Identifying Systemic Discrimination Through Compensation Analyses

June 27, 2006

On June 16, 2006, the Office of Federal Contract Compliance Programs (“OFCCP”), which is the federal agency responsible for enforcing affirmative action compliance for federal contractors and subcontractors, adopted its final rule regarding compensation analyses.  The  agency believes its methodology allows it to better identify systemic patterns of discrimination within a federal contractor’s establishment.  The OFCCP will apply this rule during compliance reviews to analyze the compensation of employees who are “similarly situated” to determine whether “statistically significant” disparities exist within the compensation scheme.

The OFCCP considers employees to be “similarly situated” if they perform similar work, have similar responsibility levels and advancement opportunities, and occupy positions involving similar qualifications and skills.  Notably, contractors’ pre-existing employee groupings developed for affirmative action purposes (e.g., job groups and salary grades) are not dispositive in determining whether employees are similarly situated for purposes of compensation analyses.  Although pre-existing employee groupings will be considered, the OFCCP will make independent determinations of whether certain employees are similarly situated by reviewing job descriptions and conducting on-site interviews of employees. 

Once appropriate employee groupings have been established, OFCCP’s professional statisticians perform a “multiple regression analysis,” which accounts for perceived disparities in compensation between similarly situated employees.  Multiple regression analysis is a statistical tool for understanding how legitimate business and market factors affect compensation decisions.  More specifically, multiple regression analysis demonstrates how one dependent variable (e.g., race or gender) tends to affect compensation when considered in relation to several explanatory variables (e.g., education, experience, seniority, location, or performance).  The OFCCP attempts to customize the explanatory variables to reflect a contractor’s business model and pay decisions, but it will also investigate whether the dependent variable disproportionately affects the application of explanatory variables.  Any purported explanatory variable that is applied disproportionately will be excluded from the analysis.

Based on the multiple regression analysis, the OFCCP will determine whether compensation disparities between similarly situated employees are “statistically significant.”  That is, the agency focuses on disparities that are larger than reasonably expected based on chance alone.  Even if a statistically significant difference is observed, however, the OFCCP rarely issues a Notice of Violation unless it obtains corroborating evidence during employee interviews.  The OFCCP may also issue a Notice of Violation for compensation discrimination if a contractor has established a significantly lower wage rate for jobs that are predominantly occupied by women and/or minorities as opposed to jobs that are predominantly occupied by men or non-minorities, which opens the door for comparable worth claims. 

Although the OFCCP would encourage all contractors to follow these standards for the evaluation of compensation practices in affirmative action plans, contractors are not required to comply.  The OFCCP’s compensation analysis standards are completely voluntary, and contractors may continue to use any appropriate method to evaluate their compensation practices.  However, if a contractor reasonably complies with these standards in good faith, the OFCCP will defer to the contractor’s findings during a compliance review.  Such deference will eliminate the contractor’s need to provide compensation information in response to Itemized Listing #11 during a compliance review.  (Itemized Listing #11 currently requests “annualized compensation data by either salary range, rate, grade, or level showing total number of employees by race and gender and total compensation by race and gender.”)

The final rule demonstrates what contractors have long suspected: the OFCCP is increasingly concerned by compensation disparities.  Because the rule was effective immediately upon passage, contractors should quickly determine whether they will attempt compliance with the OFCCP’s methods in hopes of obtaining deference during a compliance review, or whether they will simply continue their own methods under the “wait and see” approach.  Given the inherent vulnerability of self-critical information provided to the OFCCP, the admitted flaws in the OFCCP’s methods, and the increased costs associated with multiple regression analyses, contractors may be best served by continuing their current self-evaluation practices and providing information as requested by Itemized Listing #11.

If you have questions about how this change will affect your organization or if we can help you with preparing your written Affirmative Action Plan, please contact an attorney in the Frost Brown Todd Labor & Employment Department.

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