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Proposed Equal Pay Report would be ineffective and is not needed, according to NELI experts

November 21st, 2014  |  Cynthia L. Hackerott

The OFCCP’s proposed Equal Pay Report will not be effective in meeting the goals stated by the agency and it is not needed, retired attorney David Copus told the audience at the National Employment Law Institute’s (NELI) Thirty-Second Annual Affirmative Action Briefing in Chicago, Illinois. Noting that compensation is the number one focus of the OFCCP, Copus, along with John C. Fox, a former OFCCP official and current president of Fox, Wang & Morgan P.C. in San Jose, California, discussed the OFCCP’s current initiatives regarding compensation discrimination, focusing in particular on the proposed Equal Pay Report and the OFCCP’s newly revised audit scheduling letter.

Equal Pay Report proposal. Current regulations require that all employers in the private sector with 100 or more employees, and some federal contractors with 50 or more employees, annually file the EEO-1 Report with the Joint Reporting Committee (a joint committee consisting of the EEOC and the OFCCP). Under a proposed rule published in the Federal Register on August 8, 2014 (79 FR 46562- 46606) with corrections published on August 20 (79 FR 49260-49261), some covered federal contractors and subcontractors would also be required to electronically submit an annual “Equal Pay Report” on employee compensation. The OFCCP’s proposal would revise its regulations at 41 CFR Part 60-1, which set forth the reporting obligations of covered federal contractors and subcontractors under Executive Order (EO) 11246.

Coverage. The Equal Pay report would be required of prime contractors and first-tier subcontractors who file EEO-1 Reports, have more than 100 employees, and a contract, subcontract, or purchase order amounting to $50,000 or more that covers a period of at least 30 days, including modifications. The OFCCP estimates this new reporting obligation would cover about 21,251 contractors and 67,578 establishments. Copus pointed out that about 48,422 establishments – 42 percent of all establishments subject to OFCCP audit – would not be covered under the proposal. In addition, the proposal would not cover: (1) educational institutions; (2) almost all construction contractors; (3) state and local governments; and (4) possibly TRICARE subcontractors (given the five-year moratorium on enforcement of the obligations related to affirmative action programs and recordkeeping of all TRICARE subcontractors set forth in Directive 2014-01, effective May 7, 2014).

Data required. The proposal would require covered contractors to submit the following three pieces of information: (1) the total number of workers within a specific EEO-1 job category by race, ethnicity and sex; (2) total W-2 wages defined as the total individual W-2 wages for all workers in the job category by race, ethnicity and sex; and (3) total hours worked, defined as the number of hours worked by all employees in the job category by race, ethnicity and sex. No individual pay information would be submitted.

Reporting period. The filing period for the proposed Equal Pay Report would be January 1 to March 31 of each year. The report would cover total W-2 Wage and Tax Statement earnings and total work hours for the calendar year, January 1 – December 31, for all employees included in the contractor’s most recent EEO-1 Report(s) (which are due annually on September 30).  The number of employees would include all employees whether or not they are still employed by the contractor on December 31st.

The reasoning behind the March 31 deadline for the Equal Pay Report is that, by that time, employers will have submitted their W-2s from the previous year, Copus explained. This information would be submitted as a supplement to the employer’s most recent EEO-1 Report(s) filed the previous September.

Public comments. Public comments on this proposal are due by January 5, 2015. [WK Note: At the time of the NELI briefing, the comment deadline was November 6, 2014, but, in an October 31 announcement and subsequent Federal Register notice (79 FR 65613-65614), the OFCCP extended the comment period for an additional 60 days.] Fox noted that there is no deadline for final rule approval by OMB, and Copus said the rule may not be finalized within the time remaining for the Obama Administration. However, contractors concerned about this proposal shouldn’t just wait around for a final rule, but rather should file comments to bring those concerns to the attention of the OFCCP, both Copus and Fox suggested.

The OFCCP won’t give much weight to public comments when formulating the final rule, according to Copus, who said that public comments will be like “water off a duck’s back” to the OFCCP. Nevertheless, these comments will constitute evidence in any litigation that might challenge a final rule, Fox pointed out. Congress will be more willing to consider contractor concerns, Copus stated, recommending that contractors who are really agitated by this proposal should also voice their concerns to Congress.

