Paying Now to Avoid Paying Later

The Equal Pay Act (EPA) prohibits any pay disparity between men and women regardless of whether it is the result of intentional discrimination. Under the EPA, men and women must be paid equal wages if they perform jobs that require substantially equal skill, effort and responsibility and that are performed under similar working conditions within the same establishment. Pay differentials are permitted under the EPA if they are based on seniority, merit, quantity or quality of production or another legitimate factor other than gender.

In addition to these federal laws that apply to most employers, federal contractors and subcontractors must additionally comply with Executive Order 11246. This Executive Order requires federal government contractors and subcontractors to engage in certain equal employment opportunity and affirmative action practices. The U.S. Department of Labor's Office of Federal Contract Compliance Programs (OFCCP) enforces compliance with Executive Order 11246. Unlike other laws in which most inquiries into whether there is compensation discrimination arise from a disgruntled employee's complaints, the OFCCP proactively conducts compliance reviews on contractor establishments during which it analyzes, among other things, a contractor's compensation practices to determine whether they are discriminatory based on sex or race/ethnicity.

The OFCCP's Compensation Standards

One of the OFCCP's initiatives is to ferret out systemic compensation discrimination. On June 16, 2006, the OFCCP published Interpretative Standards for Systemic Compensation Discrimination under Executive Order 11246 (the 'Standards'), by which it will determine whether systemic compensation discrimination exists. The OFCCP's Standards require it to conduct a multiple regression statistical analysis of the compensation of similarly situated individuals to determine whether a statistically significant disparity exists. In determining whether employees are similarly situated for comparison purposes, the OFCCP focuses on whether the employees perform similar work activities, occupy positions involving similar skills and qualifications and have similar responsibility levels. Other factors which may be considered include the department or unit in which the employees work and the employees' status, i.e., whether they are union or non-union, full-time or part-time and hourly or salaried.

The OFCCP's multiple regression analysis should take into account factors which may legitimately impact compensation. Depending upon the employer's compensation practices, these factors may include education, prior work experience, performance, productivity and time on the job. According to the OFCCP, a statistically significant disparity occurs when the disparity reaches a level of two or more standard deviations.

A multiple regression statistical analysis can be time-consuming and costly. The OFCCP has the burden to compile and analyze the information. Employers are not required to conduct multiple regression analyses themselves. They are also not required to maintain in a database all the information needed to perform a regression analysis properly. The OFCCP's Compensation Standards, therefore, create significant burden on the agency. As a result, the OFCCP generally conducts this analysis only if there is reason to believe that discrimination has occurred. Initially, the OFCCP will compare average compensation, either by pay grade, salary range or some other unit used by the contractor. If this initial analysis indicates a significant disparity, it will then request more employee-specific compensation information and conduct a cluster regression analysis. When this also indicates a significant disparity, the OFCCP will conduct the more comprehensive multiple regression analysis required by its Standards.

The OFCCP's Standards also allow and require the agency to consider anecdotal evidence of compensation discrimination. The OFCCP has stated that it will rarely issue a notice of violation absent some anecdotal evidence of compensation discrimination.

Evaluate Compensation Practices Before They Are Called into Question

Attempting to explain or correct pay disparities after the OFCCP comes calling or after a complaint is filed, can be too late. Pay disparities are often the result of many different decisions over a period of years that impact an employee's pay. When compensation issues are challenged, it is often several years later when the disparity has grown significant and when many employees may be impacted, resulting in a potentially costly claim. Although employers are not required to perform multiple regression statistical analyses, employers should regularly evaluate their compensation systems to prevent costly challenges later. Federal contractors and subcontractors are required to self-audit their compensation practices annually to ensure that they are not discriminatory.

A compensation analysis can take many forms. Compensation analyses can range from simple computations to expensive statistical analyses, to anything in between. At its core, any analysis is a comparison of the actual pay employees receive (which may include salary, bonuses, and other forms of compensation) to determine whether there is any disparity between that paid to one group and that paid to another. If there is a disparity, the employer must consider whether it can be explained by legitimate factors such as prior work experience, education, seniority, length of time in the job, productivity, or merit ratings.

When compensation and the practices that impact compensation are regularly evaluated for consistency or potential disparities, the more detailed and expensive statistical analyses can often be avoided.

One approach to analyzing compensation is to compare the median salaries of two groups. A median compensation analysis compares the mid-point salary from a group of salaries. For example, if there are three men and three women, the middle salary figure of the three men is compared with the middle salary figure of the three women. Use of this type of analysis prevents very high or very low salaries skewing the results, which can occur when average salaries are compared.

