United States District Court Requires Federal Contractor To Produce Additional Compensation Data

Earlier this week of November 18, 2011, the United States District Court, District of Columbia ruled that a federal contractor will be required to produce additional compensation data as requested by the Office of Federal Contract Compliance Programs (OFCCP), even though the threshold tests commonly employed by the agency indicated no discrimination.

Here’s what happened…

In August of 2009, OFCCP initiated a compliance evaluation of United Space Alliance’s Cape Canaveral facility. OFCCP requested "Item 11 data" from United Space: annualized compensation data broken out by gender, race, and salary range, rate, grade or level.

Upon receipt of the data, OFCCP performed a threshold test – a kind of "Four-Fifths Rule" for compensation data. The threshold test did not indicate potential compensation discrimination. But the OFCCP compliance officer who performed the threshold test found "patterns in the data that he believed to be indications of troubling disparities between the pay of men and women."

Miguel Rivera, the compliance officer’s supervisor, agreed that "it appeared that women were earning less more frequently than men." Mr. Rivera then performed a series of additional calculations commonly referred to as "pattern analysis." The pattern analysis indicated that 75.7% of the women in the United Space workforce worked in job groups in which average female earnings were less than average male earnings.

Mr. Rivera then performed the "30-5 test" where any job group with fewer than thirty employees or fewer than five members of either gender is removed from the analysis. The "30-5 test" indicated that 76.3 percent of the remaining women worked in job groups in which average female earnings were less than average male earnings.

Based on these analyses, OFCCP requested additional compensation data from United Space. OFCCP notified United Space that it had found "unexplained differences in average compensation that require further investigation of your company’s compensation practices."

United Space responded to OFCCP, stating that based on its own analysis of the data it had submitted using the publicly-available description of the threshold test, the OFCCP request was unjustified.

OFCCP countered, stating that the thresholds used in the threshold test were "not static, but rather… subject to change as OFCCP continues to evaluate its targeting methodology." The agency then filed an administrative complaint against United Space on the grounds that it had refused to give access to or supply records and information.

At the administrative hearing, United Space argued that the OFCCP request for additional data violated the Fourth Amendment, and that based on the Administrative Procedure Act the agency was required to base any request for additional information on the results of the standard threshold test endorsed by the national office. United Space also claimed that OFCCP had violated the Fifth Amendment and the Paperwork Reduction Act.

OFCCP argued that the data request had a "reasonable basis" and therefore satisfied the Fourth Amendment, the threshold test was not binding on the agency under the Administrative Procedure Act, and that there was no evidence of a violation of the Equal Protection component of the Fifth Amendment, and that the data request was an investigation involving an agency against specific individuals or entities and therefore was exempt from the requirements of the Paperwork Reduction Act.

The administrative law judge recommended that United Space be required to comply with the desk audit and that, if the Administrative Review Board required United Space to comply with an on-site review as well, that the review be limited to gathering data and/or documents related to OFCCP’s most recent request for information.

United Space filed exceptions to the recommendation, while OFCCP defended the recommendation. Ultimately United Space petitioned the United States District Court, District of Columbia for relief from the administrative order. The District Court ruled as follows:

  • "Despite the vigor with which United Space has litigated it, there is surprisingly little at stake in this case. The Department of Labor has not accused United Space of employment discrimination. It has not ordered United Space to permit agency investigators onto company premises. The Department has merely required United Space to submit data about its employee compensation. 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."

What does this decision mean for employers? Get ready to produce your compensation data to the OFCCP, even if initial threshold analyses don’t indicate any discriminatory practices. It would appear that the decision in United Space versus OFCCP means that the agency can request any kind of compensation data at any point for any reason, as long as that reason is part of an investigation.

In this particular case, the administrative law judge found that OFCCP was "merely attempting to gather additional information to conduct a regression analysis before making any decision with regard to determining whether the Contractor should be charged with any violations."

OFCCP’s proposed changes to the scheduling letter would make this information available to the agency at an earlier stage in the review process. Currently, contractors are required to produce compensation information in an aggregated format, broken out by gender, race, and salary range, rate, grade or level. The proposed changes to the scheduling letter would require that contractors report compensation data for each individual employee. Annualized compensation, along with information regarding bonuses, incentive pay, commissions, merit increases, locality pay and overtime pay would be required. Additionally, contractors would be required to produce documentation regarding their compensation policies and practices.

OFCCP argues that submission of employee-level data would allow the agency to perform more detailed compensation analyses in addition to the current threshold tests and pattern analyses. OFCCP notes in the proposed revision to the scheduling letter that the aggregate data was less effective in allowing the agency to analyze compensation, and that this precise data at the employee level will allow OFCCP to pinpoint possible discrimination based on race and sex.

Submitting employee level compensation data has both an upside and a downside.

On the downside, many contractors are concerned about the confidentiality issues raised by employee-level compensation data. The Society for Human Resources Management noted that "compensation data of the nature OFCCP proposes to collect is especially sensitive and confidential, as it necessarily provides insight into an organization’s competitive strategies, internal costs and other valuable business details."

Contractors are also concerned about the time required to assemble and produce employee-level compensation data. OFCCP estimates that its proposed requirement for individual compensation data would decrease a federal contractor’s burden by almost two hours, since aggregated compensation data would not have to be created. However, the Society for Human Resources Management and the College & University Professional Association for Human Resources argue that being required to produce employee-level compensation data would add between 15 and 30 hours to respond to the compensation item alone.

The upside to producing employee-level data is that OFCCP would be able to perform regression analyses that more closely resemble the actual compensation decision-making process used by the contractor. Determinants of compensation, such as time in job or time in grade, educational attainment, licenses and certifications, prior relevant work experience, performance evaluations, and so forth could be controlled for in the regression, thereby making the analysis more reflective of the contractor’s compensation practices and providing a more accurate picture of internal pay equity.

But this upside is tempered by the fact that the OFCCP may not use this employee-level information for regression analyses. OFCCP’s proposed rescission of the Compensation Standards means that they may be moving away from regression analysis when examining compensation, instead continuing to rely on threshold tests with no fixed thresholds and infinitely variable cutoff points. The possibility of abandoning regression analysis is further supported by OFCCP’s repeated statements that it will rely on "broad Title VII principles" when reviewing a contractor’s compensation data for internal pay equity.

It’s likely that the proposed changes to the scheduling letter will be adopted. But even if they’re not, based on the United Space decision, OFCCP can ask for additional compensation data even if the threshold tests and analyses based on broad Title VII principles reveal no violations. Additionally, OFCCP is free to use that compensation information in an effort to find a violation using whatever analysis method it deems appropriate.