Federal Contractors Should Collect the Most Common Compensable Factors

Federal contractors need to document the most common compensable factors they use to set salaries because the Office of Federal Contract Compliance Programs (OFCCP) will want to see these factors if the agency conducts a compensation interview, according to speakers at the Society for Human Resource Management Employment Law & Compliance Conference 2022 on March 28 in Washington, D.C.

The most common compensable factors are time in job, time with company, external experience, education and certifications, said Thomas Carnahan, manager, compensation services, for Berkshire, based in Columbia, Md.

Federal contractors should start collecting data on these factors and consider a proactive pay equity audit as well, he said.

Lynn Clements, Berkshire's director, audit and HR services, added that a pay equity audit should be protected by the attorney-client privilege, despite the OFCCP's recent compensation directive.

Federal Contractors' Obligations

Supply and service federal contractors must perform in-depth analyses of their employment practices, including compensation systems, each year, Clements noted. A federal contractor must evaluate compensation systems to determine whether there are gender-, race- or ethnicity-based disparities.

As of this year, federal contractors must certify, by June 30, that they have an affirmative action program for each establishment and must do so each year thereafter, if they are in compliance and have one per establishment.

For now, federal contractors don't submit pay data except during a compliance review complaint investigation or if they are in states such as California or Illinois that require certain employers to submit pay data. Clements thinks that during the Biden administration, federal contractors will again have to submit pay data annually. Pay data once had to be submitted at the federal level due to a revision to the EEO-1 form during the Obama administration—a change the Equal Employment Opportunity Commission decided not to renew during the Trump administration.

At least twice a year, the OFCCP sends a corporate scheduling announcement list of entities that might be audited, Carnahan noted. Once federal contractors on the list receive a letter informing them that they are to be subject to an initial desk audit, there are 20 items they must answer. Item 19 concerns compensation data.

Some federal contractors provide the agency exactly what it asks for in the desk audit and no more in response to Item 19. But the OFCCP typically follows up to ask for more information, Clements noted, such as "other compensation earned," which includes bonuses, overtime and shift differentials.

Compensation Interview

If the OFCCP then conducts a compensation interview—and such interviews are being conducted more frequently these days—usually the OFCCP wants to know the role of the person who is representing the company and how long that person has been there. Often, the person speaking on behalf of the company is from payroll. That person needs to be able to articulate the company's compensation system and retrieve documents that back up that system. Many smaller contractors don't have structured compensation systems, Clements said.

The OFCCP may ask how many compensation systems the federal contractor has. For example, a contractor might have one compensation system for unionized employees at the organization and another system for nonunionized employees, Clements explained.

The agency is almost certain to want a lot of information about starting pay, as pay gaps often are attributable to low starting pay, she added. Carnahan agreed, saying at some companies there is "wobble," where managers lowball new hires' pay or base it on the new hires' prior salary, a practice he said tends to have a disparate impact on women and minorities.

If the federal contractor responds that pay is lower for certain employees because of one of the main factors for compensation—such as external experience, education and certification—the organization needs to have the information readily available.

Carnahan said a federal contractor should expect the OFCCP to ask for information the contractor didn't provide at the desk-audit stage, including details about the contractor's performance management system. If the federal contractor found a pay disparity at some point, the OFCCP will want to know how it communicated that information to the C-suite.

In addition, he said the OFCCP will be on the lookout for systemic pay discrimination and whether women and minorities have been "steered" into lower-paying jobs.

Think through the answers the federal contractor might be expected to provide, Clements recommended.

Proactive Steps

The federal contractor can provide the agency with a narrative explaining the employer's compensation policies.

Federal contractors also may want to be more proactive and run statistical analysis, such as regression analysis performed by a statistician, to look at the broader perspective and remediate any issues, if there are any, taking job factors and different employee levels into consideration.

However, Clements cautioned, "This is complicated. You don't want to dabble in it."