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| November 4, 2008 DOL Home > ESA > OFCCP |  |
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Office of Federal Contract Compliance Programs (OFCCP)
Corporate Management Compliance Evaluation OFCCP's New Systemic Compensation Discrimination Standards and Voluntary Guidelines for Compensation Self-Evaluation
What are the new compensation discrimination standards and what are their significance? The Interpretative Standards for Systemic Compensation Discrimination (71 FR 35124, June 16, 2006) (the "Standards") are a set of formal standards for interpreting the nondiscrimination requirements of Executive Order 11246 ("E.O. 11246") with respect to systemic compensation discrimination. The Office of Federal Contract Compliance Programs (OFCCP) conducts compliance reviews to determine whether covered contractors have been engaging in workplace discrimination prohibited by E.O. 11246. As part of its compliance review process, OFCCP investigates whether contractors' pay practices are discriminatory. The Standards will provide standards and methods for OFCCP evaluations of contractors' compensation practices during compliance reviews. In addition, the Standards are intended to provide - for the first time - a definitive interpretation of the 1978 Sex Discrimination Guidelines, codified at 41 CFR 60-20, as well as E.O. 11246 with respect to systemic compensation discrimination. The systemic compensation discrimination analysis as set forth in the Standards has two major characteristics: (1) the determination of employees who are "similarly situated," for purposes of comparing contractor pay decisions, will focus on the similarity of the work performed, the levels of responsibility, and the skills and qualifications involved in the positions; and (2) the analysis relies on a statistical technique known as multiple regression. The Standards focus on similarity in job content, skills and qualifications, and responsibility level. These are the criteria for establishing systemic pay discrimination under Title VII court decisions and the Equal Employment Opportunity Commission's compliance manual chapter on compensation discrimination. Systemic compensation discrimination exists where there are statistically significant compensation disparities (as established by a regression analysis) between similarly situated employees, after taking into account the legitimate factors which influence compensation, such as: education, prior work experience, performance, productivity, and time in the job. Under the Standards, a statistically significant disparity occurs at a level of two or more standard deviations, based on measures of statistical significance that are generally accepted in the statistics profession. OFCCP will issue a Notice of Violation (NOV) only based on these Standards. In determining whether a violation has occurred, OFCCP will also consider whether there is anecdotal evidence of compensation discrimination, in addition to statistically significant compensation disparities. Except in unusual cases, OFCCP will not issue an NOV alleging systemic compensation discrimination without providing anecdotal evidence to support the statistical analysis. In unusual cases, OFCCP may assert a systemic discrimination violation based only on anecdotal evidence, if such evidence presents a pattern or practice of compensation discrimination. I am one of the EEO managers for my company and we are a federal contractor. Do these new systemic compensation standards require me to do anything? No, The new Interpretative Standards for Systemic Compensation Discrimination are standards that OFCCP will use when conducting a compliance review. The new Standards follow existing court interpretations of Title VII of the Civil Rights Act of 1964, which covers all federal contractors who would be subject to an OFCCP compliance review. The new Standards are consistent with recent OFCCP enforcement practice. Thus, these new Standards do not create any new obligations and they do not require contractors to do anything new. My company is a federal contractor and I am concerned will we have to spend a lot of time reviewing employment records and inputting information into an electronic database in order to comply with the new Standards? Under the new Standards, the contractor is not required to review records and create a database for OFCCP to use during a compliance review. During the preliminary stages of the compliance review, where OFCCP conducts a preliminary analysis, we will attempt to use the data that the contractor already has in electronic format. If the contractor does not have sufficient data in electronic format to run a diagnostic regression, OFCCP will review the records and create the database. OFCCP's goal at this stage of the investigation is to balance the accuracy of the evaluation process with the burden of data collection. Therefore, if any data requested is not readily available in an electronic format, the contractor should contact OFCCP to discuss the specifics of the situation so that the best available data is provided in a timely manner. In sum, OFCCP will not require contractors to review records and build electronic databases. By regulation, 41 CFR 60-1.43, contractors must make available electronic information if it exists. The submission of available electronic information expedites the review process. My company is a federal contractor. I understand that under these new Standards, OFCCP will conduct employee interviews and will use complex multiple regression analyses. I'm concerned that such activities may impact my company's ability to run its business. Will OFCCP conduct such interviews and analyses for every contractor it reviews? No, OFCCP will not conduct employee interviews and perform multiple regression analyses for every federal contractor OFCCP reviews. Rather, OFCCP will continue to rely on its