A federal judge in Washington D.C. sent shockwaves through the employer community recently by reinstating a revised version of the EEO-1 report, which is now once again set to gather compensation information from employers across the country. The resurrection of the controversial revisions, which had been cast aside by the White House shortly after President Trump took over, may be challenged by an appeal and could also lead to further agency maneuverings. While we have not yet seen the final chapter of this controversy written, employers need to prepare for the possibility that their pay practices will soon be placed under a federal microscope like never before.
In fact, in addition to the newly reborn EEO-1 pay data reporting requirements, the Paycheck Fairness Act has been reactivated in the legislature. The Paycheck Fairness Act includes two provisions related to pay data reporting: (1) it would require the EEOC to collect pay data using gender and race/ethnicity categories; and (2) it would require the US Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) to collect compensation data for federal contractors. Neither provision in the Paycheck Fairness Act specifies how the data would be collected or filed, unlike the very detailed EEO-1 pay data requirements.
Of course, employers with global operations may already be subject to pay data reporting requirements if they have 250 or more employees in the United Kingdom or other countries with similar requirements to analyze and post results of gender pay disparities.
Finally, the plethora of state and local laws in the United States has made abundantly clear the significance of pay equity for the employer community – federal contractors and private employers. Some states have proposed public website filings, similar to those in the U.K., although those laws have not yet passed.
Winding Road of EEO-1 Report Pay Data Requirements
Historically, employers with 100 or more employees, and federal contractors with 50 or more employees, have been required to submit Employer Information Reports (EEO-1 reports) disclosing the number of employees in their employ by job category, race, sex, and ethnicity on an annual basis. But, over the past few years, there has been an ongoing battle at the federal level to determine whether the EEO-1 would also be used as a pay data reporting tool.
The curve in the road occurred in 2016 when the EEOC proposed changes to the EEO-1 report which would require employers to include pay data and the number of hours worked for their workforces. The proposed reporting expansion (“component 2”) was intended to identify pay gaps (also using hours worked by employees), which the agency could then use to target specific employers or industries to investigate pay discrimination practices. The revised form, revealed in October 2016, was to be submitted by employers by March 31, 2018, using a “workforce snapshot” of any pay period between October 1, 2017 and December 31, 2017, and using the compensation data provided to employees in their W-2 wage statements created after December 31, 2017.
But, in August 2017, another twist in the road materialized. The Office of Management and Budget (OMB) announced that it had significant concerns with the revised EEO-1 reporting requirements, including that “some aspects of the revised collection of information lack practical utility, are unnecessarily burdensome, and do not adequately address privacy and confidentiality issues.” Component 2 of the EEO-1 report was rescinded as a result.
This action did not meet the approval of several advocacy organizations, and the National Women’s Law Center and the Labor Council for Latin American Advancement sued both the EEOC and the OMB in November 2017, attempting to revive the EEO-1 report’s pay data requirement. In early March of 2019, the D.C. District Court where the lawsuit was pending issued its decision.
Federal Court Judge Eliminates Roadblock to EEO-1 Pay Data Reporting
Judge Tanya S. Chutkan of the U.S. District Court for the District of Columbia issued a 42-page opinion in National Women’s Law Center v. OMB reviving the revised EEO-1 report late in the evening on March 4, 2019. She determined that the OMB did not have good cause to change course because it could not demonstrate that any relevant circumstances warranting the action that had occurred between the time the proposed rule was finalized and the time the revisions were cast aside. And, although the OMB indicated that it did not believe the public had been provided sufficient opportunity to review the proposals and offer meaningful comment, Judge Chutkan rejected this argument as “misdirected, inaccurate, and ultimately unpersuasive.”
To the extent that the OMB justified its decision to discard Component 2 of the revised EEO-1 by stating that the data collection would be of limited utility, prove to be overburdensome, and raise privacy and confidentiality concerns, Judge Chutkan noted that these rationales all directly contradicted the findings made by the EEOC when the agency had initially issued the revisions in 2016. “OMB failed to explain these inconsistencies,” the judge said, which fell afoul of the legal standard requiring an agency to explain “why it chose to do what it did.”
The judge noted that federal agencies are free to change their existing policies, but to do so they must “provide a reasoned explanation for the change.” Instead, in this case, Judge Chutkan ruled that the OMB’s action in staying the EEOC’s collection of pay data was “arbitrary and capricious” because it “totally lacked the reasoned explanation” required by federal law. She concluded by saying that the OMB provided “inadequate reasoning” to support its decision to stay the data collection, and that courts “do not defer to an agency's conclusory or unsupported suppositions.”
