The Office of Federal Contract Compliance Programs ("OFCCP") has published final standards on system compensation discrimination and voluntary guidelines for self-evaluation of compensation practices for compliance with Executive Order 11246. In the new systemic Compensation Discrimination Standards, the OFCCP for the first time has set forth the standards and methods that it will use to evaluate contractors' compensation practices during compliance reviews. The OFCCP, at last, has abandoned the pay grade theory that it used through the late 1990s to evaluate systemic compensation discrimination. Under that theory — long rejected in Title VII case law — it is assumed that employees are similarly situated for purposes of evaluating their compensation if the employer placed their jobs in the same pay grade. The OFCCP's adoption of the new Standards codifies the use of the Title VII standards employed by courts.

The Standards provide that OFCCP compensation analyses will be based upon: (1) the grouping of employees into "Similarly Situated Employee Groupings" or "SSEGs" (focusing on similarity in job content, skills and qualifications, and responsibility level) for purposes of comparing contractor pay decisions and (2) a statistical technique known as multiple regression. They also provide that systemic compensation discrimination exists where there are statistically significant compensation disparities (as established by the multiple regression analysis) between similarly situated employees, after taking into account the legitimate factors that influence compensation, such as education, prior work experience, performance, productivity, and time in the job.

The Voluntary Guidelines for Self-Evaluation of Compensation Practices

Pursuant to OFCCP regulations, covered federal contractors must evaluate their compensation systems to determine whether there are disparities based on gender, race, or ethnicity. The regulations provide employers with no guidance on what type of evaluation is required. Indeed, the OFCCP repeatedly has noted that a contractor has the discretion to use any self-evaluation technique it deems appropriate, and the technique need not be quantitative or statistical. That much remains true, and contractors may continue to choose whatever form of self-evaluation they deem appropriate in order to comply with the regulations.

What has changed is that the OFCCP now offers an incentive to contractors to conduct a self-evaluation that conforms to the new Voluntary Guidelines. That is, if a contractor in good faith implements a self-evaluation program that reasonably comports with the voluntary guidelines, OFCCP will not conduct an independent evaluation of the contractor's compensation practices during a compliance review. In the Itemized Listing that accompanies the OFCCP's current Scheduling Letter, which initiates the compliance review process, the OFCCP requests, in Item 11, that the contractor provide "annualized compensation data (wages, salaries, commissions, and bonuses) 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 OFCCP uses that data to conduct its own compensation analysis of the contractor's data under a tiered approach, which means that the OFCCP conducts an in-depth, multiple regression analysis of a contractor's compensation data only if the OFCCP has determined, based upon a less-sophisticated analysis, that there is a significant likelihood of a potential discrimination problem. Under the final Voluntary Guidelines, a contractor that desires the compliance coordination incentive, and accordingly has implemented a self-evaluation program that reasonably comports with the Voluntary Guidelines, will not be required to submit compensation data in response to Item 11.

The Voluntary Guidelines Adopt the "Similarly Situated Employer Grouping" Concept and Require Multiple Regression Analyses.

The Voluntary Guidelines consist of three major components. The self-evaluation: (1) must be based upon SSEGs; (2) must rely on a multiple regression analysis (for contractors with more than 500 employees); and (3) must be annual. A contractor's SSEGs must include at least 30 employees, must contain five or more employees from each comparison group (i.e., females/males, minorities/non-minorities), and must account for at least 70% of the employees in the Affirmative Action Program or establishment under review. A contractor must investigate any statistically-significant compensation disparities disclosed by the self-evaluation and provide appropriate remedies (such as back pay) if the disparities cannot be explained by legitimate factors.

Contractors that avail themselves of the incentive by representing to the OFCCP during a compliance review that they have implemented a self-evaluation program under the Voluntary Guidelines must make available to the OFCCP (1) the documents necessary to explain and justify its formations of SSEGs, the exclusion of certain employees from the SSEGs, and the form of the statistical analyses employed; (2) the data used in the statistical analyses and the results of the analyses; (3) the data and documents explaining the results of the analyses; and (4) the documents related to any follow-up investigations into statistically-significant disparities, the conclusions of the investigations, and any pay adjustments made to remedy such disparities.

If the contractor's compensation self-evaluation system reasonably meets the general standards of the Voluntary Guidelines, the OFCCP will consider the contractor's compensation practices to be in compliance with Executive Order 11246.

Alternative Compliance Certification

In lieu of producing the methodology or results of its compensation self-evaluation to the OFCCP during a compensation review, a contractor may certify to the OFCCP that it has performed a compensation self-evaluation at the direction of counsel, and that the evaluation and results are subject to the attorney-client privilege and/or the attorney work product doctrine. Employers who submit such a certification cannot receive the benefit of the incentive offered by the OFCCP. That is to say that the OFCCP will evaluate their compensation practices without regard to their compensation self-evaluation.

Contractors Should Exercise Caution

Plaintiffs' attorneys litigating class employment discrimination claims frequently seek to compel the disclosure of employers' internal self evaluations. Plaintiffs' counsel seize upon statements made in such evaluations as evidence of an employer's knowledge and admissions of discrimination. Thus, contractors should be very cautious about conducting compensation self-evaluation without the guidance and involvement of legal counsel and statistical experts.