Compensation, Compensation, Compensation: How to Survive an OFCCP Compliance Review

David S. Fortney, Esq. Fortney & Scott, LLC

David B. Cohen DCI Consulting Inc.

H. Juanita M. Beecher Fortney & Scott, LLC

Agenda

•  OFCCP and Compensation •  Establishing the Attorney-Client Privilege •  Conducting a Proactive EEO Pay Analysis •  Employee Groupings •  Conducting the Analysis •  Making Adjustments •  New Scheduling Letter

OFCCP and Compensation

Scoping – Which Employees are Subject to Audit?

§  OFCCP audits are limited to employees in a specific AAP: §  Single establishment or §  FAAPs §  Almost always conflicts with corporate-wide

§  FAAPs may include employees from multiple establishments, subject to the legal standards

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OFCCP Directive 307 §  Directive 307 (renumbered 2013-03):

§  Effective Date: February 28, 2013 §  Subject: Procedures for Reviewing Compensation

Systems and Practices §  Purpose: To outline the procedures for reviewing

contractor compensation systems and practices during a compliance evaluation

§  Now incorporated into new sex regulations effective August 15, 2016 as §60-20.4

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Our Take on Directive 307 §  Large analytical units that will almost always yield

statistically significant differences §  Arbitrary removal of legitimate non-discriminatory

variables §  Steering, steering and more steering investigations §  Compensation interviews and an increase in on-site

investigations §  Politics and the support of the White House

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§  From an enforcement perspective, small group cohorts may be a thing of the past §  “The mere fact that there are pay differences between

comparators, without any other evidence of pretext or other indicia of possible discrimination, generally is not sufficient to find a violation of E.O. 11246. Individual or small group pay disparities typically are analyzed under the disparate treatment theory of discrimination.”

§  It appears that OFCCP is “screening in” less contractors after the desk audit phase of the review

Directive 307: The Good

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§  Large multiple regression analyses using pay analysis groups as the level of analysis

§  Emphasis on steering and placement issues §  No requirement to find anecdotal evidence of discrimination §  The ability for the CO to remove legitimate non-discriminatory

variables §  Tainted §  Non-significant in the model

§  No way for a contractor to model what OFCCP will do during the course of a compliance review

Directive 307: The Ugly

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OFCCP’s Approaches Stage 1: Analyze for Potential Systemic

Discrimination in Large Groups

Stage 2: May Analyze for Smaller Group or Unit Discrimination

Stage 3: May Analyze for Individual (cohort)

Discrimination

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Establishing the Attorney-Client

Privilege

OFCCP’s Obligation Directive 307 states that “in every case there are three key questions to answer” §  Is there a measurable [statistically significant] difference in

compensation on the basis of sex, race, or ethnicity? §  Is the difference in compensation between employees who

are comparable [and similarly situated] under the contractor's wage or salary system?

§  Is there a legitimate (i.e., nondiscriminatory) explanation for the difference?

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Covered Contractor Obligations

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§  Contractors have an obligation to “evaluate their compensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities” 60-2.17(b)(3) §  Employers often align with their compensation review

cycle

§  Not an obligation to pay employees equally but to pay employees in a non-discriminatory manner

New Sex Regulations §  Prohibits paying different wages to similarly situated

employees using Directive 307’s definition of “similarly situated” §  Case specific and based on some, but not all of the following

factors: task performed, skills, effort, levels of responsibility, working conditions, job difficulty, and minimum qualifications

§  Broader than Title VII §  Prohibits steering

§  Grant or deny higher-paying wage rates, salaries, positions, job classifications, work assignments, shifts, development opportunities, or other opportunities because of sex

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New Sex Regulations (cont.) §  Prohibits providing or denying earnings opportunities

§  Overtime hours, commissions, pay increases, incentive compensation or any other additions to regular earnings

§  Prohibits implementing practices that have an adverse impact and that are not shown to be job-related and consistent with business necessity

§  Expands statute of limitations using Lilly Ledbetter standard

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Conducting Privileged Compensation Self-Audits

§  Properly conducted compensation compliance self-audits are a key tool in understanding and assessing legal compliance and related risks

§  Benefits to the contractor: §  Opportunity to undertake self-directed remedial actions, and

thereby mitigate or eliminate possible legal risks §  Understand and address, in advance, the legal challenges that

could be faced in an OFCCP audit, or Title VII or Equal Pay Act claims by the EEOC or private claimants

