NELI Mid-Year OFCCP Update by John Fox - Maly Consulting LLC

Human Resource Data AnalysisEEO/AA ComplianceOFCCP AuditsN O T E SEvent Sponsor: National Employment Law Institute (NELI)Location: WebDate: Thursday, March 24, 2011Presenters:John C. Fox, Esq.Fox, Wang & Morgan P.C.San Jose, CaliforniaScribe:Carolyn Roehlfor Maly Consulting LLCEvent Topic:OFCCP Mid-Year Update WebinarOn March 24, 2011, John C. Fox presented an OFCCP Mid-Year Update, sponsored bythe National Employment Law Institute (NELI). Mr. Fox is President and a founder of Fox,Wang & Morgan, P.C., an employment law firm in the California Silicon Valley. Mr. Foxpreviously held the position of Executive Assistant to the Director of the OFCCP, where hewas responsible for all enforcement and policy matters. These notes provide a quick lookat topics covered by Mr. Fox that shed light on the current activities and direction of theOFCCP.1. Background of Recent OFCCP Compensation Activities. In an opening discussionthat he titled “How We Got the Compensation Bus into the Ditch Where we CurrentlyFind Ourselves,” Mr. Fox noted that when the current Administration in Washington,D.C. lost the Paycheck Fairness Act, it designated the OFCCP to take the lead inferreting out, investigating and prosecuting what it deems to be unfair pay practices inthe American workforce. Taking that into consideration allows one to see an orderedlogic to the actions taken by the OFCCP during the past year or two.2. Recent actions taken by OFCCP Director Patricia Shiu. Mr. Fox talked about thestrategic purpose and impact of recent actions taken by the OFCCP.a. Rescission of Directive #285, Active Case Management (ACM) Procedures.OFCCP Directive 292, dated December 2, 2010, rescinded the ACM inaccordance with a recommendation by the President's National Equal PayEnforcement Task Force. Fox stated that the “ACM harvested . . . fewcompensation audits.” Directive 292 forthrightly states that the ACM “causedOFCCP to narrow the focus of its enforcement efforts” and “eroded OFCCP'senforcement authority.”California Office: 371 Bel Marin Keys Blvd. Suite 240 Novato, CA 94949 415.883.7058 Fax 415.883.7082Maryland Office: 20203 Goshen Rd. Suite 292 Gaithersburg, MD 20879 301.253.3183 Fax 301.253.9977www.malyconsulting.com

OFCCP Mid-Year UpdateMarch 24, 2011 Page 2 of 6b. Publication of Directive #295, Active Case Enforcement (ACE). PublishedDecember 16, 2010 and effective January 1, 2011, ACE replaced OFCCP'sprevious “management” procedures with new “enforcement” procedures forscheduling compliance evaluations from the Federal Contractor SchedulingSystem (FCSS). Fox identified the following three components of ACE as beingnew or changed procedures:(1) Every 25 th Federal contractor will be selected by FCSS for a full compliancereview (replacing the previous 50 th under the ACM).(2) “Indicators” of potential discrimination may be individual and/or a class of asfew as two victims (replacing ten victims under ACM).(3) OFCCP must document compliance with Executive Order 13496, theObama order requiring contractors to notify employees of their NLRA rights.c. Proposed Rescission of Voluntary Guidelines for Self-Evaluation. On January 3,2011, the OFCCP proposed rescission of its 2006 Voluntary Guidelines for Self-Evaluation of Compensation Practices under Executive Order 11246 (EO 11246).Fox noted that few Federal contractors accepted or participated in the selfevaluationoption, which makes this rescission of little or no consequence.d. Proposed Rescission of Interpretive Standards for Systemic CompensationDiscrimination. Also on January 3, 2011, the OFCCP proposed rescission of its2006 Interpretive Standards for Systemic Compensation Discrimination, whichoutlined OFCCP's enforcement standards for meeting the requirements of EO11246. Fox noted that this document had served its purpose, which was to“retire” the Dubray Analysis previously used by the OFCCP to detect evidence ofsystemic pay discrimination. Setting aside the Dubray “trigger test” cleared theway for the OFCCP to employ the more in-depth Multiple-Regression Analysesneeded to investigate and successfully prosecute what it deems to becompensation discrimination. Multiple Regression Analysis methodology is key,for only it has withstood the rigors of courtroom review, including review by theU.S. Supreme Court.e. Publication of OFCCP Internal Directive 289. Recently, news leaked out that onJune 4, 2010, the OFCCP issued Directive 289, an internal-only directive thatputs in place a “2or2" or “double-deuce” test to replace the “trigger” test, longused during desk audits to justify requesting more pay data from a contractor.Fox surmised that the “2or2" test is not a pay discrimination test, but is rather afiltering device that will be used by the OFCCP to determine which contractorcompensation data is interesting enough to expend its resources on.Notes courtesy ofSimplifying compliance —attending meetings so you don’t have towww.malyconsulting.comMay 2011California Office(415) 883-7058Maryland Office(301) 253-3183

