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The Office of Federal Contract Compliance Programs’ (OFCCP) new Directive 2022-01, concerning federal contractors’ “obligation to conduct in-depth compensation analysis,” raises issues that will take time to sort out.

The Directive seeks to define federal contractors’ obligations for pay equity self-review under 41 CFR 60-2.17(b)(3), the ‘supply and service’ regulation outlining the gender-, race-, and ethnicity-based affirmative action obligations they must satisfy.

41 CFR 60-2.17(b)(3) states that “the contractor must perform in-depth analyses of its total employment process” (emphasis added).  However, 41 CFR 60-2.17(b)(3) does not define how to meet the requirement.  It simply states that “at a minimum the contractor must evaluate compensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities.”

To further define the pay review obligation, the new Directive cites the Agency’s Supply and Service Contractors Technical Assistance Guide and the  Educational Institutions Technical Assistance Guide.  These documents do little to clarify the obligation.  To the contrary, the Supply and Service Guide states, “OFCCP does not dictate a particular method of analysis for meeting this regulatory requirement.”  Relevant language in the Educational Institutions Guide states: “Many institutions of higher education conduct a linear regression analysis of pay with key productivity variables in the model.”  Stating what some contractors may do does not constitute a definition of what is required.

The Directive states that OFCCP has the authority to “verify compliance with this requirement” during audit.  This is undoubtedly true.  But what standard will the Agency use to verify compliance when, as noted above, “OFCCP does not dictate a particular method of analysis for meeting this regulatory requirement?”

In the past, contractors commonly met their 2.17(b)(3) requirements by utilizing a variety of non-statistical analyses.  One method, for example, has been to review pay groups to justify or correct differences in pay greater than 5% and $5,000.  Given the very general language of the regulation’s pay review requirement, this should suffice.  But will OFCCP agree as it implements its new Directive?  The Guides cited above and OFCCP’s general compensation Directive on “Compensation Practices During a Compliance Evaluation,” Dir. 2018-05, anticipate the use of complex statistical methodologies. As the methodologies outlined are not specifically aligned to 2.17(b)(3), however, any Agency insistence on their use for the mandated compensation system review would appear to be misplaced.

The Directive also outlines a troubling ramification to the current enigma of what constitutes a ‘compliant’ compensation self-analysis.  By way of background, many contractors perform two forms of compensation analyses. One, such as that outlined above, is specifically designed to satisfy 2.17(b)(3).  A second one, performed by lawyers and statisticians under legal privilege, is for the employer’s private analysis and action.  Directive 2022-01 states that the separate, privileged review can remain private “where the contractor has provided to OFCCP an acceptable pay equity audit sufficient to demonstrate compliance with 2.17(b)(3).”  This again begs the issue of what the Agency will deem acceptable.  It raises the specter of the Agency requiring production of the privileged, private review if it deems the contractor’s 2.17(b)(3) analysis not compliant.

The Directive includes another hint about upcoming OFCCP practice: “OFCCP will also look broadly at a contractor’s workforce … to identify patterns of segregation by race, ethnicity, and gender, which may result from assignment, placement, or upgrading/promotion.”  The Agency’s review of your compensation system could investigate whether differences in pay are the result of company decisions to “steer’ particular groups into particular kinds of work, limiting pay and career opportunity.

It is important that federal contractors perform a review of their compensation system annually, and be prepared to provide, as the new Directive requires, “a complete copy” of the analysis.  It is critical, as the Directive states, that contractors be ready to inform the Agency about “the frequency of pay equity audits, the communication to management, and how the results were used to rectify disparities based on gender, race and/or ethnicity.”

The new Directive makes it more crucial than ever for contractors who perform privileged pay equity reviews to document that the work is unrelated to their 2.17(b)(3) requirements, and to undertake all aspects of the review entirely independently of their Affirmative Action program.

It is also a good idea to keep an eye out for changes to the supply and service program, and for other initiatives the Agency may propose.  Directive 2022-01 is not likely to be the last word on Affirmative Action program changes to come from the current administration.

Author

Paul McGovern
Managing Partner
Praxis Compliance

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