The median compensation analysis should include a comparison of legitimate factors that impact compensation, such as length of service or performance ratings, to determine whether any difference between the median pay of the two groups can be explained by these factors. If there is a difference in one of these legitimate factors, the employer must consider whether the difference is sufficient to explain the size of the disparity in compensation.

Another way to analyze compensation is to compare the average salaries of the group. The average salaries of women are compared to that of men or minorities to non-minorities. Once again, legitimate factors that influence compensation are then compared to determine whether these factors explain any disparity.

The OFCCP's Voluntary Self-Audit Procedures

The OFCCP has published a set of Voluntary Guidelines for Self-Evaluation of Compensation Practices ('Voluntary Guidelines') that contractors may use to evaluate their compensation practices. If a contractor's self-evaluation program reasonably meets the standards outlined in the Voluntary Guidelines, the OFCCP will coordinate its own compliance analysis of the contractor's compensation practices with the contractor's approach and consider the contractor's compensation practices to be in compliance with Executive Order 11246.

To gain this benefit, the contractor must annually perform a statistical analysis on 'Similarly Situated Employee Groupings' (SSEGs) taking into account factors that legitimately affect compensation. SSEGs are groups of employees who perform similar work and occupy positions with similar responsibility levels involving similar skills and qualifications. According to the OFCCP's Guidelines, each SSEG should contain at least 30 employees and have at least five employees from each group (females/males, minorities/ non-minorities) so that a statistical analysis can be performed. The OFCCP recognizes that some employees will not be similarly situated to others and cannot be placed in an SSEG. These employees may be excluded from the statistical analysis. However, to avoid extra scrutiny by the OFCCP, the analysis needs to cover at least 70% of the employees at the establishment.

The Voluntary Guidelines allow contractors to choose any statistical analysis that accounts for factors that legitimately affect the compensation of the contractor's employees, so long as the analysis includes tests of statistical significance that are generally recognized as appropriate in the statistics field. For establishments that have 500 or more employees, the contractor must conduct a multiple regression analysis.

In order to gain the benefit of complying with this voluntary self-audit process, the contractor must investigate any disparity that results in a significance level of two or more standard deviations. If the disparity cannot be explained by legitimate factors, it must be remedied.

The OFCCP's voluntary self-audit procedures also require that the contractor maintain certain records that must be made available to the OFCCP to take advantage of the benefits of complying with these voluntary procedures. The required records include documents necessary to explain the contractor's decision with respect to its formation of SSEG's and its choice of analysis, the data and the results from its statistical evaluation, as well as documentation of any investigation, follow-up and remedies.

Conclusion

Self-audits or compensation analyses can help employers avoid costly compensation challenges either by individual plaintiffs or government agencies such as the OFCCP. Compensation reviews, whether in the form of a general analysis or a detailed multiple regression statistical analysis, can be a valuable tool to avoid future litigation, when conducted properly.

In addition to a review of the actual pay employees receive, any compensation evaluation should also include an analysis of the practices that indirectly affect compensation such as promotion decisions, performance evaluations, and work assignments. Questions to consider include: How is compensation determined and is it done consistently? Are starting salaries consistent? If compensation is based on performance, how is performance defined? Are there measurable criteria, or are subjective elements used? Are managers given wide latitude in establishing or changing salaries or are there specific measures or procedures that are followed? Are the salaries of women or minorities lower because they are not provided the opportunities for overtime, promotion, or certain work assignments?

It is also important to make sure that the comparison groups are appropriately defined. Are job titles reflective of the work performed? Are there individuals who are included in a job title, pay grade, salary range or other unit who do not belong in that group because of the work they actually perform?

Contactors and employers should be careful when conducting self-analyses by themselves, however. Any self-analysis has the potential to be discovered by third parties, plaintiffs or government agencies and could create an 'admission' of discrimination. Before conducting an analysis, employers should consult with counsel to determine what type of analysis is appropriate and whether the attorneys should be involved in the analysis in order to cloak the analysis under an attorney-client privilege.

Patricia Anderson Pryor, a member of this newsletter's Board of Editors, is a partner in the Labor and Employment Department at Taft, Stettinius & Hollister LLP.

Compensation discrimination has been a hot topic since the Supreme Court's decision in Ledbetter v. Goodyear Tire & Rubber Co. , 127 S. Ct. 2162 (2007). In Ledbetter, the Supreme Court determined that under Title VII of the Civil Rights Act of 1964 ('Title VII'), a plaintiff must establish that a discriminatory decision with respect to pay was made during the statute of limitations period. In other words, a plaintiff cannot proceed with a claim of pay discrimination under Title VII when the pay is the result of prior decisions made outside the statute of limitations period. Although this decision has been touted as a major victory for employers, it did not, as some have seemed to suggest, eviscerate the risk of compensation discrimination claims or insulate from liability employers who have unexplained disparities. Unwary employers, particularly federal contractors or subcontractors, who do not regularly review their own compensation practices, remain at risk for costly litigation.

