Directive Clarifies How to Demonstrate Compliance

Summary of the Issue

OFCCP’s initial release of Directive 2022-01: Pay Equity Audits in March 2022 created some fear OFCCP might attempt to compel the production of attorney-client privileged communications as the only evidence a contractor could use to prove they are in compliance with the compensation analysis regulations at 41 CFR 60-2.17(b)(3).

On August 18, 2022, OFCCP revised that directive to clarify how contractors will be expected to prove compliance, renaming the directive “Advancing Pay Equity Through Compensation Analysis.” You can read it in its entirety at the link above. OFCCP Director Jenny Yang summed up the changes in her blog post about the directive as below:

  1. It explicitly reaffirms OFCCP’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.

It explains the documentation required from a contractor when its compensation analysis identifies problem areas to demonstrate that it has implemented action-oriented programs.

How to prove compliance if Compensation Analyses performed under attorney-client privilege:

OFCCP still claims the best way it can determine compliance is to receive the full compensation analysis a company has conducted to determine whether disparities by race & gender exist in its compensation system(s), but provides some options if a company believes its full analysis contains privileged attorney-client communications or attorney work product.

It provides the three submission options below, provided they demonstrate various details:

  1. Redacted Comp Analysis (including specific details): Make available a redacted version of the compensation analysis (provided that the non-redacted portions include the required items described further below).
  2. Separate, OFCCP Compensation Analysis (from privileged one): Conduct a separate analysis during the relevant AAP period that does not implicate privilege concerns and provide that analysis to OFCCP in full.
  3. Detailed Affidavit of analysis (including specific details): Generate a detailed affidavit that sets forth the required facts described below but does not contain privileged material.

Required minimum details to be included in submission 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, compa-ratio regression analysis, rank-sums tests, career-stall analysis, average pay ratio, cohort analysis, etc.).

OFCCP recommends the below be submitted, but will not require, especially if they are considered privileged:

  1. all employee pay groupings evaluated;
  2. an explanation of how and why employees were grouped for the analysis;
  3. which, if any, variables, factors, measures, or controls (e.g., tenure, education, structural groupings, performance ratings, prior experience) were considered and how they were incorporated in the analysis; and
  4. the model statistics for any regressions or global analyses conducted (e.g., b-coefficients, significance tests, F-tests, etc.) for race, ethnicity, and gender-based variables.

In the event a company’s analysis identifies any problem areas, it cites that the regulations require the contractor to “develop and execute action-oriented programs to correct them.” (OFCCP does not define “problem area” – so this would be up to the company to define this and defend their definition. A reasonable definition would be significant pay differences that the company was not able to explain by business-related, non-discriminatory factors. Still – then significant needs to be defined as well!)

Those items OFCCP expects would demonstrate compliance in the event “problem areas” are found are, at a minimum:

  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.

This last subject is the most open-ended of the entire directive, given that “pay disparities” and “problem areas” are not defined. OFCCP expects you to review “pay disparities” and then take steps to correct “problem areas” identified after your review of pay disparities. As previously mentioned, problem areas could be reasonable defined as “significant pay differences that the company was not able to explain by business-related, non-discriminatory factors.” You need to determine the level of pay difference that is “significant.” For example: you might set the threshold at statistically significant differences by any grouping (pay analysis group, job group, title, etc.) You might determine only statistically significant differences by individual job title analyses are significant enough to investigate. You might set a percentage difference threshold (our analyses use 5% or more to highlight differences, especially in the event of groups that are too small for regression.)

Given this ambiguity, documenting the next steps taken after a compensation analysis has been completed are important to demonstrate compliance and also the rationale for pursuing (or not) the investigation of any disparities that have been highlighted by the reports.

Recommended Steps when Reviewing Compensation Reports

It’s important to document, at a minimum, that you conducted a review of the areas highlighted by the compensation analysis. Document what threshold you used for determining what you consider to be a “pay disparity” that requires further review. While statistically significant differences in pay at the title level cannot be ignored, all other levels of pay differences are up for debate.

If you review all the disparities and determine there are no problem areas (no unexplained differences), you need to document the next steps taken to correct the issues found. Such documentation of the actual investigation would likely be extremely helpful if it was called into question in the future, or if factors outside the company’s HRIS were investigated to determine whether a pay difference was warranted (like prior years’ related experience outside the company, certifications, education, etc.). Many times the explanatory factors are fresh in the memory today – but two years down the road when they are called into question that person who conducted the investigation may no longer be there, or they may not be able to so readily recall the reasons for the pay differences.

Kairos’ OFCCP Compensation Analyses are designed to highlight issues OFCCP would find in a desk audit of your Affirmative Action Plan job groups and job titles – and more – highlighting intersectional race/ethnicity and gender disparities. Our reports provide tools to enhance your review as well as insights into explanatory factors that may be driving disparities.

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