existing tiered-review approach. Under the tiered review system, an initial (off-site) compliance evaluation is conducted, followed, where indicated, by a focused review and a full compliance review. The level of review is based on the indicators of substantive violations revealed at the early stages of the review. OFCCP will conduct the full-scale investigation and analysis called for by the new Standards only after preliminary steps reveal indicators of potential compensation discrimination. The first step in OFCCP's review of a contractor's compensation practices is the desk audit, where OFCCP analyzes the data that the contractor submits in response to Item No. 11 of the Scheduling Letter. If that analysis reveals a potential problem, OFCCP will collect individual compensation data and perform a preliminary analysis. If the preliminary analysis reveals indicators of potential compensation discrimination then OFCCP would undertake the investigation and analysis required by the new Standards, including employee interviews and multiple regression analyses. OFCCP will follow the new Standards in determining whether to issue a Notice of Violation alleging systemic compensation discrimination. Under what conditions will OFCCP issue a Notice Of Violation (NOV) under the Standards? OFCCP will issue an NOV, alleging systemic compensation discrimination, only in two situations. First, in unusual cases, OFCCP may issue an NOV based only on anecdotal evidence, if such evidence presents a pattern or practice of compensation discrimination. The second, and more typical, situation includes statistical analysis and usually anecdotal evidence, and requires that OFCCP follow these steps prior to issuing an NOV:
It will be the standard practice to issue a Predetermination Notice prior to issuing an NOV and to discuss with the contractor the nature of the findings to provide it with the opportunity to raise issues with the analyses. What is a "multiple regression" analysis? In addition to similarity in work performed, skills and qualifications, and responsibility levels, systemic compensation discrimination analysis under Executive Order 11246 requires that the comparison take into account legitimate factors that affect compensation. In order to account for the influence of such legitimate factors on compensation, a statistical analysis known as "multiple regression" must be used. Multiple regression is explained as follows:
Daniel L. Rubenfeld, Reference Guide on Multiple Regression, in Federal Judicial Center, Reference Manual on Scientific Evidence, at 181 (2d ed. 2000). The multiple regression model must include those factors that are important to how the contractor in practice makes pay decisions. Such factors could include the employees' education, work experience with previous employers, seniority in the job, time in a particular salary grade, performance ratings, and other factors. OFCCP generally will attempt to build the regression model in such a way that controls for the factors that the investigation reveals are important to the employer's pay decisions, but also allows the agency to assess how the employers' pay decisions affect most employees. One factor that must be controlled for in the regression model is categories or groupings of jobs that are similarly situated based on the analysis of job similarity noted above (i.e., similarity in the content of the work employees perform, and similarity in the skills, qualifications, and responsibility levels of the positions the employees occupy, and additional factors as discussed above). This will ensure that the analysis compares the treatment of employees who are in fact similarly situated. In typical regression software packages or spreadsheets, the number of standard deviations is determined from the standard error associated with the regression coefficient associated with non-favored class membership. For example, if the regression shows that after accounting for the differences in the pay factors, the regression finds that there is a pay difference attributed to non-favored class membership of $700, at a standard error of $190 this reflects a standard deviation, equal to the ratio of these two values, of $700/$190 or 3.68 standard deviations. Will OFCCP share the results of the regression analyses with the contractor during a review? Yes. OFCCP will attach the regression analyses and results to, and summarize the anecdotal evidence in, either the Predetermination Notice, if one is issued, or the Notice of Violations issued to the contractor or subcontractor. How will OFCCP collect the anecdotal information discussed in the Standards? OFCCP has traditionally used interviews with applicants, employees, and managers to identify potential barriers to equal pay, advancement and hiring and will continue to do so to find anecdotal evidence of discrimination in its audits. OFCCP may also identify employees with larger pay disparities as identified by preliminary regression analyses as potential subjects for interviews along with their associated managers. OFCCP will work to minimize the burden on contractors during this process. But once a potential finding of discrimination is identified through statistical procedures, OFCCP will work to understand these findings and to gather evidence from the persons involved. How will OFCCP deal with statistically influential employees within an SSEG during the analyses? OFCCP defines a statistically influential employee as one who receives a substantially higher or lower rate of pay than others in the SSEG after accounting for the factors used in the pay analyses. If the difference in pay appears to be due to legitimate factors that were not explored in the prior analyses, such as special certifications, skills or traits, OFCCP will determine if the employee is an "outlier" and, if appropriate, will modify the regression analyses to account for these special factors or