Quick Hit: OFCCP has announced its intention to create an Ombud Service. The new service will create a new position within the OFCCP, the “Ombud,” who will serve as a contact for contractors seeking to raise concerns or suggestions about OFCCP.

Key Takeaways:

• The Ombud Service represents another example of OFCCP working to implement initiatives identified in its Town Hall Action Plan. With its flurry of recent Directives, OFCCP is taking steps to show contractors that it is responsive to their concerns.
• The OFCCP’s new Directive merely announces the creation of the service in the future. In principle, the idea of an Ombud Service makes sense. It would provide contractors with an avenue to raise concerns and address perceived unfair conduct by compliance officers. However, until we see the details of the program it is difficult to predict how useful it will be.
• One detail that will portend the effectiveness of the new service is how it handles confidentiality. Although the Directive recognizes that contractors are concerned that raising issues with the agency could lead to retribution, the Directive does not contain any statements regarding how the Ombud Service will protect the identities of contractors raising concerns. Whether and to what extent OFCCP can provide contractors such assurances will be a key element of the program and perhaps the key determinant of its success.

More Detail: On September 19, 2018, OFCCP issued Directive 2018-09 (the “Directive”), which announces the “planned implementation of an Ombud Service in the national office to facilitate the fair and equitable resolution of specific types of concerns raised by OFCCP external stakeholders in coordination with regional and district offices.”

As explained in the Directive, OFCCP is creating the Ombud Service in response to recommendations made by the Government Accountability Office’s (“GAO”) September 2016 Equal Employment Opportunity: Strengthening Oversight Could Improve Federal Contract Nondiscrimination Compliance report, as well as contractor feedback received at Town Hall meetings held by OFCCP in 2017. The new service appears aimed at addressing the concern reported by the GAO that “[s]takeholders and contractors fear that asking OFCCP for assistance would call attention to them and possibly make them a target for future OFCCP enforcement actions, such as compliance evaluations.” It also aims to respond to concerns that the agency “does not have an independent mechanism through which external stakeholders, after having exhausted district and regional office channels, can share their concerns with OFCCP about a particular open matter or provide general feedback and recommendations to improve the administration of the agency.”

The Directive does not create the Ombud Service; rather it simply announces that OFCCP plans to implement such a service. The Ombud Service’s mission will be “to facilitate the fair and equitable resolution of concerns raised by OFCCP’s external stakeholders, conduct independent and impartial inquiries into issues related to the administration of the OFCCP program, and propose internal recommendations to continuously improve the quality of services OFCCP provides to its stakeholders.”

The Directive provides contractors with some details about what to expect from the new service. Per the Directive, the Ombud Service “should require the Ombud to:

• Listen to external stakeholder concerns about OFCCP matters and suggestions for improvements;
• Promote and facilitate resolution of OFCCP matters at the district and region office level;
• Work with OFCCP district and regional offices as a liaison to resolve certain issues after stakeholders have exhausted district and regional office channels;
• Refer stakeholders to the OFCCP Help Desk for routine compliance and technical assistance inquiries;
• Accept and review matters referred directly by the national office; and
• Have the discretion to reject a referral in appropriate circumstances.”

The Directive also makes clear that the Ombud Service “will not

• Advocate for either side of a dispute;
• Give legal advice, analysis, opinions, or conclusions;
• Conduct compliance evaluations, complaint investigations or participate in conciliation agreement negotiations; and
• Have any role in conduct or discipline issues regarding OFCCP staff.”

When more details about the Ombud Service are announced we will report them here.

Quick Hit: OFCCP has issued a new Directive (Directive 2018-07), announcing its intention to develop an Affirmative Action Program Verification Initiative (the “Verification Initiative”). The Directive only notifies the contractor community that the program is in the works – for now, nothing has changed. However, the Directive shares that the program will, among other things, include “a process whereby contractors would certify on a yearly basis compliance with [Affirmative Action Program (“AAP”)] requirements,” and tweak OFCCP’s compliance evaluation scheduling criterion to attempt to increase the likelihood non-compliant contractors are scheduled for compliance evaluations.

