January 1997

Workplace Labor Update - OFCCP Targets Compensation: Contractors Beware – January 1997

11 min

The Office of Federal Contract Compliance Programs (OFCCP) of the Department of Labor enforces employment laws applicable to federal government contractors. Several years ago the OFCCP, with great public fanfare, launched its glass ceiling, or corporate management, reviews of government contractors. These reviews focused on advancing minorities and women up the chain of command. Compensation quickly became the key focus of these special reviews and the OFCCP was successful in obtaining a significant number of well publicized, substantial settlements. Perhaps realizing that its increased scrutiny of compensation has produced high profile results and more notoriety, the OFCCP has now incorporated its compensation focus into virtually every routine review. Contractors should expect the agency in any review to examine closely the company's compensation system, particularly as it affects minorities and women.

Contractors in the mid Atlantic region (Delaware, D.C., Maryland, Pennsylvania, Virginia and West Virginia) are particularly at risk, since the OFCCP is there aggressively pursuing novel theories of compensation discrimination. Despite the absence of court review or approval of these theories, the OFCCP has succeeded in obtaining many significant settlements. Several companies in the region have agreed to settlements of over half a million dollars to resolve audits finding compensation discrimination and a much larger number have entered into six figure agreements.

OFCCP's Analysis of Compensation

Obviously, no contractor wants to be in the position of having to agree to such sizable awards. To avoid this unwelcome result, contractors should first recognize the OFCCP's approach to analyzing compensation discrimination and then actively prepare in advance their own compensation studies which hopefully will negate any inference of discrimination, but at the very least, will provide contractors with the opportunity to rectify privately any problems before the OFCCP arrives.

The first step, though, is to understand how the OFCCP is likely to look at your compensation system. Contractors will recall that traditionally two theories can support discrimination findings: disparate treatment and disparate impact. Disparate treatment covers situations where someone is intentionally treated differently because of some protected characteristic such as race or gender. In contrast, disparate impact occurs when some neutral policy adversely affects a protected group. In its compensation analyses, the OFCCP has said that it is utilizing the disparate treatment model almost exclusively. This position may be wise, given the strong arguments that compensation, with its wide range of results, does not lend itself to a disparate impact model.

The OFCCP is not content, however, simply to look at isolated individuals in analyzing compensation. Almost always, the OFCCP will attempt to determine that a pattern and practice of compensation discrimination exists at a particular contractor's facility. Put another way, the agency will routinely search for possible systemic discrimination, where the monetary awards will be significantly greater.

How the OFCCP goes about finding these supposed patterns is controversial, with the agency itself admitting that its approaches have not yet been tested in the courts. In fact, the OFCCP's own Compliance Manual contains no comprehensive methodology for salary analysis. Basically what the OFCCP attempts to do is to sample various job categories to determine whether minorities and females are being paid less in that category. If some number of these disparities exists (typically three quarters or more within an EEO-1 category), the agency presumes that it has established a pattern and practice of compensation discrimination.

Many difficulties plague the OFCCP's conceptual approach. The agency does not require that any disparities in compensation, upon which it would declare a pattern, be statistically significant. In other words, any difference, even an inconsequential one, can trigger OFCCP scrutiny. The courts generally have adopted more stringent standards for analyzing adverse employment actions. In deciding whether a pattern exists, the agency also will typically ignore instances indicating race or gender parity in compensation. It seems clearly illogical in looking for a pattern of compensation discrimination to overlook cases which refute the existence of any such pattern.

Avoidance Strategies

While the theoretical merits of the OFCCP's approach may be questionable and certainly are untested, contractors still need to anticipate how their compensation system will be viewed by the agency. To begin with, the OFCCP will inquire of the contractor whether jobs are classified similarly for compensation purposes. Most commonly, the agency will seek to determine, by interviewing company management and by reviewing company compensation procedures and organizational charts, what groups the contractor has supposedly conceded may legitimately be compared for compensation purposes. The OFCCP will examine whether the contractor has placed certain jobs in groups suitable for analysis such as:

  • salary grades
  • salary bands
  • same job title (for example, Vice President)
  • jobs groups from the affirmative action plan.

If the agency finds such groupings exist, the OFCCP will presume that the contractor has admitted that the groups are appropriate for analysis.

Contractors must take great care in defining groups suitable for comparison. Otherwise, they can be held liable, in significant monetary amounts, for salary differences which may have nothing to do with race or gender discrimination. Contractors should review all written materials related to compensation to insure that they accurately reflect where jobs are comparable and may be combined for analysis. For example, many companies are exploring broadbanding to replace multiple pay grades, as a means of affording managers more flexibility in compensation decisions. However useful this mechanism may be, it poses serious risks to contractors who do not make clear that not all the jobs in a broadband are appropriate for comparison. If you do not do this, the OFCCP may presume that all broadband jobs are indeed comparable and will calculate liability accordingly. The effect may well be to increase greatly your potential exposure.

Contractors also should review any reference points (for example, minimums, maximums, midpoints, market reference points) included in their compensation systems. The OFCCP will scrutinize such reference points carefully and may use them as benchmarks for determining if minorities and females are compensated fairly. For example, if you use midpoints, be forewarned that the agency will analyze what proportion of minorities and females are paid at or above midpoint compared to their white and male colleagues. Be sure, as well, to analyze carefully any employees within a group that are either under any established minimums or over any maximums (outliers) for a particular salary grouping.

Additionally, contractors should take care to parcel out any subgroups, such as sales forces, where compensation may be driven by unique incentives. Otherwise inclusion of these groups into larger groupings may increase contractor liability.

