In Future Compliance Audits

A few weeks ago we sent out an Alert to notify federal contractors that effective February 28, 2013, the OFCCP put in place Policy Directive 307. This directive explains the OFCCP’s current philosophy on the process of investigating and identifying pay discrimination within federal contractor establishments. Directive 307 replaces the OFCCP’s previous "Voluntary Guidelines” and "Compensation Standards” that it had been following to review contractors’ pay practices.

As a federal contractor, you are required by the regulations to regularly perform an analysis of your compensation system in order to identify any gender, race, or ethnicity-based disparities. What the regulations don’t tell contractors is how to do this self audit. For the past few years, Cascade has advised contractors to complete the "2-or-2” analysis, which was the analysis method used by the OFCCP at the desk audit phase of a review. For contractors who have Cascade complete their Affirmative Action Plan updates, we have provided this analysis for you as part of your annual plan update.

Per Directive 307, no longer will the OFCCP have a consistent, predictable standard analysis method that they will use to review a contractor's compensation. The new Directive says that the compliance officer will be taking a case-by-case approach, meaning going forward no two reviews will be the same. A compliance officer’s approach may include any or all of the following, and in any order:

  • Conducts Preliminary Analysis of Summary Data (if necessary or appropriate)
  • Conducts an Analysis of Individual Employee-Level Data
  • Determines the Approach from a Range of Investigative and Analytical Tools
  • Considers All Employment Practices that May Lead to Compensation Disparities
  • Develops Pay Analysis Groups
  • Investigates Systemic, Small Group and Individual Discrimination
  • Reviews and Tests Factors before Accepting the Factors for Analysis
  • Conducts Onsite Investigation, Offsite Analysis, and Refinement of the Model

The Directive states that the auditor will also look at other factors such as the contractor’s compliance history, OFCCP or EEOC complaints, anecdotal evidence, potential violations involving other employment practices, and data integrity issues to determine the method to use in the compensation investigation.

What OFCCP representatives have also said is that a contractor’s self-audit of compensation, which reviews pay by job title only, will not be considered a satisfactory self examination. We know many companies establish pay ranges or some kind of similar structure based on the individual job. If review by job title is not satisfactory, then what will be considered satisfactory? Large, multiple job group reviews. The OFCCP intends to first look for pay differences based on race and gender within large groups of employees in jobs that may not have the exact same title but have generally equal value – years of experience, education, level within the company, EEO category, etc.

Companies that feel they can justify pay differences based on non-discriminatory criteria such as disciplinary actions, performance evaluations, length of service, education level, training level, etc. can expect each of these factors to be carefully scrutinized by the auditor. The auditor will look at each "objective” to determine if any of these factors themselves have bias based on race or gender. For example, many companies use performance level to justify pay differences. The auditor will look into how performance ratings are given and if there are any differences in performance ratings based on race or gender.

We don’t know how these compensation reviews will proceed. However, based on the information available now, we strongly advise contractors to be proactive in developing structured pay systems that group jobs of similar value. Many companies do this already. They group jobs that the contractor has determined, based on market analysis and/or internal equity, are valued similarly. Generally these jobs are assigned a specific pay group and minimum-mid-maximum range. Having this type of structured system will help the contractor defend its opinion on how the compliance auditor should group jobs during a review. Contractors with no formal compensation structure run the risk of opening the door for the OFCCP’s compliance officer to determine the comparable worth of jobs, which may not be accurate based on your industry, internal structure, merit increase processes, etc.

Grouping jobs of similar value and assigning a pay range, however, will likely not be enough. Contractors should also establish compensation policies and processes to justify how starting pay is determined, how an employee moves through a range, what objective factors are considered in determining pay increases, and how employees are evaluated for promotions and accompanying pay increases.

Currently Cascade is modifying its Affirmative Action Plan compensation analysis report for contractors, as the previous 2-or-2 analysis is no longer reflective of what we can expect in an OFCCP audit. Based on the information in the OFCCP’s Directive and their comments on the future methods they intend to use to analyze contractors’ pay, the best analysis we will be able to deliver is one where the contractor provides us with established pay group/range information for each job.

If your company does not currently have a formal pay structure in place and you have questions or would like assistance in developing a formal system, contact Carey Klosterman, Cascade’s Director of Compensation Services.

If you have any questions about your Affirmative Action Plan or developing an Affirmative Action Plan, please contact Lynn Morris, HR and Compensation Consultant.


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