OFCCP Mid-Year UpdateMarch 24, 2011 Page 3 of 6Under the “2or2" test, auditors separate a contractor's Paragraph 11 pay data into“similarly situated” groups (such as by job title) and then must use OFCCP'sinternal electronic database system to compare the pay of the employees withineach group. If only one job title has a 2% or $2,000 difference in pay among theemployees in that group, OFCCP deems that a more in-depth investigation of thecontractor's entire workforce is justified. Fox cited the following paragraph fromDirective 289 to describe the result of “failing” the “2or2" test:“Since at least one pay division shows a pay differential in averagecompensation of at least two percent or $2,000, it provides the basis torequest employee level data for the entire workforce to conduct a more indepthanalysis.”Fox stated that contractors had “confounded” Paragraph 11 compensation datarequests by the way in which they submitted the data. The new “2or2" system isthe OFCCP Director's way of “reducing the difficulty” of going on site andobtaining the meaningful data needed to do regression analyses. Since the“2or2" system will identify most pay data collections as being potentiallydiscriminatory, the OFCCP will be positioned “to reel in virtually every, if not all,establishments for top-to-bottom compensation reviews.” Fox related that theOFCCP is also adding Ph.D. compensation analysts to the staff in its Washington,D.C. National Office. It is becoming more sophisticated in its capacity to analyzedata and is “now a viable threat.”f. OFCCP Requests for Additional Compensation Data. When the “2or2" testjustifies further investigation of a contractor's compensation data, Directive #289directs the compliance officer, during the Desk Audit stage, “to send a letter to thecontractor requesting . . . additional data for each non-bargaining unit employeein the workforce.” (NOTE: Emphasis was in original document - bargaining unitdata are off limits.) Contractors around the country have received various versionsof data requests that are in addition to the Paragraph 11 audit submission. Somerequests have contained 13 items, while others have contained as many as 16items. Fox listed the following items that are contained in the 13-Factor (miniregression)Data Request:(1) Employee ID number(2) Gender(3) Race/Ethnicity(4) Job Title(5) Grade/Salary Band(6) Date of Hire(7) Date of last change in grade/job title(8) Part-time vs. full-time status(9) Exempt vs. non-exempt status(10) Annual base salary or hourly wage for full-time employees during thereview periodNotes courtesy ofSimplifying compliance —attending meetings so you don’t have towww.malyconsulting.comMay 2011California Office(415) 883-7058Maryland Office(301) 253-3183

