OFCCP Proposed Scheduling Letter Series Part 4/5: Compensation Reporting Revisions

By: Zach Olsen and Lisa Harpe 

The Office of Federal Contract Compliance Program’s (OFCCP) proposed scheduling letter makes substantive additions and revisions with regard to reporting compensation for the desk audit submission. In this blog we will specifically consider the proposed revision to Item 21 (currently Item 19) that requests employee-level compensation data, as well as the proposed Item 22, which would be a new item if added. Item 22 requests documentation on a contractor’s obligation to evaluate its compensation system for gender, race, or ethnicity-based disparities under 60-2.17(b)(3)).   

This is DCI’s fourth installment in its blog series on OFCCP’s proposed revisions to its supply and service (S&S) scheduling letter. The first three blogs can be found below:  

• Part 1: Paperwork Reduction Act Primer  
• Part 2: Reviewing “Campus-Like Settings” 
• Part 3: Selection Procedure Documentation, Additional Reporting Obligations on Promotions & Terminations 

Item 21 (currently Item 19): Employee-Level Compensation Information 

Current Practice 

As the current scheduling letter reads, federal contractors are required to submit employee level compensation data. This compensation roster is required to reflect the workforce composition of the selected affirmative action plan (AAP) and current plan date (i.e., the date of the Workforce Analysis).  

Within this compensation roster, the scheduling letter currently requires base salary to be provided for each employee but is murky on whether it explicitly requires other forms of compensation (e.g., bonus, incentives, commissions, etc.) at submission. The scheduling letter only states that these other forms of compensation “should be identified separately for each employee.” In addition, current Item 19(b) states that contractors may provide additional data on factors used to determine employee compensation (e.g. education, past experience, performance ratings, salary level/band/range/grade). Further, Item 19(c) only indicates that contractors should submit documentation and policies related to compensation practices.  

In essence, the only information explicitly required at submission are race, gender, job title, EEO-1 Category, AAP Job Group, hire date, and base compensation for each employee in the establishment under audit. 

New Proposed Changes and DCI Analysis 

The proposed scheduling letter makes a number of changes and additions to the compensation information that would need to be submitted, if approved. 

1. Federal contractors would be required to prepare not one but two employee rosters for the desk audit submission: one employee-level compensation roster for the current AAP date and a second employee-level compensation roster as of the prior AAP year snapshot date. In its justification for approval, OFCCP argues that having an additional compensation roster will allow the agency to “better identify whether there is systemic pay discrimination happening at a contractor’s workforce and whether the potential discrimination was ongoing prior to the first snapshot…and will provide OFCCP with more information to determine which cases are worth pursuing for further investigation.”
   
   DCI analysis: This would substantially increase the burden on contractors undergoing a compliance review. Notwithstanding that the information would be required irrespective of any indicator(s) of a pay disparity, the submission of multiple years of data raises questions on how OFCCP would analyze compensation changes year-over-year—and how contractors should conduct its proactive pay evaluations. 
   
   
2. Compensation of temporary employees paid by a staffing agency would be required in both compensation rosters at the desk audit submission—presumably along with information on how the temporary agency determines such pay. OFCCP indicates in its justification that it already requests information on temporary employees and that the clarification will reduce the number of follow-up requests by the agency.  
   
   DCI analysis: while OFCCP indicates that it is just clarifying this requirement, this impact would be broad and fundamental. The pay of temporary employees is not typically under the control of the contractor, and it is uncertain whether staffing agencies would disclose information about their pay practices to its client under audit. This also raises many questions of how OFCCP would use this data and/or evaluate the pay of temporary employees employed by a staffing agency. 
   
   
3. Items 21(b)&(c) in the proposed scheduling letter would require federal contractors to provide information on the additional factors that affect pay and require submission of relevant documentation on compensation policies/procedures, respectively. OFCCP expresses its position that the information is necessary at the desk audit submission to “understand the contractor’s specific pay policies and [so it] can conduct a more meaningful pay analysis.” 
   
   DCI analysis: while the additional information on pay factors can be useful for contractors to justify specific ways to group employees and what should be controlled for when conducting pay studies, the OFCCP’s use of this information is less certain. However, it is certain that incorporating this additional information  at the desk audit stage would make OFCCP’s compensation evaluation more complex. It also raises the question of whether front-line compliance officers have the necessary skills to evaluate this information  at the desk audit stage. If not, it seems unlikely that the increased burden will result in the efficiency desired by OFCCP. 

Item 22 (New Item): Contractor Evaluation of its Compensation Systems 

While this is a new item that OFCCP proposes for the desk audit submission, the evaluation requirement itself is longstanding. The addition of this item is not necessarily surprising considering it was the subject of a 2022 agency directive titled “Advancing Pay Equity Through Compensation Analysis”. (See DCI’s blog on this directive). 

With this new item, OFCCP seeks documentation that a contractor has satisfied its requirements under the regulations to evaluate its “compensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities,” as part of the contractor’s “in-depth analyses of its total employment process” 41 CFR 60-2.17(b)(3). At a minimum, the documentation must include: 

1. “When the compensation analysis was completed; 
2. The number of employees the compensation analysis included and the number and categories of employees the compensation analysis excluded;
3. Which forms of compensation were analyzed and, where applicable, how the different forms of compensation were separated or combined for analysis (e.g., base pay alone, base pay combined with bonuses, etc.);
4. That compensation was analyzed by gender, race, and ethnicity; and
5. The method of analysis employed by the contractor (e.g., multiple regression analysis, decomposition regression analysis, meta-analytic tests of z-scores, compa-ratio regression analysis, rank-sums tests, career-stall analysis, average pay ratio, cohort analysis, etc.).”

To satisfy this requirement, OFCCP has indicated contractors can either submit a redacted version of its privileged compensation analysis, provide a separate non-privileged compensation analysis specifically conducted pursuant to 60-2.17(b)(3), or provide a sworn affidavit attesting to the fact that this analysis was completed. The agency indicates it does not seek privileged information but that any submission by contractors must contain the above information to be deemed sufficient. 

Closing Thoughts 

If the proposed scheduling letter is approved, the burden for preparing a desk audit submission would be substantial. If not already, federal contractors should prepare for audits by thoroughly reviewing their compensation policies/practices. Contractors should also ensure they can identify appropriate employee groupings for pay analysis and the factors that influence pay for those employee groupings. Ideally, contractors would already be conducting ongoing, proactive pay equity studies under the direction of legal counsel. These studies allow a contractor to examine their pay practices, identify the appropriate employee groupings and factors that influence pay, and would ensure contractors are prepared to explain any identified pay disparities in an OFCCP audit.