Rationale for Compensation Differences
On Wednesday July 2, 2014, The Washington Post ran an article about the pay gap between men and women working in the White House. According to The Post, “[t]he average male White House employee currently earns about $88,600, while the average female White House employee earns about $78,400, according to White House data released Tuesday [July 1, 2014]. That is a gap of 13 percent.” Or, said differently, women earn $0.87, on average, for every dollar earned by men working at the White House.

The White House explained the pay gap (without doing any regression analysis) by having a female spokesperson respond that “even if the aggregate statistics show a gap, men and women in the same roles at the White House are paid similar amounts. ‘At the White House, we have equal pay for equal work,’ said White House spokeswoman Jessica Santillo. ‘Men and women in equivalent roles earn equivalent salaries, and over half of our departments are run by women.’”

When men and women “in the same roles” are compared, most companies and institutions can explain differences in average pay, too.

Pursuant to current OFCCP protocol, though, the 13% average pay gap observed at the White House would be a sufficient difference to prompt the assigned compliance officer to interview the person responsible for establishing the White House’s compensation system and to issue an information request for the line item data on each person working in the White House.

After the submission of summary compensation data in response to Itemized Listing 11, the OFCCP will ask to conduct an interview of the person who can answer questions about contractor compensation practices. The OFCCP previously had been criticized for issuing a follow up compensation information request that requested the same variables of every contractor, but which information request had not been approved through any regulatory process. By conducting an individualized interview, purportedly to understand the contractor’s compensation philosophy and pay practices, the information request would be tailored to the contractor, slightly different in each circumstance, and thus able to withstand a Paperwork Reduction Act challenge.

A typical interview begins with OFCCP asking for the compensation witness’s race and gender, and the questions thereafter transition into the compliance officer’s probing of the basis for compensation differences. Examples from actual interviews include the following:

  • What are the critical factors affecting employee compensation?

  • Are employees eligible for bonuses? What are the criteria for bonuses?

  • Are any employees paid on a basis other than straight salary, including incentive or commission pay?

  • Describe the company’s philosophy regarding pay. Do you have pay grades or pay ranges? How does the company determine how to set someone’s initial starting salary?

  • Who plays a role in setting the starting salary of a new employee?

  • Can employees negotiate for their starting salary?

  • What role does performance play in salary increases? How do you track it?

An employee’s salary rarely is dependent on a single variable, and yet many compliance officers conducting compensation interviews will try to steer a compensation witness into identifying the “primary” factor. In preparing for these interviews, it is important to identify the types of jobs in your company or institution’s workplace and create as comprehensive list as possible of the reasons why differences exist. If the variables you use to set the starting salary of a nonexempt hourly person’s job are different from the factors you would use to set a professional’s job, or an executive’s job, then it is important that you explain those differences to the compliance officer.

Keep in mind that after describing the factors that influence starting salary and increases in pay, the OFCCP is going to use those answers to issue an information request. In at least one interview of which we are aware, a compensation witness explained that the labor market has a lot to do with the company’s ability to set starting salary, as well as the size of any increase in salaries for existing employees. The OFCCP compliance officer’s follow up information request asked the contractor to include a column for labor market, as if that information had been neatly recorded for each person in the data base in a field maintained in the HRIS or payroll system. (That is not to say that companies should offer explanations for pay differences only if those explanatory variables have corresponding data fields neatly maintained in their HRIS or payroll system during an OFCCP interview. To the contrary, as we note below, having great examples of factors that influence pay or affect pay, regardless whether they are quantified, is often very helpful for compliance officers to appreciate).

Interviews like this one, though, are more likely to occur in the future as the OFCCP soon is going to have access to summary compensation data from all contractors, and unless the OFCCP allows employers to upload data by job title, the tool is going to produce average differences in pay, just like the White House pay gap, when differently situated employees are artificially grouped together. OFCCP soon will release its Notice of Proposed Rulemaking (NPRM) on the compensation data collection tool that the President ordered the Secretary of Labor to develop. The NPRM is due out on or before August 6.

The NPRM is likely to generate some controversy. The OFCCP has not been transparent about the purpose for which it wants to collect the data. Hopefully, the OFCCP will be clear in the NPRM in that regard. Using the data to decide who to choose to audit is a completely different use of the data than reaching an analytical conclusion about fair pay from a snapshot of compensation data taken one day in time, but both purposes are fraught with legal concern. If OFCCP uses the data to select companies to audit, it seems to be inconsistent with the constitutional Fourth Amendment requirement of the randomness of the audit selection list the OFCCP generates each year under the existing Federal Contractor Selection System (FCSS). Right now, when the compliance officer sends out a scheduling letter using the FCSS list, the compliance officer has no access to any pre-submitted data. There is no presumption of guilt or innocence, just neutrality as the process begins. If OFCCP uses the collected compensation data to target companies for an audit, the compliance officer's mindset is going to shift away from neutrality to one that presumes noncompliance.

Using it as the legal basis to request burdensome additional data further puts government contractors at a competitive disadvantage in the market when compared to their non-government contractor counterparts who don’t have nearly the regulatory overhead.

Whether the collected data will be used as a selection tool or a way to hone in on alleged discrimination in pay, or whether it will be evaluated by the National Office or by labor statisticians and economists, is yet to be known, but what we have experienced over time is that when the more thoughtful compliance officers have honed in on examples of similarly situated employees making different amounts of pay, and asked the contractor to explain them – whether through data or narrative – the companies are able to explain those differences based on legitimate, nondiscriminatory reasons, and not because of race or gender.

Over time, it seems that the reasons that resonate most with the more thoughtful and experienced compliance officers, are the following:

  1. Differences in job duties

  2. Different skill sets, educational degrees, certifications

  3. Different relevant experience, different total experience

  4. Individual Performance (helps to have those evaluations) and company performance

  5. Differences across departments (or colleges and schools in the academic environment)

Then there are very meaningful differences that are harder to quantify, rarely maintained in any HRIS database, but often play a critical role in salary explanations:

  1. Labor market, including when the internal compensation structure for long-time employees has not kept pace with the external job market for new hires

  2. Acquisition salaries (pre-existing salary structure set up by a predecessor company or seller that has not been fully integrated at the time of the compliance review)

  3. The applicant negotiated for a higher starting salary or the institution found itself in a bidding war against other companies or institutions

  4. Leaves of absence or workforce continuity gaps

Of course, there are many more such examples of plausible, nondiscriminatory reasons for differences in pay among similarly situated employees.

It will be important over the next two to three months for contractors to put some thought into the basis for differences among similarly situated employees in their own workforces so that the OFCCP obtains the benefit of that information in its rule making process. If contractors pull a roster of similarly titled employees with average pay differences, and take a random sample of those, they are likely to develop some very robust examples of why a one-size-fits-all tool is not going to be meaningful, either as a selection tool or an analytical tool.

Either that, or we can hope that the OFCCP will give the government contractors a “pass” for average pay differences of up to 13%, just like the White House average difference in pay. That certainly would fit within President Obama’s admonition to the Secretary of Labor not to direct OFCCP’s enforcement resources towards entities for which reported data suggest no evidence of potential pay violations, but that does not seem very realistic.