§  Good faith compliance 15

Conducting Privileged Compensation Self-Audits

§  Conduct compensation analyses under the attorney-related privileges

§  Audit is undertaken at the direction of in-house or outside counsel §  Structure the analyses under privilege at the outset §  Communications are kept confidential and restricted to “need

to know” §  Outside consultants retained on attorney-privileged basis

§  Determine the appropriate team to handle 16

Key Takeaways on Attorney Privilege §  Privilege is an important step in protecting your

organization from liability §  Understand whom you need to talk to, and when, in

order to establish the privilege §  In-house counsel, outside counsel

§  Follow the instructions and procedures put in place to maintain the privilege and to avoid wavier

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Conducting a Proactive EEO Pay Analysis

EEO Pay Analysis Process §  Build a database and determine the factors that will be included in the

analysis §  Decide how to group jobs for analysis

§  Structurally control for job/department differences §  Statistically control in the regression

§  Conduct analyses §  Regression §  Fisher’s exact tests §  Cohort analysis

§  Research titles that have statistically significant group differences §  Make salary adjustments if differences cannot be explained

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Pay Variables to be Analyzed §  Base Pay §  Bonus §  Merit Increase §  Starting Salary §  Stock Options §  Overtime §  Commission §  W2 Total Comp

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Type of Compensation Factors §  Human Capital vs. Establishment approach

§  Human Capital factors are the things that an individual brings to the table •  Education, Certifications, Prior Experience, etc.

§  Establishment factors are the variables that a company controls and says they pay for •  Time in Job, Performance, Training, etc.

§  Plaintiffs and EEOC/OFCCP may argue that establishment factors are inherently tainted

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Potential Salary Predictors §  Experience

§  Time in Company §  Time in Grade §  Time in Current Job §  Previous Relevant

Experience §  Performance Ratings §  Career Path

§  New Hire §  Promotion/Demotion

§  Training §  Education §  Certifications/Licenses §  Skills §  Security Clearance

§  Market Information §  Salary Survey Median §  Geographic Adjustments §  Line of Business §  Merger/Acquisition

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Directive 307 and Factors §  When using factors as controls in a regression analysis, the statistical

analyst tests the factors to make certain they are predictive for pay and that the factors are not potentially tainted by discrimination.9 The statistical analysts and OFCCP investigators work together, and consult with RSOL as needed, to determine what factors to include in the final analytical model. When conducting a comparative analysis, the CO likewise evaluates factors offered by the contractor as to their relevance to compensation and whether they were consistently applied.

§  9Where statistical testing identifies evidence that a factor results in adverse impact, further investigation may be needed to determine whether it is appropriate to incorporate it into the model.

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Employee Groupings

Directive 307: Pay Analysis Group §  Pay Analysis Group – A group of employees (potentially from multiple job titles,

units, categories and/or job groups) who are comparable for purposes of the contractor's pay practices. Regression analysis may be performed on different types of pay analysis groups. A pay analysis group may be limited to a single job or title, or may include multiple distinct units or categories of workers. A pay analysis group may combine employees in different jobs or groups, with statistical controls to ensure that workers are similarly situated.

§  Similarly Situated Employees – The determination of which employees are similarly situated is case specific. Relevant factors in determining similarity may include tasks performed, skills, effort, level of responsibility, working conditions, job difficulty, minimum qualifications, and other objective factors. Employees are similarly situated where they are comparable based on the factors relevant to the investigation, even if they are not comparable based on other factors.

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Pay Analysis Group Example §  Example of a data set used to conduct an analysis of all

Engineers in one model

Race SexTimeinCompany

TimeinGrade

TimeinJob Age JobTitle

ElectricalEngineer

ChemicalEngineer

W M 12.12 8.45 3.45 43 ElectricalEngineer 1 0B M 13.45 13.45 5.67 34 SoftwareEngineer 0 0A F 1.23 1.23 1.23 45 ChemicalEngineer 0 1N F 3.45 3.45 3.45 47 SoftwareEngineer 0 0W F 11.23 3.33 3.33 38 ElectricalEngineer 1 0H F 7.68 4.56 2.34 55 ChemicalEngineer 0 1

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Pay Analysis Group Example §  Start at the job title

§  Job titles meeting “20 and 3” rule are own PAG §  Be careful that jobs with the same title are actually the “same job” §  Others jobs can be

•  Lumped together into one SSEG, or •  Broken into job families or functions

§  If you have to cross grades §  Start with serial titles (Engineer I, Engineer II) §  Then group according to family or function §  Be sure to include either grade midpoint or a dummy-coded variable in your

regression

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Job Title Job Family Broad Group Grade

Fin Analyst I (10) Finance (19)

Admin (30)

Exempt 1 (141)

Accountant I (9)

HR Rep I (5) HR (11)

Benefits Rep I (6)

Mechanical Eng I (45) Engineering (80)

Technical (111)

Electrical Eng I (35)

Electrician (21) Maintenance (31)

HVAC Specialist (10)

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Pay Analysis Group Example

Conducting the Analysis

Multiple Regression Analysis

35%

15%10%

5%

35%

Time in Grade

Time inCompanyPerformance

Education

Other

Variability in Salary

30 © 2016 The OFCCP Institute

Regression Example §  Electrical Engineering Job Title

§  Average Salary of Men – $50,000 §  Average Salary of Women – $40,000 §  Difference – $10,000 §  Is the $10,000 difference in base salary differences between

men and women significant? Yes §  What should we do next?