Electronic submission. One concern about the proposal is that it would require contractors to submit their data electronically using a web-based data tool. The OFCCP states that the web-based portal for reporting and maintaining compensation information will be designed so that it “conforms with applicable government IT security standards.”  The agency will also establish a process for requesting an exemption to the electronic filing requirement. However, the proposal does not point out what steps the agency will take to secure the data against hackers, Copus observed, noting that this omission would be a good point to discuss in public comments.

Fox cited a 2013 report from the National Research Council (NRC) of the National Academies of Sciences (NAS), entitled “Collecting Compensation Data from Employers,” which recommends that if the OFCCP were to utilize a pay data collection instrument, it should formulate ways to mask the data submitted by contractors. Moreover, both Copus and Fox told the audience that they need to “perturbate,” – i.e. disguise – all the data submitted to the OFCCP.

One way to protect data is to code sensitive information, such as employee names, job titles, and geographic locations and provide the key to the OFCCP separately from the data files, Fox suggested. Another way to protect data is via a File Transfer Protocol (FTP) website, he added.

Other concerns. Copus and Fox detailed several other concerns about the proposal, including their assessment that the proposal won’t serve the two stated purposes cited by the OFCCP, which are to: (1) allow the agency OFCCP to target facilities most likely to have pay violations; and; (2) encourage contractors to conduct self-audits and take corrective action where appropriate. The proposal is vague on exactly how these two goals will be accomplished, Copus said.

Targeting. The OFCCP proposes to accomplish the first objective by developing an “industry standard” appropriate for each facility, that would be by NAICS primary codes. These codes are very broad, grouping together industries that encompass very disparate types of jobs, Copus explained. To illustrate his point, he cited NAICS Primary Code 11 which includes “Agriculture, Forestry, Fishing and Hunting.” Data on the average hourly compensation by race, sex, and ethnicity for each EEO-1 category would be combined with undefined external labor market data to create the “industry standard.”  But it’s unclear whether this data would be aggregated by state, metropolitan areas, or contractor size or whether national or regional aggregations would be used, he noted.

For the next step in the targeting process, the OFCCP would compare an individual contractor establishment’s compensation pattern with the “industry standard.”  However, the proposal leaves unanswered exactly what comparisons would be made, Copus noted. On this point, he questioned: (1) whether these comparisons would be made by race/sex/ethnicity for each EEO-1 category separately or for all EEO-1 categories aggregated and weighted; and (2) would there be different comparisons for different industries and different comparisons for different size companies?

In the next targeting step, the OFCCP would select establishments for audit that depart in some unspecified way and degree from the “industry standard.” Yet, the proposal is unclear as to what kind of disparity would trigger an audit, Copus said. The unanswered questions about such a disparity include whether the disparity must be statistically significant, and if so, for how many EEO-1 groups?

Moreover, the proposal fails to explain how any targeting mechanism based on the Equal Pay Report would be coordinated with any other targeting schemes for contractors not covered by the report, Copus observed. Currently, the agency has separate targeting schemes — aside from the general establishment audit targeting system for supply and service contractors — for contractors with Functional Affirmative Action Programs, construction contractors, glass ceiling compliance reviews, contractors that are educational institutions, and pre-contract award reviews. Moreover, as noted previously, about 42 percent of all establishments subject to OFCCP audits would not be covered by the Equal Pay Report.

In sum, the proposal presents more questions than answers about targeting, he said, concluding that the report will not work as a targeting mechanism because there are too many unanswered questions to be worked out.

Self-evaluations. Not only will the Equal Pay Report not work as a targeting device, but it won’t work as a self-evaluation tool, either, Copus concluded. Under the proposal, contractors could voluntarily compare their own compensation pattern with the “industry standard” according to some unspecified criteria and take corrective action where appropriate. But even if the OFCCP publishes industry standards as the proposal suggests, those standards will be summary data only with no identification of specific facilities or companies.

Moreover, what value would knowledge of the industry standards provide to contractors? Copus asked. According to the OFCCP’s preamble to the proposal, “[e]mployers do not want to be known as one of the lowest paying members of their industry, and may voluntarily change their pay structure,” but Copus said this information has nothing to do with discrimination or the pay gap that the Equal Pay Report is supposed to address. Fox suggested this information would be useful to unions as leverage in negotiating collective bargaining agreements.

