The Office of Federal Contract Compliance Programs’ crackdown on pay discrimination means more contractors are probably focusing on their compensation practices. Yet, some will have to consider the legal implications of making post-Ricci gender-or race-based salary adjustments after discovering unjustifiable pay disparities, an attorney and affirmative action consultant told Bloomberg BNA.

“The OFCCP is committed to pursuing compensation discrimination within the federal contracting community, but pay disparity is a complex issue,” Dean Sparlin, Jr. of Sparlin Law Office, PLLC said in an interview at the National Industry Liaison Group's July annual conference in New York. 

I spoke with Sparlin after he participated in a panel discussion which I attended. He also responded to a follow-up email regarding the interview. The conference’s panel highlighted practitioners’ experiences with compliance audits conducted under the OFCCP’s new procedures for reviewing contractor compensation systems and practices. 

Agency Focused on Pay Equity 

The OFCCP has adopted new approaches to review pay data. Directive 307 allows compliance officers more flexibility in assessing contractors' compensation systems and practices, while the current scheduling letter and itemized listing instructs contractors to submit compensation data on base salary or wage rate, incentive pay, merit increases, bonuses, commissions and overtime pay during an audit. 

However, the regulations afford contractors the opportunity to examine and adjust, if necessary, their compensation practices and systems in advance of an OFCCP audit. 41 C.F.R § 60-2.17 (b)(3) states that contractors “must perform in-depth analyses of … [c]ompensation systems to determine gender, race- or ethnicity-based disparities.” 

As a panelist, Sparlin advised contractors to perform a compensation self-audit under privilege. The self-audit may reveal significant statistical disparities with compensation for women or minorities that can’t be explained by legitimate and nondiscriminatory factors, so the employer may need to consider salary adjustments for the affected individual or groups, the panelists said. 

Audit May Reveal Adverse Results

“There’s a legal backdrop to gender-or race-based salary adjustments that is becoming more fleshed out in the courts and more of a challenge for employers that implement salary adjustments based on race and gender,” Sparlin said during the panel discussion. 

In Ricci v. DiStefano, the U.S. Supreme Court established a high bar for compensation adjustments targeted by gender or race, he said. Although the case dealt with promotions, “the ruling contained some broad language that also applies to compensation,” Sparlin told the audience. The ruling holds that an employer that “makes race-conscious--and by extension--gender-conscious employment decisions, which includes adjustment in pay, must have a strong basis in evidence for its rationale for taking those race-or gender-conscious measures.”

Others May Sue 

His panel presentation also cited Rudebusch v. Hughes in which male professors sued a university for discrimination after officials implemented a uniform pay raise for women professors that failed to include the male professors. If an employer finds a gender-based pay disparity with women workers and decides to give the employees raises and none to the men, “then you may have a problem” Sparlin said. 

Other race, ethnic or gender groups may file a discrimination complaint against the employer because of the pay adjustments. “This is a pretty awkward place for an employer, arguing to a judge that it had a strong basis in evidence that the company was discriminating against certain workers,” he said during the panel discussion. “In Rudebusch, the male professors were allowed to go forward with some of their claims. You think you have fixed one problem, but then you have another one,” the Virginia-based attorney said. 

Employers can address pay disparity without relying on gender-and-race conscious decisions. He advised contractors to look at factors that correlate to gender or race, but are legitimate and nondiscriminatory decisions. “For example, if you have certain jobs that are female-dominated and tend to be on the lower-pay scale, then raise the pay for those jobs. You may see a close in the pay gap,” Sparlin added. 

Bloomberg BNA: You talked about the “strong basis in evidence” standard in Ricci. What would constitute a strong basis in evidence in an OFCCP context?  Would a show cause notice or conciliation agreement hold up as evidence? Or just the mere fact that the compensation self-audit revealed significant statistical disparities is enough?

Sparlin: A “strong basis in evidence” would be evidence sufficient to prove past compensation discrimination and thus to justify a remedy.  Whether the source of that evidence is an OFCCP audit, a lawsuit, or a self-audit is not as important as the quality of the evidence itself.  

A statistical disparity alone may not be enough if there is not persuasive evidence that the disparity was actually caused by unlawful discrimination.  The dilemma for an employer, as I have pointed out, is that the employer has the burden of putting forth and advocating the strength of this self-incriminating evidence.  

Even in an OFCCP audit or lawsuit, there is typically a conciliation agreement or settlement in which the employer denies liability.  If the employer stands by such a non-admissions clause, this denial of liability could undermine the employer’s simultaneous claim that the evidence is “strong.”

Bloomberg BNA: On your presentation slide for legal considerations on pay adjustments, you listed “communication to employees.” I think you were about to discuss this bullet point, but the panel had to move on. What’s the issue here? 

Sparlin: Although I did not have time to discuss this topic, it was touched upon by some of my co-panelists.  The most important thing to remember is that compensation is a sensitive issue.  That sensitivity is not just legal.  Business considerations, such as impacts on company finances and employee morale, are also important.  

When compensation adjustments are made, an employer should consult an attorney to shape communications that minimize legal risk while satisfactorily anticipating and addressing issues that employees may raise.  This is particularly important if the adjustments are made outside the usual merit increase cycle.

Bloomberg BNA: What are the legitimate and nondiscriminatory factors that affect compensation which contractors sometimes overlook during a self-audit compensation analysis?  

Sparlin: The categories that you typically think of are experience and education. However, in the workplace, there are unique skills that may be difficult to quantify, such as certain professional certification and security clearances related to government contracts. As a result, contractors really need to look at their jobs and decide which unique factors are valued when you are looking for workers and when you decide what to pay them. 

Bloomberg BNA: Your co-panelist, an attorney, stated that she had been involved with some audits in which the agency had challenged certain factors that the contractor said are legitimate and nondiscriminatory measures in setting compensation. What are the circumstances that would cause such a challenge? 

Sparlin: There are a couple of reasons as to why this might happen. One would be if the OFCCP believes that there is some subjectivity or some basis to believe that those factors themselves might be exercised in a discriminatory fashion. The classic example is a job-performance rating. 

The agency also might question the use of a factor if its investigation showed that the contractor didn’t consider the factor in the compensation process. For instance, you have written policies about how you determine compensation, but the factor is not listed. Another example may involve a compliance officer telling an employer that its compensation manager or human resources official never mentioned the factor during interviews at the start of the audit. 

Bloomberg BNA: Any practical advice for contractors that have to submit compensation data for a compliance audit?

Sparlin: Accuracy is paramount. You should make sure that the compensation database has been thoroughly checked. Next, strongly and meticulously present your compensation structure to the agency, including how you group your own workforce under your self-audit analysis of compensation. Those are the two key things you need to consider. 

Bloomberg BNA: Any final thoughts?

Sparlin: We still don’t have a good thorough idea of where the agency’s compensation enforcement is going, because, so far, we really haven’t had any OFCCP-compensation cases that have risen to the litigation level.