• OFCCP Modifies Multi-tiered Compensation Analysis: New Method Broadens Platform for Findings of Disparity
  • June 26, 2008
  • Law Firm: Seyfarth Shaw LLP - Chicago Office
  • The Office of Federal Contract Compliance Programs (OFCCP) has modified its methodology for evaluating contractor compensation practices. Compensation disparities affecting minorities and women continue to be a principal focus of the OFCCP’s compliance reviews. The Agency last published guidance regarding compensation evaluation procedures in June, 2006 when it adopted a three-phase approach to its process. The updated method will continue to follow this multi-phased approach, however, several of the models used to evaluate compensation have changed.

    Update to the 30-30-3 Test

    Until now, the OFCCP most commonly used what is generally referred to as the 30-30-3 test as the first step in its multi-phase compensation evaluation process. The Agency’s new method uses an analysis identified as the 30-10-3 test. The tests are similar in that each evaluates average pay differences between race and gender groups based upon certain pay divisions (job group, job title, grade, etc.). Also, each uses a tiered approach to evaluating compensation. There are important differences, however, in key prongs of the analysis.

    First, the 30-30-3 test uses a trigger equal to an average pay difference of 2% between gender or race groups within a pay division, whereas the new test uses the average pay difference of 5%. For both tests the pay difference must negatively affect 30 females or minorities. Also, contractors formerly had the authority to select the pay division used to present their analyses to the OFCCP. Using the new test, the OFCCP will always use job groups as the pay division when it conducts its analyses. This means it is critical that contractors closely reexamine their job groups to ensure they are truly representative of jobs with common functions and pay scale.

    Second, in the new test the number of affected individuals falling into the negatively affected pay division must make up at least 10% of the entire workforce for that gender or racial category. The old test’s threshold was set at 30%. The last tier of 30-30-3 test remains unchanged; the OFCCP will determine if the percentage of the total workforce in the affected job group is at least three times as large as the percentage of males and non-minorities falling into a job group where the males or non-minorities are negatively affected. Failing the 30-10-3 test will trigger the OFCCP to investigate further.

    It is expected the OFCCP will, from time to time, re-examine the set of triggers it uses to evaluate compensation practices based on their current findings. We suspect the Agency may not have found as many instances of systemic compensation discrimination as it initially hoped with the use of the 30-30-3 test. The new thresholds are more sensitive and will likely result in the OFCCP’s identifying more contractors alleged to have systemic compensation discrimination. Contractors should consider conducting an audit or self-evaluation of their compensation analysis practices, especially those who are not currently using job groups in their pay analysis.

    Cluster Regression Analysis

    If a contractor fails the 30-10-3 test, the next phase in the OFCCP’s evaluation process is a cluster regression analysis. Like the former methodology, the Agency may request more detailed compensation data to perform this more detailed analysis. Data categories the Agency may request include the following:

    • Employee ID number
    • Gender
    • Race
    • Date of hire
    • Date in position
    • Date of birth
    • Current salary
    • Part-time / Full-time status
    • Exempt / Non-Exempt status
    • Job title
    • Salary grade or band level
    • Employee location

    Using its former methodology, the Agency would conduct its analysis using “clusters” of small pay divisions based on similar pay and apparent job responsibilities. Should cluster regression fail to explain pay disparities, contractors should expect the Agency to proceed with Phase 3, a full scale regression analysis.

    Action Items

    • Audit current compensation analysis practices to determine if your results will closely match OFCCP findings in the event of a compliance evaluation.
    • Consider conducting a tiered test as a component of standard compensation analysis.
    • Consider reevaluating the pay divisions used to conduct compensation analysis to reflect job groupings.
    • Examine existing job group structure to ensure jobs are appropriately grouped according to job function and pay scale.
    • Assess information obtained from any self-evaluation to assess whether any remedial actions are warranted.