Once you have ascertained what groups should be constituted for salary comparison purposes and clearly identified them in your written materials, supported, if possible, by organizational charts and job descriptions, you should carefully train your managers so that they are well aware of what groups should be looked at for salary comparisons and internal equity decisions. In audits, the OFCCP will interview these managers about your compensation system and, if information is provided which is inconsistent with the groupings the company has previously established, difficulties may result. In any event careful delineation of the groups available for comparison and management training are key.

Once the OFCCP decides what groups the contractor has established for salary purposes, it will analyze those groups to assess whether minorities or females tend to be paid less than their white or male counterparts. The agency will typically look at present salaries, starting salaries and interim adjustments. For each group the OFCCP calculates the median salary for minorities and females and their white and male counterparts. If the medians for minorities or females are lower, expect the OFCCP to use this disparity, whether it is significant or not, as a sample in constructing a pattern and practice of systemic compensation discrimination. As noted before, the OFCCP's disregard of statistical significance undercuts the validity of its approach, as does the agency's typical reliance on a median approach. Many statisticians would argue that looking at means, rather than mediums, would be more productive. Further troubling is the lack of any uniform standard used by the OFCCP of how many samples are actually necessary to constitute a pattern and practice. Finally, contractors should be aware that, rather than limit recovery to employees actually studied within a particular sample, the OFCCP will typically seek relief for all minorities or women within the salary grouping.

The reality is that such disparities in compensation medians, standing alone, are unreliable predictors of pay discrimination. What they ignore are all the actual factors that determine legitimately what someone should get paid: relevant educational attainment; pertinent experience, both at the contractor and previously; length of time in the position and in the salary grade; job content; special expertise; the line of business or organizational unit where the employee works; market considerations and, of course, performance.

When presented by the OFCCP with the simple type of analysis outlined above, contractors should aggressively explore whether the differences in median pay between particular groups really mean anything. First, you should determine, using the variety of tests available, whether the OFCCP's results are even statistically significant. Then contractors should analyze the incumbents in the groups under study to see why salary differentials exist. Examine whether any of the factors just discussed related to qualifications or performance explain the differences and, thereby demonstrate the absence of any discrimination.

Contractors can accomplish such analyses in a variety of different ways. They can compare employees of different races or genders whose attributes _ date of hire, skill level, job responsibilities _ suggest comparability. This device is known as a cohort analysis. The intent in doing this analysis is to show that job-related factors explain any differences in compensation. For example, many corporate reorganizations or mergers result in disparate employees being put together for salary purposes or with employees having their salaries red-circled, that is, maintained at their current level even though their present job responsibilities do not warrant that salary level. Cohort analysis can ferret out these factors and explain their impact.

Another, more sophisticated and potentially very useful analysis involves multiple regression. Without going into the details of this complex statistical tool, suffice it to say that regression analysis can consider the impact on salary of many different variables, including education, experience and performance, and help establish that neither race or gender negatively affects compensation. Regression has the additional advantage that the OFCCP presently lacks the resources to do such analyses in connection with every audit. Normally the agency will only commit to such analyses in the event of enforcement proceedings. A well done regression analysis can yield effective clout in dealing with the OFCCP on compensation issues.

In constructing regression analyses, contractors often will do well to determine and include all the factors that contribute to compensation decisions. Recognize, however, that the OFCCP is more likely to be persuaded where the factors presented are objective, such as educational attainment or length of experience, rather than subjective, such as performance reviews.

The analyses discussed thus far will help to explain differences in the present compensation of employees. As discussed previously, also expect the OFCCP to assess both starting salaries and subsequent adjustments. The factors that contractors will want to consider for these inquiries are somewhat different than the ones already discussed. For starting salaries, contractors should review any job content assessments, such as point evaluation systems, which help establish starting salaries, as well as other contributors such as external market factors and prior salary. Where prior salary is used to explain starting salary differences, expect the OFCCP to be skeptical, given the agency's theory that minorities and women may lack bargaining clout. Prior salary, particularly where salary negotiations are well documented, however, can be a legitimate factor in setting initial compensation.

With respect to salary increases, the agency attempts to determine if the rate of compensation adjustments accorded to minorities and females is equivalent to whites and males. Should differences be found to exist, contractors will want to analyze whether factors such as the employee's promotional history and performance record, rather than impermissible considerations of race or gender, explain slower rates of salary progression.

Contractors may well view all of this analysis as an unwelcome and onerous task. Unfortunately, the alternative may be to fund an even more onerous settlement agreement with the OFCCP. Most beneficial to contractors will be a careful review, in advance of any OFCCP audit, of their compensation systems and their impact on minorities and women. By doing an advance study contractors can thoughtfully define the groups for comparison, perform comprehensive analyses, and examine the results. If any anomalies exist and cannot be explained, they can be corrected internally and confidentially by the contractor, rather than be the subject of an OFCCP press release. Indeed, the contractor who has performed its own salary analysis and demonstrated the non-discriminatory nature of its compensation system can use this study, in the event of an OFCCP audit, to dissuade the agency from making any adverse findings with respect to compensation. If you do such salary studies, though, be sure to involve counsel to maximize the claim of privilege.


The OFCCP has clearly identified compensation as a principal focus for compliance reviews. While the agency's approach is novel, in some respects questionable, and unchallenged thus far in enforcement proceedings or in the courts, contractors should be prepared for thorough scrutiny of their pay systems, in the event of an OFCCP audit. Best served will be those contractors which have already done their own salary studies, made any necessary adjustments, and can demonstrate the absence of any discrimination.