Key Takeaways:

1. If you are a contractor that has not been diligent in preparing its annual AAP, in the near future you will have strong incentives to change your ways. If you are one of those contractors, now is the time to get your AAP house in order.
2. The Verification Initiative makes some practical sense and from the Directive it appears OFCCP has given the matter serious thought. That being said, the devil, as always, will be in the details. This program has the potential to be a positive development for compliant contractors, or another compliance headache.

Stay tuned. We will report on the details of the program once it is announced.

More Detail: As we previously reported, Acting OFCCP Director Craig Leen announced at the National Industry Liason Group Conference that the OFCCP is working on a contractor certification program. Although he was short on details, he shared that the program would aim to provide OFCCP with a way to identify contractors who are likely in compliance in order to focus compliance evaluations on contractors likely not in compliance.

In Directive 2018-07, OFCCP has formalized this initiative. As explained by OFCCP, the Verification Initiative appears to have two primary goals: (1) increase contractor compliance with OFCCP regulatory requirements; and (2) help OFCCP focus its compliance evaluations on non-compliant contractors.

The Directive notes that OFCCP can only conduct compliance evaluations for a small portion of the 120,000 contractor establishments governed by its regulations. The Verification Initiative is a way for OFCCP “to expand its compliance reach.” The Directive also expresses OFCCP’s “concern[] that many federal contractors are not fulfilling their legal duty to develop and maintain AAPs and update them on an annual basis.” The Directive cites to a 2016 U.S. Government Accountability Office report which found that “close to 85 percent of contractor establishments did not submit a written AAP within 30 days of receiving a scheduling letter.” Noting that the agency only audits a small fraction of government contractors, the Directive states that “federal contractor establishments have a small likelihood of discovery if they decide not to develop and update an AAP.” This, according to OFCCP, creates a “free rider” problem, where some contractors “benefit from participating in the federal procurement process while not bearing the corresponding costs of AAP compliance based on the current high likelihood they will not be listed (and potentially receiving an inequitable advantage over law abiding contractors).”

As such, the Directive announces that OFCCP seeks to “establish[] a program for verification of compliance by all contractors with AAP obligations.” The program would encourage compliance in two ways. First, contractors would have incentive to prepare their AAPs because they would have to certify compliance. Second, certifying compliance would lessen the chances that contractor would be selected for a compliance evaluation. As the Directive explains, the failure to develop and update an AAP violates threshold contractual and legal obligations, and indicates a lack of commitment to comply with equal employment opportunity and anti-discrimination obligations. Accordingly, in situations where contractor establishments fail to comply with the AAP requirement, the likelihood of other violations, including discrimination, may be higher. Thus, OFCCP believes that [adding certification information as a] new [compliance evaluation scheduling] criterion could be effective at identifying potential violators of the authorities OFCCP enforces.

The Directive only announces the creation of a verification program at some point in the future. As such, we still do not know what the program will entail or even when OFCCP aims to implement it. However, the Directive states that the program “would initially take the form of OFCCP review of a certification, followed by potential compliance checks, and could later take the form of annual submission of AAPs to OFCCP for review.” The Directive states that “comprehensive program” will include:

1. Development of a process whereby contractors would certify on a yearly basis compliance with AAP requirements.
2. Inclusion of a criterion in the neutral scheduling methodology increasing the likelihood of compliance reviews for contractors that have not certified compliance with the AAP requirements.
3. Compliance checks to verify contractor compliance with AAP requirements.
4. Requesting proffer of the AAP by contractors when requesting extensions of time to provide support data in response to a scheduling letter.
5. Development of information technology to collect and facilitate review of AAPs provided by federal contractors.

The Directive anticipates that the new program will not come as a surprise to contractors. It promises that “OFCCP will prepare a public outreach and education campaign on this initiative. The campaign would encourage contractors to contact the agency for compliance assistance regarding AAPs.”