Fox also pointed out that the self‐analysis suggested in the Equal Pay Report will not satisfy the current regulatory requirement for contractor’s self‐analysis on pay.

Unlawful wage gap myth. The OFCCP maintains that the purpose of the Equal Pay Report and its other compensation discrimination enforcement efforts is to eliminate the gender wage gap in the federal contractor workforce caused by widespread unlawful denial of equal pay for equal work. However, Copus disagreed with the agency’s assertion that the gender wage gap is in fact caused by unlawful actions on the part of employers.

The White House’s claim that unequal pay for equal work causes the gender wage gap is simply not true, Copus said, explaining that many legitimate factors affect an employee’s current pay. For example, seniority is impacted by family responsibilities and the fact that a disproportionate number of women take off from the workforce to raise children is not discriminatory, but a fact of life, he noted.

Although the White House maintains that women earn an average of just 77 cents for every dollar earned by men, the 77 cents figure does not refer to the same work; rather, it includes all workers regardless of job, according to Copus. The OFCCP even admits that, “occupational differences may account for about half of the gender wage gap,” he pointed out. Thus, only a tiny portion of the gender wage gap is attributable to paying women less than men for doing the same work. Instead, the gender wage gap derives largely from the fact that females, on average, tend to work in lower paying jobs while men, on average, tend to work in higher paying jobs.

Copus cited a September 2, 2014 opinion piece in Time Magazine which states that the assertion that “[w]omen earn 77 cents for every dollar a man earns—for doing the same work” is a myth. According to the piece, “[n]o matter how many times this wage gap claim is decisively refuted by economists, it always comes back. The bottom line: the 23‐cent gender pay gap is simply the difference between the average earnings of all men and women working full‐time. It does not account for differences in occupations, positions, education, job tenure or hours worked per week. When such relevant factors are considered, the wage gap narrows to the point of vanishing.”

Furthermore, the OFCCP’s own enforcement data shows that there is not widespread wage discrimination against women in federal contractor workplaces, Copus said. During the period between fiscal year (FY) 2009 and FY 2014, in which the OFCCP conducted 23,734 audits, the agency found compensation violations, including violations impacting men and minorities, in only one half of one percent of all audits. Of the cases involving gender bias, most involved less than four women, and only two of those were large enough to warrant a press release, he noted. Fox added that over the last 30 years and 10 presidential administrations, the OFCCP has simply not been able to find any evidence of widespread wage discrimination due to gender bias.

Current pay focus is erroneous. Even so, any purported wage gap in current pay is irrelevant because “any analysis of current pay is irrelevant,” Copus asserted. The OFCCP concedes, in Directive 2013-03 (previously numbered as Directive 307) and related policy statements, that it is bound by Title VII when conducting compensation enforcement under Executive Order (EO) 11246. Yet, the agency’s focus on current pay does not comport with the Supreme Court’s 2007 holding in Ledbetter v Goodyear Tire & Rubber Co (89 EPD ¶42,827) that the correct focus under Title VII is pay decisions, Copus explained. The only change the Lilly Ledbetter Fair Pay Act of 2009 made to Title VII law was to extend the charge filing period indefinitely when an employee challenges a discrete pay decision; it did not, however, change the requirement in the Ledbetter decision that Title VII claimants must identify and challenge discrete pay decisions, he emphasized. Accordingly, the OFCCP cannot claim pay discrimination under the relevant legal standard unless it identifies a specific pay decision (meaning an event that impact pay such hiring, promotions, pay freezes, bonuses, and demotions) and proves that decision is discriminatory, he said.

Even though the OFCCP’s practice of looking only at current pay is a “fatal flaw” that is “demonstratively wrong,” the agency is sticking with it because the contractor community is not contesting it, Copus said. In addition, the compensation analysis advice offered by some vendors and law firms focuses only on current pay, and ignores analyzing pay decisions, cautioned Copus.

Revised audit documents. The OFCCP’s standard practice for a conducting a compliance review begins with a desk audit in which the agency sends the contractor its standard Scheduling Letter and accompanying Itemized Listing seeking the contractor’s written Affirmative Action Program (AAP) and supporting documentation. On September 30, 2014, the Office of Management and Budget (OMB) approved revisions to these documents, and the OFCCP began using the revised versions in mid-October.

