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Labor Department judge affirms OFCCP audit practice for compensation analysis that has raised concerns among federal contractors

March 4th, 2011  |  Cynthia L. Hackerott

“Under the Obama administration, [the OFCCP is] taking a much stronger approach to enforcement on compensation discrimination, as part of our effort to, once and for all, end the wage gap between men and women,” OFCCP Director Patricia A. Shiu noted during a January 7, 2011 webchat. A recent decision by a Department of Labor (ALJ) stands to support the agency in its bolder enforcement approach. The ALJ ruled that, as part of the desk audit portion of an OFCCP compliance review, the agency was entitled to seek additional data for analyses beyond that which a contractor had submitted in response to the OFCCP’s standard scheduling letter (OFCCP v United Space Alliance LLC, ALJ Case No 2011-OFC-2, February 28, 2011). This ruling affirms an OFCCP audit practice that has been called into question by some in the federal contractor community.

Process for analyzing compensation discrimination in audits.  Once a federal contractor has been selected for an OFCCP audit, the agency sends its standard scheduling letter requesting the contractor to provide the OFCCP with its affirmative action programs and specified supporting documents and records. The scheduling letter and the contractor’s response to it are known collectively as the “desk audit” phase of a compliance investigation. If the results of the desk audit reveal “indicators” of potential discrimination or other compliance issues, the OFCCP may dispatch a compliance officer to conduct an on-site review of the contractor.

One way by which the agency may decide to conduct an on-site audit is based on the data submitted by a contractor in response to Paragraph #11 of the “Itemized Listing” that accompanies the scheduling letter. Paragraph 11 requires the submission of annualized compensation data by either salary range, rate, grade or level showing total number of employees by race and gender and total compensation by race and gender. In its initial review of this data, the OFCCP is looking for indicators of potential discrimination.

Tipping point test. After the OFCCP receives a contractor’s response to paragraph 11, it uses an algorithm for an initial assessment of the data to see if indicators of potential discrimination are present. The algorithm has evolved over time, and the OFCCP has never officially announced or otherwise explicitly communicated to the public the precise algorithm. However, various OFCCP experts have managed to deduce the algorithm, commonly referred to as the “tipping point test,” and have shared this information with the federal contractor community. An excellent explanation of the “tipping point test” currently in use by the OFCCP has been provided by Jana Moberg of the DCI Consulting Group on DCI’s “OFCCP Blog Spot” at:  http://ofccp.blogspot.com/2011/02/new-ofccp-tipping-point-test.html.

If the application of the tipping point test results in an indicator of potential discrimination, the OFCCP will seek additional data beyond what was requested in the scheduling letter. This request for additional data is sometimes referred to as a “mini-regression analysis” request or the “12-factor letter,” although it may contain more than 12 factors. Reports from the field indicate that the agency will usually conduct the mini-regression analysis of the entire workforce and not just the segments of data that have failed the tipping point test.

ALJ rules contractor must submit additional data. In the recent ALJ ruling, United Space Alliance, LLC, a contractor that works with NASA to operate human space operations, including the Space Shuttle and the International Space Station refused to submit this additional data when the OFCCP requested it during a desk audit. After an  OFCCP compliance officer performed an a threshold indicator test on the compensation data submitted by the contractor in response to paragraph 11, the results turned up no indicators of possible pattern of pay disparity between men and women. In other words, the data passed the threshold indicator test. Nevertheless, the compliance officer performed two additional tests (neither of which employed thresholds) which showed indicators of possible pay disparities between men and women, in favor of men.*1 Based upon these results, the OFCCP requested additional data from the contractor, eventually seeking 18 items of information regarding all employees in the contractor’s work force.

The contractor did not submit the data, and the Assistant District Director for the OFCCP’s Orlando District Office then requested an on-site compliance review, for the purpose of continuing the compliance evaluation to resolve the unresolved issues involving possible compensation discrimination against women. After the contractor refused to continue with the desk audit (and also refused to allow the OFCCP to continue the compliance evaluation on-site), the agency filed an administrative complaint with the Labor Department. Following a hearing, the ALJ issued his recommended decision and order to the department’s Administrative Review Board (ARB).

OFCCP has “broad discretion.” The ALJ rejected the contractor’s assertion that the OFCCP was bound to accept the threshold analysis results and go no further. Noting that the OFCCP has “broad discretion in carrying out this mission,” the ALJ stated it was “quite reasonable” for the OFCCP to use additional analyses to test the results of the threshold analysis, and that the additional 18 questions presented to contractor were “quite limited in scope.” The ALJ found that the OFCCP was “not using any rudimentary non-statistical test to charge [the contractor] with any violations.” Instead, the agency was “merely attempting to gather additional information to conduct a regression analysis before making any decision with regard to determining whether [the contractor] should be charged with any violations.”

