by David Cohen, President, DCI Consulting Group

During the recent National ILG Conference in Las Vegas, OFCCP Director Patricia Shiu announced that the administration would be rescinding the compensation standards and guidelines. The compensation standards and guidelines were released under the Bush Administration on June 16th 2006. For the first time, these standards codified and published OFCCP’s protocol for enforcing systemic compensation discrimination. This published guidance became an invaluable tool for federal contractors because it gave contractors insight into how OFCCP would monitor compliance efforts and identify the tools and understanding needed to proactively recognize and fix potential problem areas. With this knowledge, many contractors took advantage of the ability to “get ahead of the game” by being proactive and conducting analyses to identify “problems” before or in anticipation of an OFCCP compliance evaluation. In addition, it gave the agency’s compliance officers a set of objective standards that function as a roadmap for enforcement; these standards assured that both contractors and the agency were using the same playbook.

Now that the agency has publicly announced the rescinding of its compensation standards, the federal contractor community is once again left with an informational void on how its compensation systems and data will be evaluated. The agency has not announced what its proposed replacement to the standards will be, and it will most likely be months, if not years, before the agency publishes a set of new standards. In the interim, what are federal contractors to do?

It is important to understand the legal framework in which the agency operates before a contractor can make a decision on how to conduct its proactive analyses going forward. OFCCP evaluates compensation discrimination for gender and race/ethnicity under Executive Oder 11246. Under this order, OFCCP follows a Title VII standard for evaluating and enforcing discrimination. Under Title VII, there are two theories of discrimination, disparate treatment and disparate impact. Historically, and as explained in the 2006 compensation standards, the OFCCP evaluates compensation discrimination under a disparate treatment theory. One can think about disparate treatment as having two manifestations: individual treatment and pattern or practice against a class. Both require evidence of intent. Under a pattern or practice theory, the plaintiff/government would have to show that “discrimination was the company’s standard operating procedure, the regular rather than the unusual” (Teamsters v. United States, 1977). That is, merely showing that an employee is currently making less than another employee is not enough evidence to prove discrimination. In order for the OFCCP to prove a case of pay discrimination under this theory, the government would either have to prove that there was a discriminatory pay decision (see Ledbetter) or that there are statistically significant differences (two or more standard deviations) between protected classes in similarly situated employee groupings (SSEG) coupled with anecdotal evidence of discrimination. The anecdotal evidence does not necessarily have to be a “smoking gun”, but should show that either the company intentionally discriminated or that its compensation practices were not consistently applied from one group to another.

OFCCP’s compensation standards are written under a disparate treatment pattern or practice theory of discrimination and not a disparate impact theory. In the preamble to the standards, the OFCCP cites over 30 years of case law and ‘strong statistical principles’ to support its established requirements for demonstrating initial evidence of discrimination. These requirements include:

  • Job titles grouped into similarly situated employee groupings (SSEG);

  • Statistically significant differences in pay between protected classes after controlling for legitimate and non-discriminatory variables (multiple regression analysis), and;

  • Anecdotal evidence of discrimination to bring those statistics to life.

Once the OFCCP establishes the trifecta of evidence, they can move towards enforcement under a disparate treatment pattern or practice case of discrimination. Without those three criteria, OFCCP can move forward with its case only if they find strong evidence of intentional discrimination against a protected class member. This, however, would most likely be an individual treatment case versus a pattern or practice. Without statistical significance and/or evidence of intentional discrimination the OFCCP does not have a case. Why?

Unbeknownst to some in the EEO community, the OFCCP does not enforce the Equal Pay Act (EPA) of 1963. Unlike disparate treatment, the EPA does not require a showing of intentional discrimination. The EPA requires that men and women (race/ethnicity is not covered) in the same workplace be given equal pay for equal work. The jobs need not be identical, but they must be ‘substantially equal’. In addition, unlike a pattern or practice case where statistical significance is required, any difference in salary between two people is potentially actionable. This type of analysis may be familiar to many federal contractors who have gone through an OFCCP compliance evaluation in recent years. This type of analysis is commonly referred to by OFCCP as a “cohort analysis”. Simply, the OFCCP looks within a job title and requires justification for situations where a female and/or minority employee is making less than a male or white employee (or vice-versa). Once identified, the OFCCP requires the contractor to articulate a rationale for why this individual has a lower salary than the comparator. However, because the OFCCP does not enforce the EPA, it cannot enforce an EPA violation unless it identifies and proves a discriminatory pay decision. Therefore, without evidence of intentional discrimination the OFCCP cannot move a case to enforcement.

