Advancing pay equity through compensation analysis

This article was provided by Berkeley Research Group.

On Aug. 18, the Office of Federal Contract Compliance Programs (OFCCP) published a revised Directive 2022-01: “Advancing Pay Equity Through Compensation Analysis,” which provides notable changes pertaining to federal contractors.

First, the revised directive itself uses the phrase “compensation analysis” instead of “pay equity audit,” which had been used in the original directive to reference contractors’ obligations under 41 CFR 60-2.17(b)(3). According to Jessy R. Yang, director of the OFCCP, this change was made to “to avoid any confusion regarding the nature of a contractor’s obligations.”

Second, the new directive outlines the documentation that contractors will be required to produce to demonstrate that they have satisfied the requirement to conduct compensation analyses; and also to demonstrate that they have put into practice “action-oriented programs” if the compensation analysis conducted identifies potential areas of concern.

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Third, the directive reasserts the OFCCP’s position that it does not require privileged attorney-client communications or attorney work product to be produced.

Compensation Analysis Documentation: What Is Now Required?

In the revised directive, the OFCCP lists the documentation required to show that the contractor has met its obligation to perform a compensation analysis to evaluate its compensation system for race-, gender-, and ethnicity-based disparities. At a minimum, the contractor must provide documentation demonstrating the following:

1. The timing of the compensation analysis in terms of when it was completed.

The contractor also may want to document the “snapshot date” of the pay information used in the analysis and how it relates to payroll/HR events. For example, the contractor may want to document that the compensation analysis was conducted in April before merit increases and promotions were given, or in December after merit increases and promotions were announced. The contractor also may want to document that the compensation analysis was conducted before or after increases in hiring, if applicable. Knowing when the compensation analysis was conducted in relation to key payroll/HR events may provide additional context to the contractor and the OFCCP.

2. The number of employees the compensation analysis included and the number and categories of employees the compensation analysis excluded.

While the OFCCP asks for documentation related to the number of employees the compensation analysis included and the number of and categories of employees excluded, it does not provide a threshold number or percentage of employees to be included in the analysis (e.g., compensation analysis must include at least 90% of the contractor’s employees). OFCCP notes, however, that employees excluded from the analysis may include “small and unique groups of workers that are not comparable to the other groups analyzed within an AAP.”

3. The forms (note the “s”) of compensation 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 or other incentive pay, etc.).

The OFCCP, however, does not explicitly state the forms required for documentation. Instead, contractors are reminded in a footnote that compensation includes “any payments made to, or on behalf of, an employee or offered to an applicant as remuneration for employment including but not limited to salary, wages, overtime pay, shift differentials, bonuses, commissions, vacation and holiday pay, allowances, insurance and other benefits, stock options and awards, profit sharing, and retirement.”  If multiple forms of compensation are analyzed, it is important to think about the factors that may impact each form of compensation; the analysis used for base salary, for example, may not be applicable for the analysis of bonuses.

4. All method(s) of analysis used by the contractor (e.g., multiple regression analysis, decomposition regression analysis, meta-analytic tests of z-scores, compa-ratio regression analysis, rank-sum tests, career-stall analysis, average pay ratio, cohort analysis, etc.).

The directive lists examples of methods that a contractor may use to perform a compensation analysis. Generally, the typical approach has been to use a multiple regression analysis if there are a sufficient number of employees to analyze. Multiple regression analysis is a statistical technique that helps to determine if there are compensation differences, for example, by gender, after simultaneously controlling for the multiple factors that typically influence compensation, such as job tenure, prior experience, and education.

Required Compensation Analysis Documentation: Privileged Attorney-Client Communications or Attorney Work Product

The directive outlines three ways in which a contractor may satisfy its regulatory obligations if it believes its full compensation analysis contains privileged attorney-client communications or attorney work product. The contractor can provide the OFCCP other documentation that could be used to demonstrate that it conducted the compensation analysis required under 41 CFR 60-2.17(b)(3), including:

• Providing a redacted version of its compensation analysis if the nonredacted portions include the required items
• Conducting a separate analysis during the relevant affirmative action program (AAP) period that does not pose privilege concerns; and providing the complete analysis to OFCCP
• Producing a detailed affidavit that sets forth the required information but does not contain privileged material

Compensation Analysis Documentation: What Is Recommended?

Beyond the documentation required by the OFCCP, the directive lists the additional documentation contractors are recommended to submit, as relevant:

• All employee pay groupings 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 into 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)

The OFCCP states that where contractors “maintain this information in non-privileged form, making it available can assist OFCCP in conducting a more efficient compliance evaluation.”

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While the revised directive provides transparency in terms of the documentation required by the OFCCP, assessing the details of the documentation to be provided to the OFCCP ahead of time—perhaps in the planning phase of the compensation analysis and then later upon completion of the analysis—would allow the contractor to be well prepared to address potential issues ahead of time and before submission to the OFCCP.

The views and opinions expressed in this article are those of the authors – Dubravka Tosic, Ph.D., Director, Berkeley Research Group and Jill Fitzpatrick, Ph.D., Associate Director, Berkeley Research Group – and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

Dubravka Tosic is a Director at Berkeley Research Group and provides expert witness consulting in labor and employment disputes, litigation and arbitration matters, and regulatory audits, and in connection with proactive company reviews. She can be reached at [email protected].

Jill Fitzpatrick is an Associate Director at Berkeley Research Group who specializes in labor and employment matters and fair lending matters. She can be reached at [email protected].