The agency will publish “objective industry standards” on acceptable pay differences.

On August 6, the Office of Federal Contract Compliance Programs (OFCCP) published an advance copy of a regulatory proposal that, if adopted, would require federal contractors and subcontractors to file nearly 70,000 “Equal Pay Reports” on an annual basis.^[1] The proposed pay data submission would impose significant administrative burdens on employers, but perhaps the more troublesome aspect of the proposal relates to how OFCCP intends to use the data. As discussed in more detail below, OFCCP proposes to use the pay data to establish and publish “objective industry standards” as to the acceptable ratio of male-to-female average pay levels. Employers with ratios that fall below the industry standards will be deemed to have a possible systemic pay discrimination problem, subjecting them to extensive OFCCP pay audits. OFCCP offers no empirical basis for this analytical approach, and it will likely lead to targeting certain employers based on complex economic dynamics that have nothing to do with pay discrimination.

OFCCP’s Equal Pay Reporting proposal is contained in a Notice of Proposed Rulemaking (NPRM) published in the Federal Register on August 8. OFCCP’s proposal implements a Presidential Memorandum issued in April that directed the agency to collect pay data from federal contractors in order to “close” the so-called “pay gap”—empirical differences in average pay based on gender and race that appear in broad data collected through government surveys. Although the source of the pay gap has been widely studied and debated by labor economists and other experts, the position outlined in OFCCP’s NPRM is that the gap reflects discrimination by employers.

Applicability

The proposed reporting obligation would apply to employers that employ 100 or more employees and are performing federal contracts or subcontracts of $50,000 or more.^[2] The NPRM contains a footnote that could be interpreted to limit the obligation to first-tier subcontractors, an ambiguity that will likely be addressed in the final rule.

Equal Pay Reports

OFCCP’s proposal would require federal contractors and subcontractors to submit pay data to the agency on an annual basis through an electronic Web portal similar to that used by the Equal Employment Opportunity Commission (EEOC) when collecting EEO-1 data. Employers could request an alternative reporting format based on a showing of “undue hardship.” The proposed data submission would be required for each facility of 50 or more employees. The reports would be due each year by March 31 and would cover wages paid to employees during the prior calendar year. The proposed reports would contain the following information by EEO-1 occupational categories^[3] and broken down by race, ethnicity, and gender^[4]:

• The sum of W-2 wages of employees^[5] in the category

• The number of employees in the category

• The sum of hours worked for the employees in the category

OFCCP’s discussion in the proposal suggests that the agency contemplated that other data points could be included in the collection, but OFCCP did not identify any other data. Employers that file Equal Pay Reports would have an obligation to retain the reports for two years.

“Objective Industry Standards”

OFCCP proposes to use the submitted pay data to select contractors for intensive compensation audits. In particular, OFCCP intends to develop what the agency asserts will be “objective industry standards” of the male/female and minority/nonminority^[6] pay ratios and compare each employer’s submissions against the industry standards. OFCCP would develop the objective industry standards based on the pay data submitted and external sources, such as labor market surveys. Employers whose ratios fall below the industry standards would be targeted for audits. OFCCP will also publish these standards and will expect that contractors will compare their own data against the industry standards as a self-audit method. In a subsequent audit, OFCCP will request that the employer explain whether it conducted such an internal review and, if so, disclose the results and any remedial measures taken.

OFCCP provides no scientific study or empirical basis for this analytical approach. Indeed, the approach bears no discernible relationship to the types of statistical analyses conducted by experts studying the source of the pay gap, much less any statistical method recognized as reliable and relevant proof of pay discrimination under Title VII. If OFCCP implements its proposal, it would be prudent for employers to assess their data against the industry standards published by the agency to gauge the risk of an audit. However, it is hard to see how this comparison could serve as a reasonable self-audit method.

OFCCP Burden Analysis

OFCCP estimates that developing the Equal Pay Reports would cost employers only $684 per contractor establishment, or $50 million in the aggregate. OFCCP’s burden estimates are likely understated. This is an issue on which employers can provide helpful input by commenting on the NPRM so that the public record reflects more reasonable burden estimates.

OFCCP Responses to Prior Employer Comments on Pay Reporting Proposals

In the preamble of the NPRM, OFCCP responded to employer-side comments submitted in 2011 when the agency proposed the concept of a pay data collection in an Advanced Notice of Proposed Rulemaking.^[7] From an employer’s perspective, the agency’s responses to two scientific studies related to pay data reporting were dissatisfying. First, OFCCP sponsored an extensive study in 2002–2005 conducted by Abt Associates of compensation data provided on the agency’s prior equal opportunity (EO) survey. In a lengthy, technical report, Abt Associates concluded that the pay data collected by the agency on the EO surveys—similar to the data proposed for the Equal Pay Reports—did not provide a meaningful basis for selecting contractors for compliance audits. In the NPRM, OFCCP did not address any details of the Abt study and/or the study’s conclusions and recommendations.

Equally concerning was OFCCP’s response to the National Academy of Sciences’ (NAS’s) recommendations in a 2012 report, which concluded a study of pay data reporting sponsored by the EEOC. The NAS found that the enforcement agencies do not have any scientific basis for the utility of any specific data report and recommended that the agencies sponsor a pilot study by an independent expert before embarking on any regulatory collection of data. In the NPRM, OFCCP acknowledged the NAS findings and recommendations but explained that “the timing of the pilot study is incompatible with the direction provided to [the Department of Labor] in the Presidential Memorandum . . . directing proposed rulemaking within 120 days.”

Next Steps for Employers

Employers should consider sponsoring comments in response to the NPRM. Substantial and thoughtful regulatory comments may be effective in persuading OFCCP or the Office of Management and Budget to scale back the scope of the proposed reporting obligation, otherwise reduce the burdens involved, or even place the Equal Pay Report on indefinite hold until a comprehensive study of the utility of such a report can be completed.

The NPRM signals OFCCP’s continued aggressive approach to enforcement against systemic pay discrimination. Employers subject to OFCCP audits should consider conducting a privileged risk assessment to forecast and manage the risk of an extended agency audit or allegation of pay discrimination.

_{^[1]. View more information here.} 

_{^[2]. Under OFCCP’s proposal, an employer would have to perform the covered contract or subcontract for more than 30 days to be subject to the obligation. It is unclear whether the agency intends this to alter the long-standing interpretation that OFCCP obligations only apply during the performance of a covered contract or subcontract.}

_{^[3]. The current EEO-1 occupational categories are Executive/Senior Level Officials and Managers, First/Mid Level Officials and Managers, Professionals, Technicians, Sales Workers, Administrative Support Workers, Craft Workers, Operatives, Laborers, and Service Workers.}

_{^[4]. The race and ethnicity categories would be the same as on the EEO-1 form: Hispanic/Latino, White (non-Hispanic), Black or African-American, Native Hawaiian or Other Pacific Islander, Asian, American Indian or Alaska Native, and Two or More Races.}

_{^[5]. The definition of “employee” would be the definition contained in the EEOC’s regulations implementing the EEO-1 reporting requirement, which includes part-time employees.}

_{^[6]. OFCCP’s discussion in the NPRM is unclear on this point, but the industry average ratios may perhaps be published by individual race groups.}

_{^[7]. Morgan Lewis filed a comment to the Advanced Notice of Proposed Rulemaking, opposing the proposed data collection.}