On August 24, 2018, OFCCP released its long-awaited Directive outlining the standard procedures OFCCP will use during the course of compensation audits of federal government contractors. Concerned that it failed to provide clear guidance to contractors, the Directive rescinds and updates Directive 307, OFCCP’s most recent guidance concerning compensation audits. OFCCP explained that it “believes that fulsome guidance will further support contractors’ ability to conduct meaningful self-audits so that they can proactively identify and address issues with their compensation practices.” The Directive and its attachment and the FAQs are attached here.

OFCCP explained that the purpose of the new Directive was to (1) provide further transparency to contractors regarding the procedures used by OFCCP in conducting compensation audits; (2) support compliance and self-analysis by contractors; and (3) improve compensation analysis consistency and efficiency during compliance evaluations. The Directive was intended to provide more transparency to contractors regarding OFCCP’s procedures and practices for establishing pay analysis groups (PAGs) and conducting statistical analyses and modeling.

OFCCP reiterated in the attachment to the Directive that it is focused on identifying and addressing compensation disparities that are the result of systemic discrimination, including pattern or practice discrimination and disparate impact discrimination. If OFCCP believes there are indicators of systemic discrimination, it will seek to understand the contractor’s compensation system, policies and practices and undertake what it characterizes as a “holistic” review of the contractor’s EEO, diversity and inclusion policies. The attachment explains that, in conducting such a holistic review, it will consider a variety of employment practices that can lead to compensation disparities between similarly-situated employees, including the promotion, training and advancement opportunities, and the assignments offered to employees.

OFCCP also described the categories of evidence it will consider during compliance reviews, including statistical and anecdotal evidence. Anecdotal evidence can be derived from the review of policies, compensation records and other documents and interviews with managers and workers. OFCCP explained that, in determining which cases to pursue, OFCCP will be less likely to pursue a matter if the statistical evidence is not corroborated by non-statistical evidence, unless the statistical evidence is especially strong or OFCCP has identified a pattern of compensation discrimination by the contractor in prior audits.

OFCCP will continue to use the OMB-approved scheduling letter to collect initial compensation data from contractors. Compliance officers will use the information provided by contractors to develop pay analysis groupings (PAGs) of comparable employees. According to the attachment to the Directive, it is OFCCP’s objective to use or create PAGs that mirror the contractor’s compensation system. It notes that, if a contractor provides information concerning its compensation hierarchy and job structure in the submission, OFCCP will attempt to design its analysis based on that structure. OFCCP expects the information provided by the contractor concerning its compensation structure to be reasonable and verifiable and will include groups of sufficient size to undertake a meaningful statistical analysis.

OFCCP declined to identify in the Directive the size of groupings it considers sufficient. However, in the FAQs issued with the Directive, OFCCP states that it will first review each of the PAGs to determine if they contain at least 30 employees under a similar pay system performing similar job functions. It will then try to determine if there are at least 10 employees per variable (e.g., gender, years in position). Thus, if a pay model had five control variables, the PAG would ideally have at least 50 employees. It also noted in the FAQs that, in rare circumstances, OFCCP may rely on non-statistical, or cohort, data to assess small job groups. If a contractor declines to provide proposed groupings or the information necessary for OFCCP to establish PAGs, OFCCP will conduct its preliminary desk audit based on either EEO-1 or AAP job groups, if they are reasonable and sufficiently large.

After it identifies appropriate PAGs, OFCCP will then control for factors that impact pay within the PAGs, such as sub-job groupings, functions, units and titles, as appropriate. During this preliminary analysis, OFCCP will also control for tenure, full-time status and other appropriate factors. If the results of the desk audit warrant additional review, OFCCP will seek additional information to understand the contractor’s compensation systems, factors that drive compensation decisions, and job structure. Based on this additional information, OFCCP may broaden or narrow its preliminary PAGs.

OFCCP identified principles that it will use to conduct statistical analyses, both during and after the desk audit phase:

• It will use multiple linear regression analysis (MRA) to help reduce false negative and positive results;
• It will analyze (1) base pay, (2) total compensation and, if necessary (3) individual components of pay (e.g., bonuses or commissions);
• It will convert salary to a log of salary using a regression model; and
• It will analyze statistical outliers to test whether the PAGs have been composed properly.