will remove the employee from the analyses. If the difference is not due to legitimate factors, including the influence of discrimination, the employee will remain in the study. The new Standards say that OFCCP will compare employees who are "similarly situated" based on similarity in the work they perform and in the skills, qualifications, and responsibility level involved in the positions they occupy, as well as other pertinent factors. Will OFCCP attempt to combine, group, or compare employees who are not "similarly situated" in order to create a group large enough for meaningful statistical analysis? No. Under no circumstances will OFCCP attempt to combine, group, or compare employees who are not similarly situated under these final interpretative standards. If employees are not similarly situated under these final interpretive standards, they will not be included in the statistical analysis, regardless of statistical size requirements or OFCCP's general objectives to include a significant majority of employees in the regression analyses. For screening purposes during initial desk audit procedures, OFCCP may compare the compensation practices of employees by AAP job group or other appropriate pay division. The analysis set forth in the Standards will, however, govern OFCCP's issuance of all Notices of Violation alleging systemic compensation discrimination by a contractor. What is the 30/5 rule for Similarly Situated Employee Groups (SSEGs)? Under the Voluntary Guidelines, OFCCP defines a Similarly Situated Employee Group (SSEG) as a grouping of employees who perform similar work, and occupy positions with similar responsibility levels and involving similar skills and qualifications. The 30/5 rule refers to the requirement that each SSEG to be statistically-evaluated must be comprised of at least 30 employees, including five or more employees of each group being compared. Contractors should use non-statistical methods to evaluate the compensation of employee groupings that do not meet the 30/5 Rule. The example below applies the 30/5 Rule to two different groupings of similarly-situated employees.
Since Group A includes 30 or more total employees, including at least 5 females and 5 males (6 females and 28 males) and at least 5 minorities and 5 non-minorities (10 minorities and 24 non-minorities), the group meets the 30/5 SSEG requirement and may be evaluated through statistical analyses for both gender and minority disparities in compensation. Group B meets the 30/5 SSEG requirement for conducting statistically-based gender comparisons because of the 32 employees in the group, there are at least 5 males and 5 females (10 males and 22 females). However, Group B does not meet the 30/5 SSEG requirement for statistically evaluating minority/non-minority disparities because there are fewer than 5 minority employees in the group (4 minorities, 28 non-minorities). Under the Voluntary Guidelines, contractors should use non-statistical methods to assess minority/non-minority disparities in Group B. When comparing two minority races or ethnicities (e.g. Hispanic vs. American Indian) by SSEG, the 30/5 rule requires that the two subgroups, when combined, must have 30 or more employees and be comprised of at least 5 employees from each minority race or ethnic subgroup being compared (e.g. 5 or more Hispanics and 5 or more American Indians). How will OFCCP evaluate the SSEGs that contractors create under the Voluntary Guidelines and submit to OFCCP as part of a compliance evaluation? For those contractors who opt for the voluntary self-audit submission under the Voluntary Guidelines, and construct in good faith Similarly Situated Employee Groups (SSEGs) that meet the 30/5 rule and cover 70 percent of the workforce, and the analysis is conducted on a SSEG-by-SSEG basis, OFCCP will accept the SSEGs definitions provided by the contractor without further review. OFCCP will not request or conduct a pooled analysis to challenge these findings to include a greater portion of the workforce for review. The Voluntary Guidelines require that the contractor conduct non-statistical analyses on the compensation of those individuals excluded from the SSEGs. If the SSEGs that meet the 30/5 rule do not encompass 70 percent of the workforce, OFCCP will review their components to determine whether the definitions seem reasonable. OFCCP understands that at some facilities the combined effect of the size of the work force and the type of work conducted may produce few groupings that would meet the SSEG 30/5 rule. In such cases, OFCCP may accept the SSEGs and a coverage rate that is less than 70 percent to find the analyses in compliance under the Voluntary Guidelines. Importantly, this 70 percent target does not apply to the standards OFCCP will use in its own independent investigation. OFCCP may also study any employees who cannot be evaluated through statistical means (such as high-level executives who have no comparators) by using non-statistical techniques to evaluate the contractor's compensation practices. And OFCCP's Corporate Management Compliance Evaluations, also known as "Glass Ceiling" reviews, will continue. My company is a federal contractor and we already conduct some compensation analyses that we use to determine if there are potential compensation discrimination problems. However, our compensation analysis does not use groupings that meet the new Voluntary Guidelines and we don't use a multiple regression. Will OFCCP take our analysis into account during a compliance review? OFCCP will consider any compensation analysis that the contractor has performed as part of the information exchange process. However, OFCCP will not use this information to close out the compensation portion of a review unless the methods conform to those set forth in the Voluntary Guidelines. OFCCP will afford the contractor many opportunities to provide information or analyses which OFCCP will