Many Laws Prohibit Compensation Discrimination

Title VII prohibits discriminatory compensation decisions based on an employee's sex, race, religion, national origin or color. A number of other statutes also prohibit employers from discriminating against certain employees with respect to pay or compensation. For example, the Age Discrimination in Employment Act (ADEA) prohibits discriminatory decisions based on an employee's age, and the Americans with Disabilities Act (ADA) prohibits such decisions based on an employee's disability. Each of these statutes, like Title VII, prohibits intentional discrimination in connection with employment decisions affecting pay.

The Equal Pay Act (EPA) prohibits any pay disparity between men and women regardless of whether it is the result of intentional discrimination. Under the EPA, men and women must be paid equal wages if they perform jobs that require substantially equal skill, effort and responsibility and that are performed under similar working conditions within the same establishment. Pay differentials are permitted under the EPA if they are based on seniority, merit, quantity or quality of production or another legitimate factor other than gender.

In addition to these federal laws that apply to most employers, federal contractors and subcontractors must additionally comply with Executive Order 11246. This Executive Order requires federal government contractors and subcontractors to engage in certain equal employment opportunity and affirmative action practices. The U.S. Department of Labor's Office of Federal Contract Compliance Programs (OFCCP) enforces compliance with Executive Order 11246. Unlike other laws in which most inquiries into whether there is compensation discrimination arise from a disgruntled employee's complaints, the OFCCP proactively conducts compliance reviews on contractor establishments during which it analyzes, among other things, a contractor's compensation practices to determine whether they are discriminatory based on sex or race/ethnicity.

The OFCCP's Compensation Standards

One of the OFCCP's initiatives is to ferret out systemic compensation discrimination. On June 16, 2006, the OFCCP published Interpretative Standards for Systemic Compensation Discrimination under Executive Order 11246 (the 'Standards'), by which it will determine whether systemic compensation discrimination exists. The OFCCP's Standards require it to conduct a multiple regression statistical analysis of the compensation of similarly situated individuals to determine whether a statistically significant disparity exists. In determining whether employees are similarly situated for comparison purposes, the OFCCP focuses on whether the employees perform similar work activities, occupy positions involving similar skills and qualifications and have similar responsibility levels. Other factors which may be considered include the department or unit in which the employees work and the employees' status, i.e., whether they are union or non-union, full-time or part-time and hourly or salaried.

The OFCCP's multiple regression analysis should take into account factors which may legitimately impact compensation. Depending upon the employer's compensation practices, these factors may include education, prior work experience, performance, productivity and time on the job. According to the OFCCP, a statistically significant disparity occurs when the disparity reaches a level of two or more standard deviations.

A multiple regression statistical analysis can be time-consuming and costly. The OFCCP has the burden to compile and analyze the information. Employers are not required to conduct multiple regression analyses themselves. They are also not required to maintain in a database all the information needed to perform a regression analysis properly. The OFCCP's Compensation Standards, therefore, create significant burden on the agency. As a result, the OFCCP generally conducts this analysis only if there is reason to believe that discrimination has occurred. Initially, the OFCCP will compare average compensation, either by pay grade, salary range or some other unit used by the contractor. If this initial analysis indicates a significant disparity, it will then request more employee-specific compensation information and conduct a cluster regression analysis. When this also indicates a significant disparity, the OFCCP will conduct the more comprehensive multiple regression analysis required by its Standards.

The OFCCP's Standards also allow and require the agency to consider anecdotal evidence of compensation discrimination. The OFCCP has stated that it will rarely issue a notice of violation absent some anecdotal evidence of compensation discrimination.

Evaluate Compensation Practices Before They Are Called into Question

Attempting to explain or correct pay disparities after the OFCCP comes calling or after a complaint is filed, can be too late. Pay disparities are often the result of many different decisions over a period of years that impact an employee's pay. When compensation issues are challenged, it is often several years later when the disparity has grown significant and when many employees may be impacted, resulting in a potentially costly claim. Although employers are not required to perform multiple regression statistical analyses, employers should regularly evaluate their compensation systems to prevent costly challenges later. Federal contractors and subcontractors are required to self-audit their compensation practices annually to ensure that they are not discriminatory.

A compensation analysis can take many forms. Compensation analyses can range from simple computations to expensive statistical analyses, to anything in between. At its core, any analysis is a comparison of the actual pay employees receive (which may include salary, bonuses, and other forms of compensation) to determine whether there is any disparity between that paid to one group and that paid to another. If there is a disparity, the employer must consider whether it can be explained by legitimate factors such as prior work experience, education, seniority, length of time in the job, productivity, or merit ratings.

