Breaking News: OFCCP Issues New Directives Offering New Guidance on Compensation Evaluations, Establishing a Recognition Program for Contractors, and Laying the Groundwork for a Contractor Certification Program

Seyfarth Synopsis: On the heels of its recent slate of directives, the Office of Federal Contract Compliance Programs (“OFCCP”) has issued a new group of directives which continue to signal changes for the contractor community.  The first, Directive 2018-05, provides much needed transparency around the agency’s process for evaluating compensation during compliance reviews.  The second, Directive 2018-06, and third, Directive 2018-07, outline the agency’s plan to establish a Contractor Recognition Program and a Contractor Certification Program, respectively.

Move Over Directive 307

On August 24th, the OFCCP issued Directive 2018-05: Analysis of Contractor Compensation Practices During a Compliance Evaluation (“Compensation Directive”) which rescinds the Directive 2013-03, known within the contractor community as Directive 307.  The new directive is described as the OFCCP’s effort to “(1) further clarify and provide additional transparency to contractors about OFCCP’s approach to conducting compensation evaluations; (2) support compliance and compensation self-analyses by contractors under applicable law, and OFCCP regulations and practices; and (3) generally improve compensation analysis consistency and efficiency during compliance evaluations.”  The OFCCP notes that this new directive is “more transparent about the agency’s practices” with respect to how employees are grouped for the purposes of comparing their compensation and how it conducts compensation evaluations constructs its statistical models.

While the contractor community is unlikely to see significant changes in the approach the OFCCP takes when analyzing compensation, the Compensation Directive provides much needed clarity around the methodology used by the agency during compliance reviews.  It clear that the OFCCP will remain a statistics driven agency and that the compensation analysis will rest on statistical breakouts of pay.  The Compensation Directive still requires OFCCP to analyze pay using Pay Analysis Groups (“PAGs”) and the focus on base pay, total compensation, and, if necessary, components of compensation such as bonus, commission and shift differentials remains.  

The Compensation Directive outlines its approach to statistical modeling and the use of control variables.  For instance, the OFCCP clarifies that it uses a favored-group analysis for analyzing compensation by race/ethnicity.  It also advises that it may rely on age as a proxy for experience only during the desk audit but will seek to obtain actual prior experience.  It will also evaluate market studies on a case-by-case basis if the information is provided and will not automatically include “squared-tenure” terms in the preliminary desk audit analysis. 

The Compensation Directive comes with several clarifications that are important for contractors:

1. Assuming the structure is reasonable, “[i]f a contractor provides its compensation hierarchy and job structure in the submission to the Itemized Listing, OFCCP will attempt to design its analysis based on that structure.”
2. The OFCCP will notify the contractor of the general nature of the disparity under review by explaining that the agency is reviewing, for example: “Compensation policies and practices with respect to women in production, sales and management.” 
3. If it makes a preliminary finding of discrimination, the agency will disclose “the individual-level data necessary for the contractor to replicate the PAGs and regression results” in electronic format.
4. The OFCCP will also include representatives from its Branch of Expert Services (e.g., labor economists or statisticians) in the conciliation process, if necessary, to provide clarity around the Agency’s statistical methodology and findings.  

The Compensation Directive applies to any reviews scheduled after August 24th and to any open reviews to the extent that the analysis does not conflict with prior guidance.

New Tools in the Toolkit for Encouraging and Enforcing Compliance

The two additional directives, which are likely to garner much less attention for now, are part of the OFCCP’s ongoing efforts to “expand the agency's reach, and protect more workers by supporting proactive and comprehensive compliance by contractors.”

Contractor Recognition Program

The Contractor Recognition Program is aimed at celebrating “high-quality and high-performing compliance programs and initiatives” in order to create greater awareness within the contractor community of what other members are doing.  The agency notes that as part of its efforts to provide contractors with compliance assistance tools and resources, it hopes that this program will help establish “implementable best or model contractor practices, a contractor mentoring program that uses contractors to help their peers improve compliance, and other initiatives that provide opportunities for contractors to collaborate or provide feedback to OFCCP on its compliance assistance efforts.”

Contractor Certification Program

The goal of the Contractor Certification Program is to ensure broader fulfillment of federal contractor obligations.  The agency notes that “[b]ased on the size of the contractor population and other factors, OFCCP schedules only a portion of these establishments annually for compliance evaluations. Therefore, OFCCP must seek more ways to expand its compliance reach.”  The directive does not contain firm details, but states that it may initially take the form of certifying compliance to OFCCP or the contracting agency itself and may eventually lead to annual submission of AAPs for review.  The directive also notes that a contractor’s participation in the program will be incorporated into the scheduling of compliance reviews.

We will have to wait and see the exact form that the program takes, however, the directive seems to attempt to address some concerns from the contractor community about what they might be asked to certify by stating that its purpose is to ensure that contractors are meeting “the most basic equal employment opportunity (EEO) regulatory requirement, namely, the preparation of a written affirmative action program (AAP) and annual updates to that program.”  However, until the certification is formally proposed, it is unclear what “the most basic equal employment regulatory requirement” means. 

What Does This Mean for Employers?

As far as the directives outlining the intent to establish the Contractor Recognition Program and the Contractor Certification Program, there are no real changes for employers for the time being.  Both of these directives deal with the new programmatic requirements in broad strokes.  Neither creates new obligations for contractors at the current time, but instead creates new tools for the agency to encourage and enforce compliance of current contractor obligations.

In a similar sense, the Compensation Directive does not purport to create any new or adjust any existing obligations, but rather to clarify how the agency goes about enforcing contractor obligations.  That being said, the Compensation Directive does give contractors key guidance on how the agency believes they should evaluate compensation in connection with their affirmative action plans. 

We anticipate further announcements from the OFCCP given its promise to provide contractor education and compliance assistance materials and its announcement regarding the Contractor Recognition and Certification Programs.  We will continue to monitor these changes and will alert you as more develops.

In the meantime, if you have questions about best practices for OFCCP compliance and audit defense, please contact a member of Seyfarth’s Organizational Strategy & Analytics Team or your Seyfarth relationship partner.