consider at all stages of the compliance review. For example, during our investigation under the systemic compensation discrimination standards, OFCCP will ask the contractor for input on which employees are similarly situated and on what factors influence compensation under the contractor's compensation system. OFCCP will also afford the contractor an opportunity to explain any statistically-significant compensation disparities that OFCCP finds through the multiple regression analyses. How will OFCCP treat the confidentiality of compensation and other information it reviews as part of an investigation under the Standards or that a contractor submits pursuant to the Voluntary Guidelines? OFCCP added a provision to the final Voluntary Guidelines under which "OFCCP will treat compensation and other personnel information provided by the contractor to OFCCP under these voluntary guidelines as confidential to the maximum extent the information is exempt from public disclosure under the Freedom of Information Act, 5 U.S.C. 552." OFCCP borrowed this text from its regulations at 41 CFR § 60-2.18(d). OFCCP will also treat compensation and other personnel information provided by the contractor to OFCCP during a systemic compensation investigation as confidential to the maximum extent the information is exempt from public disclosure under the Freedom of Information Act. What are the new compensation self-evaluation guidelines? In conjunction with the Standards, OFCCP has also published a set of general, voluntary guidelines that contractors can use to evaluate their compensation practices. Pursuant to OFCCP regulations (41 CFR 60-2.17(b)(3)), covered contractors must evaluate their compensation system(s) to determine whether there are disparities based on gender, race or ethnicity. The Voluntary Guidelines for Self-Evaluation of Compensation Practices for Compliance with the Nondiscrimination Requirements of Executive Order 11246 with Respect to Systemic Discrimination (71 FR 35114, June 16, 2006)(the "Voluntary Guidelines") are intended to provide suggested techniques for complying with this compensation self-evaluation requirement, although the Voluntary Guidelines remain voluntary. OFCCP has provided an incentive for contractors to adopt the general methods outlined in the Voluntary Guidelines. Specifically, if a contractor, in good faith, reasonably implements the general methods outlined in the Voluntary Guidelines — which includes remedying any statistically significant compensation disparities identified by the self-evaluation which are not explained by legitimate, non-discriminatory factors — OFCCP will coordinate its compliance monitoring activities with the contractor's self-evaluation approach. If the contractor's compensation self-evaluation system reasonably meets the general standards outlined in the Voluntary Guidelines, OFCCP will consider the contractor's compensation practices to be in compliance with Executive Order 11246. Under the Voluntary Guidelines, contractors have the choice of any statistical analysis that accounts for factors that legitimately affect the compensation of its employees under the contractor's compensation system, such as experience, education, performance, productivity, location, etc. Further, the statistical analysis must include tests of statistical significance that are generally recognized as appropriate in the statistics profession. What are the consequences for a contractor that does not undertake a voluntary self-evaluation under the Voluntary Guidelines? Importantly, a contractor's decision not to implement a self-evaluation program that comports with the Voluntary Guidelines shall not be a consideration in OFCCP's assessment of a contractor's compliance with Executive Order 11246 or OFCCP's regulations. However, failure to adopt any self evaluation method would be a basis for a finding of non-compliance with the regulations adopted in 2000 (41 CFR 60-2.17(b)(3)). Given that a regression analysis is a complex process, not all contractors will be able to undertake one in order to comply with the Voluntary Guidelines. What should these contractors do? OFCCP realizes analysis of employee compensation is a challenging frontier for many contractors. In discussion with contractors and consultants, OFCCP has found that the key challenge in implementing the new procedures will be the creation of the similarly situated employee groups (SSEGs). Once the SSEGs are created, the task of conducting a regression analysis can be undertaken with little statistical expertise through relatively inexpensive software packages that yield sufficiently informative results. OFCCP does not expect contractors to hire statisticians or economists to perform this work or to buy expensive software systems. OFCCP will develop compliance assistance tools to assist with performing regression analyses. In addition, OFCCP's acceptance of a simple SSEG-by-SSEG approach for the Voluntary Guidelines will help to eliminate some of the complexity that is associated with other types of regression analyses such as the pooled analyses discussed. While some statistical expertise will enable a contractor to better conduct and evaluate the regression analyses, conducting a regression analysis on each SSEG using the primary pay factors is relatively simple with modern computer software. While OFCCP cannot endorse a particular software package, numerous inexpensive software packages and spreadsheets exist for conducting a linear regression analysis of the type set forth in the Voluntary Guidelines that are user-friendly and do not require extensive training to execute. Contractors should seek assistance from industry liaison groups and other organizations for recommended applications. If the contractor selects the voluntary self-audit option and follows the Voluntary Guidelines, OFCCP will find them in compliance.
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