Paperwork Reduction Act. The ALJ also rejected the contractor’s assertion that the OFCCP’s request for additional compensation data beyond those items included in the Office of Management and Budget (OMB)-approved scheduling letter violated the Paperwork Reduction Act (PDA). The PDA requires that requests for information using identical questions posed to, or reporting or recordkeeping requirements imposed on, ten or more members of the public be approved by the OMB. In this case, as a result of the annualized compensation data submitted by the contractor in response to scheduling letter, the OFCCP reasonably requested additional information to be used to continue the desk audit, the ALJ found. At that point, the OFCCP’s request was an “individualized investigation” of the contractor. The request was being made solely of that particular contractor, not of all federal contractors, or even of all federal contractors being audited. Although similar requests may have been made of multiple federal contractors (roughly 50 to 60 percent of audits in the Orlando District), such requests were made as a result of an individualized audit and investigation into possible compensation discrepancies, the ALJ concluded. Therefore, the PDA did not apply.

Administrative Procedure Act. Moreover, the ALJ found that the OFCCP did not violate the Administrative Procedure Act (APA) by failing to follow a “mere statement of policy” contained within a FAQ published on the OFCCP’s website regarding OFCCP procedures for conducting desk audit’s of contractor’s compensation practices. The FAQ at issue discussed three criteria with specific thresholds for evaluating a contractor’s compensation practices (in essence, a generalized description of the “tipping point test.”) Nevertheless, the OFCCP did not intend for this FAQ to be binding because the FAQ included language such as “generally speaking” and specifically reserving the right that these standards were “subject to change” and the agency never published this statement in the Federal Register. Finally, this statement had no binding effect on private parties or individuals, as the Assistant District Director’s testimony made clear he was not bound to follow only the “threshold” analysis mentioned in the FAQ. Thus, the FAQ did not constitute a binding norm, but rather was a mere policy statement intended to provide the OFCCP and the regulated community with guidance.

Other recent compensation enforcement developments. In the context of recent developments, this decision only adds to the muscle power behind the OFCCP’s more aggressive approach to compensation discrimination enforcement. As discussed in this and other employment law blogs, in January 2011, the OFCCP posted a notice in the Federal Register (76 FR 62-64) of its proposal to rescind its two policy notices on systemic compensation discrimination put into place by the Bush Administration in June 2006 (See, 71 FR 35114-35122 & 35124-35141). These 2006 guidelines were not regulations or changes to any regulations; rather, they were statements regarding how the agency intended to enforce existing regulations. However, as explained above, the fact that these policy statements were published in the Federal Register could arguably render them binding upon the OFCCP.  In the notice published in January 2011, the OFCCP explained that it wants to rescind the regulations because they are “too rigid” and undermine the agency’s ability to vigorously investigate.

Last month, the OFCCP submitted for OMB approval an Advanced Notice of Proposed Rulemaking (ANPRM) on the development of a new strategic compensation data collection tool intended to effectively identify contractors that are likely to violate E.O. 11246. In addition, the data collection tool may be used to conduct establishment-specific, contractor-wide, and industry-wide analyses. In the January 7 webchat, Director Shiu clarified that, the OFCCP is “not reissuing the old [Equal Opportunity] Survey,” rather it is “in the process of developing a new compensation data collection tool.”*2

Director Shiu also stated in the webchat that “[i]nvestigations of systemic compensation discrimination are complex and nuanced. OFCCP has traditionally focused on identifying compensation discrimination through the development of a variety of investigative and analytical tools. The use of a particular tool, or combination of tools, depends on the facts of a specific case and includes consulting with labor economists and other experts as appropriate.” Clearly, the OFCCP is poised to exercise its “broad discretion” and carry out Director Shiu’s promise of stronger enforcement in the area of compensation discrimination by allowing itself more flexibility and tools.

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*1 Of note, the ALJ states in a footnote, that “The threshold indicator test was developed by the National Office. The specific thresholds used in the test are for internal use by OFCCP and were not produced or divulged at the hearing.”

*2 The regulatory requirement for federal contractors to file the controversial EO Survey, put into place by the Clinton Administration, was eliminated by the Bush Administration on September 8, 2006 (71 FR 53032-53042).

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