§  Conduct a Multiple Regression Analysis that controls for legitimate non-discriminatory factors

31 © 2014 The OFCCP Institute

Regression Outputs

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This model explains 51% of the variance in pay

This model is significant (<.05)

What if Our R2 is Low? §  Two criteria

§  Significant F §  Magnitude of R2

§  If low R2

§  Have we grouped the jobs properly? §  Do we have the right variables in the equation? §  Do we have outliers?

§  In salary? §  In one of the merit variables?

§  Implications of a low R2

§  Cannot use regression to make salary adjustments §  Is our pay practice subjective?

§  Starting salaries §  Raises

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Is Sex Still Significant?

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Even after controlling for 5 legitimate variables, salary differences are still significantly different

Possible Regression Outcomes

§  Merit variables reduce t-value for sex or race below 2.0 §  Merit variables reduce t-value for sex or race but it is

still above 2.0 §  Merit variables increase a previously non-significant t-

value for sex or race above 2.0

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Making Adjustments

Making Adjustments §  If any of the pay groups have statistically significant sex or race/

ethnicity differences in salary, further research should be conducted

§  Research areas §  Are we missing any important variables? §  Are there people included in the pay group that should not be? §  Are there any errors in the data? §  Are there legitimate outliers that should be removed?

§  Make appropriate pay adjustments if statistical indicators cannot be justified

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New Scheduling Letter

Old Item 11 11.  Please provide annualized compensation data (wages, salaries,

commissions, and bonuses) by salary range, rate, grade or level showing total number of employees** by race and gender and total compensation by race and gender. Present these data in a manner that is most consistent with your compensation system. If the information is maintained in electronic format, please submit in that format. See 41 CFR 60-1.4(a)(1). You may also include any other information you have already prepared that would assist us in understanding your compensation system(s).

  **For this purpose, the method used to determine employee totals by the contractor should be the same as that used to determine employee totals in the workforce analysis for the AAP.

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New Item 19 19.  Employee level compensation data for all employees (including but not limited to full-time,

part-time, contract, per diem or day labor, temporary) as of the date of the workforce analysis in your AAP. Provide gender and race/ethnicity information and hire date for each employee as well as job title, EEO-1 Category and job group in a single file. Provide all requested data electronically, if maintained in an electronic format. See Note 1, below. a.  For all employees, compensation includes base salary and or wage rate, and hours

worked in a typical workweek. Other compensation or adjustments to salary such as bonuses, incentives, commissions, merit increases, locality pay or overtime should be identified separately for each employee.

b.  You may provide any additional data on factors used to determine employee compensation, such as education, past experience, duty location, performance ratings, department or function, and salary level/band/range/grade.

c.  Documentation and policies related to compensation practices of the contractor should also be included in the submission, particularly those that explain the factors and reasoning used to determine compensation.

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Strategies for Submitting Item 19 §  Do you provide more than base/hourly pay? §  Should you organize your data consistent with what you

believe are similarly situated pay analysis groups? §  How do you deal with fact that the data provided looks

back 12 months from date of WFA? §  Do you provide data beyond what is specifically

requested if you know it helps to explain differences?

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Compensation Interviews §  OFCCP appears to be using two formats for the

compensation interview §  Traditional Interview §  Compensation Checklist

§  Things to avoid in the interview §  Committing to the factors that influence pay

•  Base pay is nuanced and it always depends §  Committing to pay analysis groups suggested by OFCCP (e.g.,

Job Groups) §  Most audits still seem to focus on base pay

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OFCCP SE Region Compensation Checklist Compensation checklist looking for yes/no answers. By saying “Yes” or “No” please indicate if the following compensation factors are relevant to how you pay your employees.

1.  Job date? 2.  Title? 3.  Date of entry into job title? 4.  EEO-1 category as listed in EEO-1 report? 5.  Job group? 6.  Base salary or wage rate excluding overtime and other incentives? 7.  Hours worked in the workweek? 8.  Work shift? 9.  More than one shift? 10.  Exempt vs nonexempt status? 11.  Employment status (PT/FT/per diem/contract/etc)? 12.  Do you have PT employees? 13.  Date of birth as a proxy for experience? 14.  Date of termination? 15.  Do you have certifications that are job related? 16.  Specialties (e.g., type of engineer:  mechanical, electrical, etc)? 17.  Do you pay a premium for critical skills? 18.  Job related training? 19.  Education highest level achieved? 20.  Year highest level of education level received? 21.  Major of highest level of degree? 22.  Minor of highest level of degree? 23.  Name of university of level of degree: 24.  Past experience / years? 25.  Past experience / type (e.g. management, technical, etc)?

