Pay equity is front and center as a priority for the White House and the Office of Federal Contract Compliance Programs (“OFCCP”). In August the Federal Register published a notice of proposed rulemaking (“NPRM”) that would require most Federal contractors and first-tier subcontractors to submit compensation data to the OFCCP through a web-based filing system on an annual basis. This compensation data tool—dubbed the “Equal Pay Report”—was responsive to the April 8, 2014, Presidential Memorandum signed by President Obama that called for proposed regulations to be published within 120 days. The NPRM provides for a 90-day public comment period ending November 6. Your comments will be important; please consider contributing your concerns to OFCCP by that date.
The impact of the Equal Pay Report on federal contractors will be significant. OFCCP has stated that it will use the compensation data to create industry compensation standards which will then be used as benchmarks for both the OFCCP and the contractor community. It says the benchmarks will be part of the methodology used to prioritize which contractors will be selected for OFCCP audits. Additionally, OFCCP indicated that the summary industry-based data would be reported to the public “as soon as practicable” and suggested that the aggregated industry-based data will provide the contractor community with the opportunity to self-assess their own compensation data against the aggregated industry benchmark. It remains to be seen whether there is any meaningful application for this benchmark given the gross aggregation of the data. OFCCP persists in failing to understand the sophistication of most employers’ pay systems and the fact that aggregated pay data disregards key legitimate distinctions such as experience level and skill differences within job groups.
What is Required under the NPRM?
Covered federal contractors and subcontractors would be required to file an Equal Pay Report by March 31 of each year that shows:
Unlike the EEO-1 report, the proposed Equal Pay Report would require employers to include all employees who worked at any time during the full calendar year from January 1 through December 31. While the agency believes the data is “a critical tool for eradicating compensation discrimination,” the proposed methodology will result in distorted data, as reporting W-2 wages which consist of all wages, including commissions and bonuses, may suggest that there are racial or gender-based differences that do not actually exist because they cannot be normalized by using the total hours worked. Moreover, providing non-annualized hours for partial year and full-year employees will also provide skewed results.
In addition to the reporting requirements, bidders for federal contracts who have existing federal contracts must certify that they are in compliance with the Equal Pay Report filing requirements.
Which Employers are Proposed to be Covered?
Many, but not all, federal contractors and subcontractors will be required to file the Equal Pay Report. Covered entities are those prime contractors or first-tier subcontractors who have more than 100 employees, and have a contract, first-tier subcontract, or purchase order amounting to $50,000 or more that covers a period of at least 30 days, including modifications, or serves as a depository of Government funds in any amount, or is a financial institution that is an issuing and paying agent for U.S. savings bonds and savings notes. Construction contractors at any tier with a contract or subcontract of at least $50,000 are also covered by the proposed regulations.
Educational institutions may also be impacted by the NPRM as OFCCP has solicited comments as to whether federally contracting educational institutions that file IPEDS should also be required to file the Equal Pay Report.
What About the Data Privacy Concerns?
EEO-1 reports are often the subject of Freedom of Information Act (FOIA) requests and often land in the hands of the private plaintiff’s bar. OFCCP attempted to put to rest fears that the Equal Pay Report data would be turned over to competitors and plaintiffs’ attorneys by stating that FOIA would exempt the disclosure of contractor data where it is shown that (1) the contractor is still in business (2) the data is confidential and sensitive, and (3) the release of data would subject the contractor to commercial harm. Whether the OFCCP’s practice is sufficient to consistently protect such data absent an explicit FOIA exemption for pay data remains to be seen.
Importantly, the proposal does little to allay the fears, forcefully articulated by the National Academy of Sciences (“NAS”) in a report funded by the EEOC entitled “Collecting Compensation Data from Employers,” that the federal government is not yet ready to collect this information. In this report, the NAS concluded the federal government needed to plan how it will use pay data, have a pilot study to test any initial plans for data collection and use, and have greater capacity to deal with the data and its analysis once collected. It chided the government to establish this foundation before requiring employers to collect and report pay information. Notably, these steps have yet to be accomplished despite President Obama’s not-so-subtle reference to the NAS report in his April 8 Equal Pay Day Presidential Memorandum to “consider independent studies regarding the collection of compensation data.” In an era where data security breaches of even top secret documents are not unusual, the possibility that the confidential employee compensation data of so many employers could be readily hacked and made publicly available needs to be taken seriously. Significant attention needs to be brought to this issue and actions must be taken to ensure this does not happen.
What To Do Now
So where do we go from here? As noted above, the deadline for the comment period is coming up very soon so consider submitting comments, especially with regard to the questionable usefulness of W-2 data, the significant privacy concerns, and last but not least, the burden of compliance. OFCCP has historically had difficulty accurately assessing the burden to contractors of its various proposed requirements. In the instant case, the agency estimates that the cost for each contractor in complying with the proposed Equal Pay Report obligations is $684 per contractor establishment or $2,176 per company. The OFCCP estimates it will take about an hour for a management professional at each establishment to read compliance assistance material or participate in webinars/ to understand the new requirements, and that contractors with automated systems will require six hours per establishment to generate the report data, conduct analyses, complete the online report form, review the report, and submit it to the OFCCP online. If your estimate of the burden to your organization differs, please consider submitting that information.
Contractors may also consider generating a “mock” Pay Equity Report under attorney-client privilege according to the format proposed in order to identify which focus areas the OFCCP would likely target. Since contractors have not been in the practice of conducting pay analysis using W-2 data by EEO-1 job categories, this approach may present very different results than the contractor has seen in its previous analyses.
Finally, it has never been more important to conduct a proactive pay equity analysis under attorney-client privilege. If you have conducted such a study a few years ago, it’s time to repeat it. Virtually every OFCCP compliance evaluation now includes a pay equity analysis by the agency and contractors must be prepared to defend their pay practices. It is essential to fully understand how factors like performance, geography, special skills, and experience drive pay in reality, not just as a matter of policy. And if there are sex or race/ethnicity differences that can’t be explained by legitimate, job-related criteria, it’s time to address them.
In addition to a multiple regression analysis of the base pay of similarly situated employee groups, contractors should consider examining the various components of compensation such as bonus and incentive pay. Total cash compensation may also be reviewed. Contractors should address any areas of concern as soon as possible, ideally before being scheduled for future audits. Finally, in its pay analysis contractors should be especially alert to any jobs that appear to be sex- or race/ethnicity-segregated. OFCCP is vigorously pursuing its re-purposing of the theory of “steering” as a pay discrimination problem (when it actually is a placement problem with possible pay implications). Wherever the contractor sees jobs that are exclusively or mostly one race/ethnicity or gender, examine the placement practice to ensure that recruiters or hiring managers are not discriminating against persons of a specific race/ethnicity or sex.