In analyzing pay disparities using these models and principles, OFCCP will evaluate males and females in separate regression models. OFCCP noted, however, that it may evaluate the interaction of sex and race in future models. For race and ethnicity, OFCCP will create a variable for each race and ethnicity category with more than five employees. OFCCP provided the following guidance concerning the factors it will apply in undertaking a MRA:

• It will control for components of employee tenure (e.g., time in position, time with the company) separately;
• It will not consider squared terms (factors, such as time in position, that level out over time) until after the initial desk audit phase;
• It will control for education categories and performance ratings and rakings, combining them as necessary;
• It may use age as a proxy for prior experience only at the desk audit phase;
• Per the FAQs, it may control for job title if pay legitimately varies based on job title.
• It will control for job level or grade, combining them as necessary; and
• It will evaluate market salary surveys, if provided by the contractor, on a case-by-case basis if job and pay differentials are not sufficiently accounted for.

Before OFCCP will apply any of these (or other relevant) factors, it will test them for neutrality to make certain they do not have a disparate impact on any protected category. OFCCP also adopted the “rule of five” recently used by the National Office statisticians in compliance reviews and conciliation negations. It described this rule in the FAQs in discussing the circumstances when job title would be a relevant factor:

OFCCP will attempt to control for . . . job title if pay legitimately varies by job title. In many instances, controlling for factors like grade level, department, or business unit sufficiently distinguishes functional differences in job titles . . .. To capture meaningful pay differentials across the categories, OFCCP requires that each category contain at least five observations. If a category has fewer than five observations, OFCCP will join those observations with their ordinal counterpart (e.g., nearest grade or level) or to the category with the nearest average pay. With this approach, OFCCP meaningfully controls for pay differentials across job titles while minimizing the risk of suturing the model with low frequency employee controls.

At the end of the attachment, OFCCP identifies three practices it will use to facilitate transparency and consistency and the resolution of findings through conciliation:

1. At the conclusion of the desk audit, OFCCP will notify the contractor in writing of the general nature of any preliminary compensation disparities. For instance, a contractor may be informed that preliminary disparities have been found in “compensation policies and practices with respect to women in production, sales and management.”
2. Consistent with Directive 2018-01, OFCCP will attach to any pre-determination notice (PDN) the individual-level data necessary for the contractor to replicate OFCCP’s PAGs and regression results. The contractor will have the opportunity to offer a non-discriminatory explanation for the preliminary findings before a violation will be found. The PDN and the contractor’s response will be reviewed by the National Office. The individual-level data will also be attached to any Notice of Violation (NOV) issued to the contractor after the National Office’s review is completed.
3. To facilitate conciliation, OFCCP will include professional labor economists or statisticians from the Branch of Expert Services in the conciliation process to clarify OFCCP’s variable coding, statistical methods and findings and to answer questions about the process and assumptions used in computing back pay.

With respect to point 2, OFCCP explained in the FAQs that, if a contractor provides factors that may explain the disparities in pay, OFCCP’s statisticians and other field and national office staff will coordinate with representatives from the DOL’s Regional Office of the Solicitor to decide on a preliminary analytical model. The contractor will be given an opportunity to provide additional information to OFCCP regarding its compensation systems and practices. Based on the additional information provided by the contractor, the preliminary model may be refined.

The Directive went into effect on August 24, 2018. It will apply to all compliance evaluations scheduled on or after that date. The Directive states that it will apply to “open reviews to the extent they do not conflict with OFCCP guidance or procedures existing prior to the effective date” of the Directive.

After we have an opportunity to digest the detailed standards set forth in the Guidance and associated documents and obtain input from OFCCP officials, we will provide a series of blogs entitled “Demystifying OFCCP’s New Compensation Guidance” that reviews – in plain text – the three key elements of the Guidance and provides practical advice for compliance with them.