Federal Court Approves OFCCP Broadened Access to Compensation Data

The Office of Federal Contract Compliance Programs (“OFCCP”) has announced, as one of its regulatory priorities, identification and elimination of perceived compensation discrimination, whether based upon sex, race or ethnicity. To initiate compliance reviews of covered federal contractors or subcontractors, OFCCP issues an Office of Management and Budget (“OMB”) approved Scheduling Letter to which is attached an Itemized Listing of supplemental information to be provided by the contractor for an off site desk audit. Paragraph 11 of the Listing presently seeks general and annualized compensation data for fairly broad categories of employees, broken down by pay grade or other "pay division," reflecting the total of annualized compensation for all employees, as well as minority, non-minority, male and female employees within the particular pay division.

OFCCP has launched efforts on several fronts to obtain and investigate more detailed and individualized contractor compensation data beyond that permitted by the OMB approved request for itemized information. On September 28, 2011, OFCCP published a notice in the Federal Register that it was requesting OMB to approve substantial revisions to the Scheduling Letter and attached Itemized Listing which would greatly expand the scope and nature of contractor compensation data to be submitted to the OFCCP. 76 Fed. Reg. 60083. Likewise, on August 10, 2011, OFCCP published in the Federal Register an advance notice of proposed rulemaking seeking public input on the development and implementation of a new "compensation data collection tool" which would gather detailed information on covered contractors' compensation systems and practices. 76 Fed. Reg. 49398. On June 4, 2010, OFCCP distributed internally a secret and still undisclosed "Directive 289" setting forth new procedures to be followed in the analysis of contractor compensation practices at the desk audit stage of a compliance review.

OFCCP also is requesting from contractors undergoing a desk audit substantial amounts of additional compensation information, on an individualized basis, beyond that which it had secured through Paragraph 11 of the OMB approved Itemized Listing – even if the compensation data initially provided suggested no discrimination issues under currently published OFCCP "threshold" standards, and established no reasonable suspicion of a violation of Executive Order 11246. It has become increasingly common for contractors undergoing a desk audit to receive requests for an additional 13, 15 or even 18 compensation factors prior to receiving any indication from OFCCP that the initial compensation data submitted failed any of the initial threshold tests utilized by OFCCP from time to time.

One such contractor, United Space Alliance, refused to provide the supplemental compensation data requested by OFCCP, as the data previously supplied established no indicator of unlawful pay disparity under the threshold test then in effect.

Following United Space Alliance's refusal to supply the supplemental data, and its refusal to permit OFFCP to conduct an on-site compliance review to gather the data, OFFCP commenced enforcement procedures, and a U.S. Department of Labor (“DOL”) Administrative Law Judge found against the contractor, concluding it was reasonable for OFCCP to request additional data to perform additional analyses to test the results of the initial threshold analysis. The Administrative Law Judge rejected all challenges raised by United Space Alliance.

The U.S. DOL Administrative Review Board took no action on a petition for review filed by the contractor, which then sought review under the Administrative Procedure Act in the United States District Court for the District of Columbia. On November 14, 2011, the District Court again rejected all arguments raised by the contractor in United Space Alliance, LLC v. Solis, Civil Action 11-746, based essentially on the finding that the OFCCP's request for supplemental data was within the agency's authority to request and analyze data on bases other than its published threshold tests. Significantly, the District Court held there was no constitutional requirement that the contractor be given notice of the ways in which OFCCP exercises its discretion to investigate potential instances of discrimination. Twisting the blade, the Court concluded:

"The court understands that United Space and the entire community of federal contractors are keenly interested in how OFCCP decides whether to request additional data on a contractor's compensation practices, but that interest does not allow those companies or this court to interfere with the agency's investigatory practices. Submission to such lawful investigations is the price of working as a federal contractor."

United Space Alliance was clearly a sweeping victory for OFCCP. Whether or not the decision is appealed, and affirmed or even reversed if appealed, it appears covered contractors and subcontractors will be faced with far more extensive production of compensation data during the course of compliance reviews, if not based upon the United Space Alliance decision, then through OFCCP's parallel regulatory agenda, which includes proposed revisions to its Scheduling Letter and attached Itemized Listing, as well as its contemplated development of a new "compensation data collection tool." The impact on contractors could be significant. Look for increased length and thoroughness of compliance reviews, resulting in increased costs. In addition, data submitted to OFCCP may well be subject to disclosure to interested third parties through Freedom of Information Act (“FOIA”) requests to OFCCP, with only limited protection available through the narrow exceptions provided for in FOIA and trade secret considerations.

What to do now?

Contractors may wish to consider, in advance of their receipt of a Scheduling Letter, and within the protections afforded by attorney-client privilege, a thorough review of their compensation systems and practices to identify and rectify potential compensation discrimination exposure. In addition, whether by design or not, OFCCP has not been requesting data reflecting all compensation factors or variables which might be included in a properly conducted regression analysis to establish that gender, race or ethnicity are not determinative. Contractors should consider identifying all such factors and having an appropriate regression analysis conducted in advance of any compliance review, again within attorney-client privilege, to limit unwanted disclosure.

Likewise, nothing in Executive Order 11246 or implementing regulations presently mandate any particular grouping of jobs to be used for comparison of compensation. The grouping of employees and jobs, as well as identification of pay divisions to determine which employees are "similarly situated" for compensation analysis purposes, as well as the size of the groups involved are all matters which can be negotiated with OFCCP during the course of a compliance review in determining how requested compensation data is to be presented. Consideration of alternative approaches in advance of a compliance review is time well spent, whether to avoid false positives, or to identify and rectify potential areas of exposure.