by David Cohen, President, DCI Consulting Group
A recent ruling by an Administrative Law Judge (ALJ) regarding Item 11 requests has some important implications for both contractors and the OFCCP. The case, OFCCP v. United Space Alliance LLC, DOL, OALJ, No. 2011-OFC-00002, 2/28/11, can be found here.
Before discussing the case, it might be useful to briefly explain the process by which a federal agency obtains approval to request information from employers. When a federal agency such as OFCCP wants to collect information from employers, the agency is required to seek approval from the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act (PRA). The purpose of the PRA is to ensure that the request does not create an unreasonable burden on the employer. Federal agencies are required to show OMB the time, money, and resources that will be required for the employer to generate the information being requested. OMB must evaluate the request and determine if the burden of the request is reasonable based upon the utility of the information.
Since 1999, OFCCP has been allowed to collect summary compensation data as part of the standard scheduling letter (Item 11). OFCCP is legally bound to the specific items listed on the scheduling letter and cannot ask for information outside the scope of those items prior to the completion of a desk audit. Once OFCCP conducts a desk audit and identifies a potential violation (i.e., some evidence of a potential pay disparity, which is ambiguous) the agency proceeds to a detailed investigation. During this investigation, OFCCP is given broad authority to request and evaluate any and all information as it relates to the potential violation.
The focus of the United Space Alliance ruling was on what OFCCP’s burden is in order to determine a potential violation based on item 11 data. Many in the federal contractor community had recently heard that OFCCP developed an internal directive (circa 2007) for its field staff on the protocol for evaluating Item 11. This was an internal directive that was not subject to the terms of the Freedom of Information Act (FOIA) and thus did not have to be publically disclosed. The OFCCP took the position that this screening device was an internal investigative tool, and as such, did not have to be disclosed to contractors. A good analogy would be how the IRS uses a “classified” algorithm when analyzing tax returns to determine which individuals to select for an audit. Therefore, this screening was, and remains, a black box. In recent months, we have learned that the OFCCP has scrapped the old Directive and replaced it with a new directive that identifies any difference in pay of 2% or $2,000 as a potential violation.
The United Space Alliance ruling considered whether OFCCP can send the 12-Factor request for additional compensation data to a contractor that did not fail OFCCP's internal screening mechanism. Because the audit in question occurred in 2009, OFCCP would likely have used the 5-30-3 ‘three-pronged screen’ to identify a potential violation. That screen required the following to identify a potential violation:
(1) For at least one pay division there is a difference of five percent or more in average compensation between the groups being compared and at least one group appears to be adversely affected.
(2) After combining the pay divisions meeting condition (1), the number of employees in the non-favored group is at least 30 and represents at least 10 percent of the total employees in that group in the overall workforce.
(3) The overall percentage of the group most adversely affected in the combined pay divisions must be at least three times greater than the overall percentage of the other groups adversely affected.
United Space Alliance proactively conducted this three-pronged screen on their Item 11 compensation data and determined that it did NOT fail the screen. That is to say, there was no evidence of potential violation using this screen. However, OFCCP proceeded to request the 12* factor data so it could conduct a more meaningful analysis. United Space Alliance objected to the both the additional data request and the on-site investigation on the grounds that it did not fail the initial screen. OFCCP filed an administrative complaint based upon a denial of access. Next stop, a court hearing before ALJ Daniel A. Sarno Jr.
ALJ Price set out to answer two issues:
1. Following Defendant's initial consent to the desk audit, did OFCCP establish a reasonable suspicion of a violation of the Executive Order sufficient to request more information during the desk audit and was that request limited in scope (author emphasis).
2. Did OFCCP establish a reasonable suspicion of a violation of the Executive Order sufficient to ask for an on-site compliance review under not only the Executive Order but also the Rehabilitation Act and Vietnam Era Veterans Readjustmet Act Amended (VEVRAA).
I will attempt to briefly explain the judge's ruling on these very important issues. For those of you who are OFCCP junkies (like me) I highly recommend that you read this ruling; there are a number of interesting aspects of Judge Sarno’s decision.