OFCCP Mid-Year UpdateMarch 24, 2011 Page 4 of 6(11) Hourly wage and number of hours worked during the review period forpart-time employees(12) Other paid allowances, if any, such as commission pay, overtime pay,bonus pay or shift differential. Report each allowance in separate datacolumns.(13) SSEGs, if developedAppendix B to OFCCP Directive #289 contains a 15-Factor Request, whichincludes the following additional or altered items, as compared to the 13-FactorRequest:(1) Job Group (AAP) of job title(2) Department(3) Annual base salary or base hourly wage (excluding overtime, bonuses,incentives)(4) Work shift(5) Employee location; and(6) All other factors not previously listed that impact compensation for yourcompany.Mr. Fox called into question OFCCP's authority to request data as they are nowdoing under Directive #289. The Paperwork Reduction Act (PRA), enforced by theOffice of Management and Budget (OMB), regulates and effectively limits whatgovernment agencies may collect. OMB has approved OFCCP's Notice of DeskAudit letter and its attached 11-question itemized listing. However, Fox notes thatthe 13, 15 or 16 listings are not included in OMB's list of approved OFCCPdocuments. Nonetheless, recent court cases have resulted in conflicting rulings asto whether OFCCP has the authority to request compensation data over andabove the OMB-approved 11-question itemized listing.g. How to Properly Analyze Compensation Data. Mr. Fox's advice:(1) Catalog facts - capture all factors that affect pay that can be digitized.(2) Create an inexpensive “limited database” (cloak some in attorney-clientprivilege?)(3) Expand regression factors if discrepancies in pay persist in factors alreadyanalyzed(4) Check initial compensation(5) Laboriously seek non-discriminatory reasons to explain away discrepancies ina file-by-file review, if necessary(6) If pay discrepancies persist: Check procedural defenses, bring in the ChiefFinancial Officer, and lastly, get out the checkbookh. Ideas for Side-Stepping or Shortening On-Site Audits. Fox provided four ideasthat might be of use in exercising control during on-site audits:Notes courtesy ofSimplifying compliance —attending meetings so you don’t have towww.malyconsulting.comMay 2011California Office(415) 883-7058Maryland Office(301) 253-3183

OFCCP Mid-Year UpdateMarch 24, 2011 Page 5 of 6Idea 1:Idea 2:Idea 3:Idea 4:Ask the OFCCP auditor which data sets failed the “2or2" test andprovide only that information.Articulate upfront the non-discriminatory reason(s) for the difference inpay identified by the “2or2" test. Set out the data reason(s) on an Excelspreadsheet to make it concise and easy to understand.Populate only a portion of data and submit it for a “Mini-RegressionAnalysis.”Refuse to submit additional compensation data and take the risk that theauditor will come on site.i. Additional Information. Fox added the following additional information worthnoting:(1) OFCCP only has a right to data that you already have available; it cannotmake you create data over and above what you already have.(2) So far, OFCCP field office personnel are not carrying out the heavy-handedorders from Washington, D.C. in every case. At the present time, complianceofficers are not required to come on site.(3) Send compensation data to OFCCP auditors only for employmenttransactions that occurred in the two years previous to the receipt date of theNotice of Desk Audit letter.(4) Consider sending a letter to OFCCP asking what it will look at while on site.(5) The Federal Contractor Scheduling System (FCSS) will select every 25 thFederal contractor for full on-site audit. Ask upfront if you are the 25 thcontractor.(6) OFCCP does not have authority to investigate discrimination under theVietnam Era Veterans Readjustment Assistance Act of 1974 (VEVRAA), but theagency is currently pursuing changes that will allow it to evaluate whethercertain protected veterans are being discriminated against.(7) Take care of minor technical discrepancies that might indicate violations orpotential discrimination immediately while the auditor is on site. There is agood chance the auditor will close the audit rather than draw it out.(8) The Dukes v. Wal-Mart Case has focused attention on fair pay issues. Thiscase is still pending. If the U.S. Supreme Court grants class status to plaintiffsNotes courtesy ofSimplifying compliance —attending meetings so you don’t have towww.malyconsulting.comMay 2011California Office(415) 883-7058Maryland Office(301) 253-3183

OFCCP Mid-Year UpdateMarch 24, 2011 Page 6 of 6in the Wal-Mart case, this will likely have substantial impact on policy in thefuture.(9) The OFCCP's Office of the Solicitor staff has become more active and isagain vigorously filing cases rather than primarily serving as legal advisorsand counselors, as it did under both Presidents Clinton and Bush.###Notes courtesy ofSimplifying compliance —attending meetings so you don’t have towww.malyconsulting.comMay 2011California Office(415) 883-7058Maryland Office(301) 253-3183