27.  Duty location of employee? 28.  Performance rating in effect as of relevant snapshot date? 29.  Department? 30.  Business Unit? 31.  Function role? 32.  Salary band or grade? 33.  Date of entry into salary band or grade? 34.  Additional pay item relevant to pay: bonus pay? 35.  Type of bonus? 36.  Is type of bonus fixed and/or non-discretionary? 37.  Name of the bonus plan the employee is eligible for? 38.  Incentive pay?

Type? Name?

39.  Commission pay? Type? Name?

40.  Merit increase pay? 41.  Locality pay? 42.  Shift differential pay?  43.  OT pay? 44.  OT eligibility? 45.  Piece rate pay? 46.  Tip pay? 47.  Stock options? 48.  401K eligible?

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Other Audit Considerations §  Submitting additional compensation data

§  Resumes §  Applications §  Etc.

§  Responding to a Notice of Violation §  What pay analysis groups did they use? §  What explanatory factors did they use in the regression? §  Did they omit any factors that they should have? §  Have they identified any anecdotal evidence to support the

statistical analysis?

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David B. Cohen David Cohen is President of DCI Consulting Group, Inc. and Senior Vice President of

The Center for Corporate Equality (CCE). He provides consulting services to employers and management law firms on a wide range of human resource risk management strategies, particularly in the areas of EEO/affirmative action program development, systemic compensation statistical analyses, comprehensive human resources self-audits, and employee selection and test validation.

Recognized as a national EEO and affirmative action compliance expert, Mr. Cohen speaks frequently before corporate leaders from Fortune 500 companies, and at regional and national ILG conferences and OFCCP events. In 2006, he co-authored a book entitled Understanding Statistics: A Guide for I/O Psychologists and Human Resource Professionals, which was published by Thomson Wadsworth. Mr. Cohen is also the Associate Editor of the Applied HRM Research. Email: dcohen@dciconsult.com

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David S. Fortney David Fortney is a co-founder of Fortney & Scott, LLC, a Washington, D.C.–based law firm

counseling and advising clients on the full spectrum of work-place related matters. Fortney & Scott, LLC has been recognized as a leading management employment law firm in the highly prestigious “Best Law Firms” survey for 2011–2016 by U.S. News & World Report and Best Lawyers for Washington, DC and the nation.

Mr. Fortney is co-founder of The OFCCP Institute. His OFCCP practice includes representing and counseling federal contractors nationwide on complying with contractors’ nondiscrimination and affirmative action obligations enforced by OFCCP. He regularly advises and represents clients facing audits by OFCCP, including OFCCP’s compensation audits, desk audits, on-site reviews, audits of Functional Affirmative Action Programs, and pre-award compliance evaluations. Mr. Fortney was invited to testify about federal contractors’ interests in a December 2013 Congressional oversight hearing on OFCCP.

Mr. Fortney has consistently received the highest professional rankings, including CHAMBERS USA, Washington, DC Super Lawyers, The Best Lawyers in America, and Washington DC’s Best Lawyers, as one of the leading employment lawyers in Washington, DC. Email: dfortney@fortneyscott.com

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H. Juanita (Nita) M. Beecher Nita Beecher is Of Counsel to Fortney & Scott, LLC with a focus on OFCCP regulatory affairs.

Ms. Beecher’s primary focus is labor and employment law with substantial experience with class investigations by the EEOC and OFCCP.

From 2003 to 2015 Ms. Beecher led the ORC/Mercer Workforce Opportunity Network (WON), a network of senior diversity, EEO and affirmative action corporate practitioners. From 2000 to until its dissolution in 2011, Ms. Beecher led the Employment Law & Litigation Group (ELLG), a network of senior in-house labor and employment lawyers.

Prior to ORC/Mercer, Ms. Beecher served as an in-house counsel labor and employment counsel for McDonnell Douglas/Boeing; Arch Mineral; Consolidation Coal and E. I. du Pont de Nemours & Co. for more than 20 years where she advised in-house clients on labor and employment law issues.

A recognized expert on OFCCP regulatory matters, Ms. Beecher has been a regular speaker at the ILG National Conference since 2004. Ms. Beecher served on the expert panel at NAS that made recommendations to EEOC and OFCCP on collecting pay from employers. Email: nbeecher@fortneyscott.com

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