When compensation and the practices that impact compensation are regularly evaluated for consistency or potential disparities, the more detailed and expensive statistical analyses can often be avoided.

One approach to analyzing compensation is to compare the median salaries of two groups. A median compensation analysis compares the mid-point salary from a group of salaries. For example, if there are three men and three women, the middle salary figure of the three men is compared with the middle salary figure of the three women. Use of this type of analysis prevents very high or very low salaries skewing the results, which can occur when average salaries are compared.

The median compensation analysis should include a comparison of legitimate factors that impact compensation, such as length of service or performance ratings, to determine whether any difference between the median pay of the two groups can be explained by these factors. If there is a difference in one of these legitimate factors, the employer must consider whether the difference is sufficient to explain the size of the disparity in compensation.

Another way to analyze compensation is to compare the average salaries of the group. The average salaries of women are compared to that of men or minorities to non-minorities. Once again, legitimate factors that influence compensation are then compared to determine whether these factors explain any disparity.

The OFCCP's Voluntary Self-Audit Procedures

The OFCCP has published a set of Voluntary Guidelines for Self-Evaluation of Compensation Practices ('Voluntary Guidelines') that contractors may use to evaluate their compensation practices. If a contractor's self-evaluation program reasonably meets the standards outlined in the Voluntary Guidelines, the OFCCP will coordinate its own compliance analysis of the contractor's compensation practices with the contractor's approach and consider the contractor's compensation practices to be in compliance with Executive Order 11246.

To gain this benefit, the contractor must annually perform a statistical analysis on 'Similarly Situated Employee Groupings' (SSEGs) taking into account factors that legitimately affect compensation. SSEGs are groups of employees who perform similar work and occupy positions with similar responsibility levels involving similar skills and qualifications. According to the OFCCP's Guidelines, each SSEG should contain at least 30 employees and have at least five employees from each group (females/males, minorities/ non-minorities) so that a statistical analysis can be performed. The OFCCP recognizes that some employees will not be similarly situated to others and cannot be placed in an SSEG. These employees may be excluded from the statistical analysis. However, to avoid extra scrutiny by the OFCCP, the analysis needs to cover at least 70% of the employees at the establishment.

The Voluntary Guidelines allow contractors to choose any statistical analysis that accounts for factors that legitimately affect the compensation of the contractor's employees, so long as the analysis includes tests of statistical significance that are generally recognized as appropriate in the statistics field. For establishments that have 500 or more employees, the contractor must conduct a multiple regression analysis.

In order to gain the benefit of complying with this voluntary self-audit process, the contractor must investigate any disparity that results in a significance level of two or more standard deviations. If the disparity cannot be explained by legitimate factors, it must be remedied.

The OFCCP's voluntary self-audit procedures also require that the contractor maintain certain records that must be made available to the OFCCP to take advantage of the benefits of complying with these voluntary procedures. The required records include documents necessary to explain the contractor's decision with respect to its formation of SSEG's and its choice of analysis, the data and the results from its statistical evaluation, as well as documentation of any investigation, follow-up and remedies.

Conclusion

Self-audits or compensation analyses can help employers avoid costly compensation challenges either by individual plaintiffs or government agencies such as the OFCCP. Compensation reviews, whether in the form of a general analysis or a detailed multiple regression statistical analysis, can be a valuable tool to avoid future litigation, when conducted properly.

In addition to a review of the actual pay employees receive, any compensation evaluation should also include an analysis of the practices that indirectly affect compensation such as promotion decisions, performance evaluations, and work assignments. Questions to consider include: How is compensation determined and is it done consistently? Are starting salaries consistent? If compensation is based on performance, how is performance defined? Are there measurable criteria, or are subjective elements used? Are managers given wide latitude in establishing or changing salaries or are there specific measures or procedures that are followed? Are the salaries of women or minorities lower because they are not provided the opportunities for overtime, promotion, or certain work assignments?

It is also important to make sure that the comparison groups are appropriately defined. Are job titles reflective of the work performed? Are there individuals who are included in a job title, pay grade, salary range or other unit who do not belong in that group because of the work they actually perform?

Contactors and employers should be careful when conducting self-analyses by themselves, however. Any self-analysis has the potential to be discovered by third parties, plaintiffs or government agencies and could create an 'admission' of discrimination. Before conducting an analysis, employers should consult with counsel to determine what type of analysis is appropriate and whether the attorneys should be involved in the analysis in order to cloak the analysis under an attorney-client privilege.

Patricia Anderson Pryor, a member of this newsletter's Board of Editors, is a partner in the Labor and Employment Department at Taft, Stettinius & Hollister LLP.