On August 18, 2022, the OFCCP revised Directive 2022-01, “Advancing Pay Equity Through Compensation Analysis” to provide more guidance on what compliance documentation will be required to ensure that a contractor is complying with its obligation to conduct a compensation review.
As part of the Executive Order 11246 AAP for minorities and women, contractors are required to perform an in-depth review of their total employment process. This review includes a review of a contractor’s compensation systems by race/ethnicity and gender. Although this requirement has been in place for many years, this Administration has focused on how contractors satisfy this regulatory obligation as part of its focus on pay equity. At the recent NILG 2022 National Conference, OFCCP Director Jenny Yang emphasized the importance of this requirement during her plenary session and indicated the agency believes a significant percentage of contractors may not be conducting this required review.
Since first issuing Directive 2022-01 in March 2022, OFCCCP received significant feedback from the contractor community and others, including concerns about whether the agency would require the production of compensation analyses that were protected by attorney-client privilege or work product. This week’s clarification seeks to address some of those concerns and provides further guidance on how contractors are expected to satisfy the regulatory requirement to review their compensation systems.
Key Points to the Revision:
- OFCCP has clarified that the agency will not require attorney-client privileged work product to demonstrate compliance. Instead, the contractor can make a redacted version of its compensation analysis available. A second option is that contractors can conduct separate analyses without privilege and provide those analyses in full to the OFCCP. A third option is a contractor provides a detailed affidavit that contains all the required information about its compensation review but does not contain any privileged material. However, OFCCP makes clear that contractors will “not be found in compliance with their compensation analysis obligations if they simply invoke privilege and provide OFCCP with no or insufficient documentation of compliance.”
- OFCCP removed references to a “pay equity audit” throughout the directive. The directive also provides examples of the types of analyses contractors might conduct as their required compensation analysis, including 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, and cohort analysis.
- OFCCP provided guidance on what documentation is required to demonstrate a contractors’ compliance with the regulatory requirement to review compensation systems. The documentation must provide the following:
• When the compensation analysis was completed
• Number of employees included in the compensation analysis and the number and category of the employees that were excluded from the analysis
• The “forms” of compensation that were analyzed and if applicable, how the different forms were separated or combined for analysis (e.g., base pay alone, base pay combined with bonuses, etc.)
• The method of analysis used by the contactor (e.g., multiple regression, 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.)
- Although not required like the above, the OFCCP requests that contracts provide additional information to assist them in understanding how the compensation systems were evaluated. The OFCCP states in the new directive that some of this additional information may be considered privileged by contractors and they are not encouraging contractors to waive privilege but proving additional information would assist the OFCCP in conducting a more efficient compliance evaluation. The additional information mentioned are the following:
• All employee pay groupings that were evaluated
• An explanation of how and why employees were grouped for the analysis
• 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
• 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.
- Contractors are required to develop and execute action-oriented programs to correct any problem areas that are found during a compensation analysis. OFCCP provided guidance on the documentation required to show they have implemented an action-oriented program. The documentation must demonstrate the following:
• The nature and extent of any pay disparities found, including the categories for which the disparities were found, the degree of the disparities, and the groups that were adversely impacted
• Whether the contractor has investigated the reasons for any pay disparities found
• That the contractor has instituted action-orientated programs designed to correct any problem areas identified
• The nature and scope of these problems, including the job(s) for which the programs apply and any changes the contractor made to the compensation system (e.g., pay increases, amendments to the compensation policies and procedures)
• How the contractor intends to measure the impact of these programs on employment opportunities and identified barriers
Berkshire’s Compensation team is available to help contractors develop a process for reviewing their compensation systems that both makes sense for the contractor and will satisfy the requirements set out by OFCCP in its revised directive. Most importantly, all contractors should be prepared to explain to OFCCP how they satisfied the regulatory requirement to review their compensation systems as part of their in-depth review of their total employment process under EO 11246.