On August 7, 2009, OFCCP sent United Space Alliance a scheduling letter notifying them of the compliance evaluation. United Space Alliance submitted the contents of its affirmative action plan as well as Item 11 compensation data. OFCCP conducted its "analysis" and sent a 15-item data request. United decided not to send the compensation data to OFCCP and an on-site review was scheduled. The on-site review letter specifically stated that the on-site review would not be limited to possible violations of the Executive Order; it would include VEVRAA and the Rehabilitation Act investigations as well.
What did the ruling say?
1. The OFCCP is not bound by one method in which to analyze Item 11 data. In fact, OFCCP used three different tests to determine whether there was an indicator. The OFCCP stated that it ran the three pronged screen (which United Space Alliance passed) but also ran a "pattern analysis" and a "30 and 5" test. I am not sure what the last two tests actually are, but OFCCP did state that there was no formal threshold for failing these two additional tests. In other words, there is no clear standard for what is a potential violation. The bottom line is that ALJ Sarno gave OFCCP the green light to either follow their internal directives or create new standards, perhaps until the contractor fails. Once the contractor fails something, there is now an indicator of potential discrimination that warrants the collection of additional compensation data.
2. ALJ Sarno ruled that even though the OFCCP posted a FAQ on its website stating that it had a standard procedure for evaluating Item 11, it was not bound by the FAQ. More specifically, Sarno stated:
..the OFCCP never published this statement in the Federal Register, again suggesting the OFCCP did not intend this statement to be binding.
Interestingly enough, I have been involved in some recent audits in which the OFCCP has pointed to something on its FAQ section and inferred that it was in fact a binding regulatory requirement. However, ALJ Sarno has clarified that nothing on OFCCP's FAQ section of its website is binding. As Sarno stated: "the FAQ does not constitute a binding norm, but rather is a mere policy statement intended to provide the OFCCP and the regulated community with guidance".
3. ALJ Sarno ruled that OFCCP did not have reasonable suspicion after the desk audit screen that would warrant or necessitate an on-site evaluation of information related to 503 and VEVRAA. This may be the most significant part of the ruling. In effect, the judge said that there was no indicator of a potential violation of 503 and VEVRAA found during the desk audit that would warrant further investigation. More specifically, ALJ Sarno said "Plaintiff has made no attempt to show that expanding its requested on-site compliance review beyond acquiring data and/or documentation related to possible violations of the Executive Order. Nor do I find such an extension to be reasonable or limited in scope." In other words, OFCCP is obligated to tell you what they have found during the desk audit screen and will then be limited post-desk audit to those material facts that relate to the possible violation.
4. The OFCCP and United's experts agreed that the additional data was needed to conduct a meaningful analysis. Both parties agreed that the best method to determine whether there is a pay discrimination violation is multiple regression analysis. In fact, the judge agreed that collecting the additional data for the purpose of conducting a regression analysis to be "prudent and quite reasonable". I find this part of the ruling interesting because OFCCP once again has agreed in litigation that a multiple regression analysis is the best method in which to evaluate compensation discrimination. The testimony by OFCCP in this case seems to contradict the statements made in the current proposed rescission to the Compensation Standards and Guidelines.
5. The OFCCP did not violate the Paperwork Reduction Act (PRA) or the Administrative Procedure Act (APA) by requesting additional compensation data.
One final thought is worth considering. Based on the combination of this ruling and our previous blog article on the new "trigger" test showing a 100 percent potential violation rate, it is clear that contractors should expect to receive the 12, 15, 18, etc. item request for additional compensation data in ALL of their audits. My advice to contractors is to be proactive and conduct an analysis prior to any OFCCP compliance evaluation. That would include:
• Protecting your analysis under attorney-client privilege
• Developing reasonable employee groupings (SSEGS)
• Utilizing multiple regression analysis to account for explanatory variables
• Identifying and investigating any unexplained statistical indicators
• Making appropriate salary adjustments if differences cannot be explained
*OFCCP actually asked for 15 items and then eventually 18 items as this case progressed.