Paragraph 19. Paragraph 19 of the revised Itemized Listing requires contractors to submit “[e]mployee level compensation data for all employees (including but not limited to full-time, part-time, contract, per diem or day labor, temporary) as of the date of the workforce analysis in [the contractor establishment’s] AAP.”  Contractors are required to provide gender and race/ethnicity information and hire date for each employee as well as job title, EEO-1 Category and AAP job group in a single file.

After 35 years of trying, the OFCCP finally got one of its fondest hopes – it can now seek individual, employee-level compensation data via the Itemized Listing, rather than attempting to get this information via supplemental document requests (SDRs) after the contractor submits its response to the Itemized Listing, Fox observed. The importance of this change is that contractors cannot negotiate what information they will provide to the OFCCP in response to the Itemized Listing, whereas they can negotiate what information they will provide in response to SDRs, both Fox and Copus pointed out. They also observed that the demand for individualized pay data in Paragraph 19 differs from the proposed Equal Pay Report requirement of aggregate pay data.

Paragraph 19 also requires submission of “[d]ocumentation and policies related to compensation practices of the contractor” and it invites the contractor to submit “any additional data on factors used to determine employee compensation.” Copus advised against submitting the optional additional data, saying that doing so may constitute an admission against interest for the contractor.

Job group formulations. Contractors need to be aware of their AAP job groups and carefully review them, Fox advised, because the OFCCP will likely assert that putting jobs in the same group for AAP purposes is an admission on the part of the contractor that these jobs are similar for the purpose of compensation discrimination analysis as well. “Make your job groups equal to similarly-situated employees,” he said. Copus advised that AAP job groups should be very narrow, and he also recommended that AAPs should include a statement that job groups do not influence pay.

Responding to OFCCP data demands. Given that the OFCCP will be sticking to its erroneous focus on current pay, rather that the relevant legal standard of focusing on pay decisions, how should contractors respond to the demand for current pay data in Paragraph 19?

The decision on whether to resist the OFCCP’s demand for current pay data is a policy decision that contractors must make when they first respond to the revised Scheduling Letter and Itemized Listing, Fox stated. Attorneys should put their clients on notice that the law does not require contractors to submit current pay data because data on current pay is irrelevant under Title VII, he advised. Accordingly, attorneys need to get their clients’ permission before submitting data on current pay to the OFCCP. Even so, contractors who chose to respond by supplying current pay data to the OFCCP should note in their responses that the relevant legal standard for Title VII compensation analysis is pay decisions, both Fox and Copus agreed.

Although Paragraph 19 only requires contractors to submit current pay data, and not any analysis of that data, Fox recommended that contractors analyze their current pay data under attorney-client privilege prior to submitting that data to the OFCCP so that the contractor can identify disparities and understand why these disparities exist. Moreover, because the relevant legal standard is pay decisions, contractors should analyze their pay decisions for unlawful disparities as well. Indeed, attorneys who don’t put their clients on notice that they should analyze pay decisions are risking malpractice suits, Fox warned. Copus recommended that contractors proactively examine recent pay decisions – such as starting pay, promotional pay increases, and merit pay increases – using multiple regression analysis.

The presenters. Copus has more than 35 years of litigation and counseling experience and has regularly represented employers in OFCCP matters, including hundreds of standard OFCCP compliance evaluations and “glass ceiling” audits. He began his legal career in 1969 at the Equal Employment Opportunity Commission (EEOC), where for many years he headed the National Programs Division. In 1977, he entered private practice representing employers, and he recently retired from Ogletree Deakins in Morristown, New Jersey.

Fox is the President and a founder of Fox, Wang & Morgan P.C. in Los Gatos, California. He leads large and complex litigation matters in state and federal courts, in cases involving wage-hour and discrimination class actions, trade secret claims, employment contract disputes, wrongful termination, corporate investigations, and the use of statistics in employment matters. Fox previously served as Executive Assistant to the Director of the OFCCP, where he was responsible for all enforcement and policy matters.

NELI’s Thirty-Second Annual Affirmative Action Briefing was held in Chicago on October 16-17, 2014. For more information on NELI, including its publications and future programs, call (303) 861-5600 or go to NELI’s website at: www.neli.org.