What Checkpoints Should We Look For?
Judge Chutkan ordered the collection of pay data to go back into effect, noting that employers had over a year to prepare for the revised reports back in 2016-2017 and should have expected the possibility that the amplified EEO-1 could be resurrected. This means that most private employers with 100 or more employees and all federal contractors or first-tier subcontractors with 100 or more employees will have to gather and submit compensation information broken down by race, sex, and ethnicity to the EEOC in the very near future. The compensation must be further categorized into one of 12 pay bands initially created by the EEOC, utilized in the appropriate category of the ten pre-determined job categories where employers routinely and annually report their workforce demographics. Once again, the one-page EEO-1 report will expand to a multi-page document that integrates payroll compensation data into the HRIS demographic data. For many employers, the pay data and hours worked information is maintained separately on databases that do not easily communicate or integrate with each other.
We expect that we will soon hear additional information from the agency about whether the 2018 EEO-1 reports – due to be submitted by May 31 following the EEOC’s prior deadline extension necessitated by the federal government partial shutdown earlier in 2019 – will need to include this compensation information or whether employers will receive some sort of reprieve. In fact, it is doubtful that the EEOC currently has the capacity to collect and manage the pay data itself, as it was caught as unaware as the employer community. The EEOC has requested the court permit it to require 2018 pay data to be submitted by September 30, 2019. The plaintiff organizations in the lawsuit insist the EEOC should be prepared to collect the pay data by the May 31, 2019 deadline and that employers should be required to file. The court scheduled another hearing for April 16 to further clarify and, hopefully, issue its decision.
Whether the next obstacle to the process could come in the form of a delayed reporting timeframe or a delay in the revised report until next year is uncertain. Indeed, as of March 18, 2019, the EEO-1 portal was opened without a pay data request included. The agency had stated that it is working diligently on the issue and has promised to provide updates as applicable. Meanwhile, the employer community is at either a full stop or at least a “yield” position.
We expect the OMB to appeal the decision to the D.C. Circuit Court of Appeals and seek a delay of the revised EEO-1’s implementation while the appeal is pending. That would put the EEO-1 pay data reporting on hold again and provide employers with some immediate breathing room. And it would not be surprising if the agency went back to work to once again attempt to revise the regulations in a way that would potentially satisfy further judicial scrutiny.
Setting aside predictions on what might happen, employers should operate under the assumption that they will soon have to comply with the revised EEO-1 reporting rules. This means that employers should make it a priority to review current pay systems and identify and address any areas of pay disparity. It is critical to take steps now to minimize increased scrutiny that could be around the next bend.
Fork in the Road? EEO-1 Pay Data versus AAP Compensation Self-Audits
Of course, federal contractors and subcontractors subject to the full affirmative action requirements have been conducting periodic compensation audits of their workforce for years. Thus, the federal contractor community is better poised than the private employer community to have internal electronic mechanisms in place to collect and analyze this data. The very significant difference, however, in the contractor’s periodic compensation self-audits and the EEO-1 filings is that the compensation self-audits need not be filed with a government agency. In fact, unless the contractor is audited by OFCCP, the compensation self-audits remain confidential and are not considered part of the actual Affirmative Action Plan itself.
Are We There Yet?
By conducting a thorough internal audit of pay practices, an employer may be able to determine whether any pay gaps exist that should be further examined. A timely internal pay review may allow the employer the luxury of time to determine whether any disparities that may exist can be justified by legitimate and non-discriminatory explanations, or whether you will need to take corrective action to address troublesome pay gaps. This also allows the employer to correct any unexplained pay inequities in a manner that is less disruptive to its business needs and does not create employee relations issues. Of course, as the contractor works through a pay audit, it should consider how it will capture the data required for Component 2 of the EEO-1 report, when required – which could be immediately, lacking any follow-up action by the agencies involved in the recent court case.
Accordingly, we recommend you conduct a pay audit to gain or improve an understanding of your pay practices, particularly if it has been some time since your company’s most recent periodic compensation review as required under the affirmative action regulatory requirements. In addition, due to the increased complications caused by varying state legislative developments, we strongly encourage you to get your attorney involved in this analysis early in the process.
While we wait to learn the future of the revised EEO-1 in the coming weeks or months, we urge the federal contractor community to continue to assess the situation and to monitor these developments.