It is worth noting one other presentation from the NILG conference. Shortly after Pat Shiu announced the rescinding of the compensation standards, OFCCP director of statistical analyses, Dr. Javaid Kaiser, presented a workshop entitled “You Conducted your Comp Analysis: Now What?”. During this informative session, Dr. Kaiser talked about conducting a proactive compensation analysis as well as responding to the OFCCP’s secondary compensation data request (a.k.a. the 12 Factor Letter). Dr. Kaiser laid out his best practices strategy for dealing with OFCCP during a compliance evaluation as well as what contractors should do to be proactive. This included the development of similarly situated employee groupings (SSEGs) and multiple regression analysis to control for a majority of the legitimate non-discriminatory variables that drive pay. If statistical indicators are identified and the contractor cannot explain those differences, the contractor should look to take remedial action.

This sound advice is exactly what is called for in the 2006 compensation standards and guidelines. The only thing missing from his presentation was the identification of anecdotal evidence. With the continued recommendation from OFCCP to develop SSEGs and conduct multiple regression analysis, contractors must wonder what it is that OFCCP is actually rescinding. Is it the requirement to obtain and demonstrate anecdotal evidence? Although not necessarily required under Title VII, case law suggests that judges are very skeptical of statistical evidence absent the anecdotal evidence that brings the statistics to life in a pattern or practice case. It is difficult to understand how OFCCP could ignore this requirement and still move to enforcement.

With the impending rescission of the compensation standards, what should contractors do? It is important to note that, regardless of the status of the standards, OFCCP is still bound by the requirements of Title VII and relevant case law. Therefore, if OFCCP chooses to litigate and refers the matter for enforcement to the Solicitor of Labor’s Office (SOL, i.e., OFCCP’s attorneys) the SOL will have to rely on case law (most of which endorses SSEG development and multiple regression analysis) in order to litigate. With that in mind, it is likely a best practice strategy for contractors to “stay the course” and continue to conduct their proactive compensation analyses (under attorney-client privilege) using SSEGs and multiple regression analysis. This is the most effective way to identify and eliminate systemic discrimination in an organization, and is based on sound scientific and legal theory. In the meantime, it will be anybody’s guess on how OFCCP will evaluate and determine meaningful disparities in compliance reviews until new guidance and standards are published.

I close this post with one final parting thought in light of recent EEO trends. Consider the following scenario. An OFCCP compliance officer conducts a compliance evaluation of a contractor’s compensation data and uses an arbitrary 2% (or $2,000) difference threshold to identify a “significant difference”, or uses a cohort analysis to identify individuals who are making less than a single comparator. OFCCP then requires the contractor to explain the identified difference. The contractor attempts to explain the difference but the OFCCP does not accept the stated reason. OFCCP moves to a Notice of Violation and recommends salary adjustments for the identified individuals. The contractor signs the conciliation agreement and makes the requested adjustment.

The settlement is picked up by the press and both male and white employees read about the adjustments in the local paper. Feeling left out, both male and white employees who feel underpaid question the settlement and file a ‘reverse’ discrimination claim against the contractor that they were intentionally discriminated against in pay based on their race or sex because their salaries were not adjusted. Consider the fact that the salary adjustments may have been made:

  • Solely on the basis of race and sex (see 14th Amendment – Equal Protection Clause);

  • In spite of the fact that there was no established manifest imbalance (see Johnson v. Transportation Agency), and;

  • In spite of the fact that there was no strong basis in evidence of discrimination (i.e., no compelling evidence of actual disparities) (see Ricci v. Destafano and Rudebusch v. Hughes).

How would the judge rule? Making the requested adjustments under no real standard of enforcement could be a clear case of discrimination against group members that did not benefit from the pay adjustments.

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