OFCCP Updates Compensation Compliance Directive - American Society of Employers - Anthony Kaylin

OFCCP Updates Compensation Compliance Directive

ofccpEarlier this year, the OFCCP released Directive 2022-01: Advancing Pay Equity Through Compensation Analysis.  There was a lot of controversy over the directive, both with respect to expected analysis and analysis to be submitted when a compliance officer requested it.  For the latter, the agency generated discord in the compliance sector, because it was seemingly saying attorney/client privilege can be overturned by the agency. 

The agency recognized the controversy it created and updated the Directive.  The updated Directive also seemingly puts the attorney/client privilege to rest and describes additional types of documentation contractors can provide in the course of an audit to demonstrate compliance with their obligation to review their “compensation system(s)” under 41 CFR 60-2.17(b)(3), including submission of a detailed affidavit in lieu of producing an analysis.

Specifically, OFCCP Director Jenny Yang wrote:

  1. It explicitly reaffirms the agency’s position that it does not require the production of attorney-client privileged communications or attorney work product.
  2. It identifies the documentation that OFCCP requires from a contractor to determine that the contractor has satisfied its obligation to perform a compensation analysis.
  3. It explains the documentation required from a contractor when its compensation analysis identifies problem areas to demonstrate that it has implemented action-oriented programs.

Further, because of confusion over the terms “pay equity analysis,” “pay gap analysis,” and “pay disparity analysis,” Director Yang explained that “although the original Directive used the phrase “pay equity audit” to refer to contractors’ obligations under 41 CFR 60-2.17(b)(3), this revised Directive instead uses the term “compensation analysis” to avoid any confusion regarding the nature of a contractor’s obligations.”  Therefore, the term is now compensation analysis, which is a better and broader description of the analyses contractors perform on salary and total compensation.

In the OFCCP world, most contractors for an audit would conduct a pay disparity analysis, reviewing the differences of pay between employees in generally the same title category.  They would not conduct pay equity analysis simply because they are reviewing disparities and not fairness of the pay system.  Moreover, pay gap analysis really reflects on the demographic hierarchy of the employers and opportunities for affirmative action programs within the organization.

To be in compliance with the regulations, the Directive has three options for contractors to demonstrate compliance:

  1. A contractor may make available a redacted version of its compensation analysis, provided that the non-redacted portions include the required facts described below.
  2. A contractor may conduct a separate analysis during the relevant AAP period that does not implicate privilege concerns and provide that analysis to OFCCP in full.
  3. A contractor may generate a detailed affidavit that sets forth the required facts described below but does not contain privileged material.

At a minimum, contractors must provide the following details to OFCCP to demonstrate compliance:

  1. when the compensation analysis was completed;
  2. the number of employees the compensation analysis included and the number and categories of employees the compensation analysis excluded;
  3. Which forms of compensation were analyzed and, where applicable, how the different forms of compensation were separated or combined for analysis (e.g., base pay alone, base pay combined with bonuses, etc.);
  4. That compensation was analyzed by gender, race, and ethnicity; and
  5. The method of analysis employed by the contractor (e.g., multiple regression analysis, decomposition regression analysis, meta-analytic tests of z-scores, comp-ratio regression analysis, rank-sums tests, career-stall analysis, average pay ratio, cohort analysis, etc.).

The last point gives an indicator as to expectations of a required analysis under 41 CFR 60-2.17(b)(3), but OFCCP still has to go through a regulatory process to enshrine these approaches as appropriate and sufficient to comply with the regulations.

Further, in the course of the review, if a contractor’s compensation analysis identifies any problem areas (including gender-, race-, or ethnicity-based pay disparities), the Directive explains that OFCCP will require documentation that demonstrates compliance with the regulations at 41 CFR 60-2.17(c) that require the contractor to develop and execute action-oriented programs to correct them. 

To demonstrate compliance, OFCCP will, at a minimum, require:

  1. The nature and extent of any pay disparities found, including the categories of jobs for which disparities were found, the degree of the disparities, and the groups adversely affected;
  2. Whether the contractor investigated the reasons for any pay disparities found;
  3. That the contractor has instituted action-oriented programs designed to correct any problem areas identified;
  4. The nature and scope of these programs, including the job(s) for which the programs apply and any changes (e.g., pay increases, amendments to compensation policies and procedures) the contractor made to the compensation system; and
  5. How the contractor intends to measure the impact of these programs on employment opportunities and identified barriers.

A contractor will not be in compliance if they simply invoke privilege and provide OFCCP with no or insufficient documentation of compliance.

As this Directive approach is new, contractors will have to wait until the agency applies it in practice.  To some it may still be overreaching, but it does lay more groundwork as to consistency of expectations.  Yet a directive is simply that – a directive.  It is not regulation, and therefore, it may end up in the courts to decide the legal bounds of the updated Directive.

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