1. Compensation Compliance for Federal
Contractors: The Rules Have Changed!
As challenging as it sometimes might be, federal
contractors must stay abreast of all new rules and
regulations and take them seriously. Failure to do
so could result in fines, interest, and penalties
going back several years. The government can also
suspend existing contracts and prohibit you from
bidding on future government contracts.
But federal contractors should also understand that
having a compliant compensation program in place needn’t just be a defensive
move. A compliant compensation program is a huge advantage to a company when
it comes to building their business and bidding on new contracts.
What Rules Have Changed?
The Office of Federal Contract Compliance (OFCCP) is the operating arm of the
Equal Employment Opportunity Commission (EEOC). As part of the United States
Department of Labor, the OFCCP is responsible for ensuring that federal
contractors follow the compliance requirements. Since the mid 1990’s, OFCCP
audits have focused on items such as I-9′s, underutilization of females and
minorities, employment/hiring practices, and employment/termination reviews.
In 2006, the OFCCP created suggested compensation audit guidelines for federal
contractors. In 2010, they rescinded those guidelines, stating that the guidelines
didn’t give the OFCCP the ability to conduct a thorough compensation analysis.
Beginning in 2010, the OFCCP expanded their audit focus to include
compensation programs in order to discover disparate pay practices under Title
VII. The Secretary of Labor suggested that 20 to 40 percent of all OFCCP financial
settlements would likely be based on compensation discrimination.

2. As a comparison, in 2009 there were two compensation cases. In 2010, the number
jumped to 10 compensation settlements. In the first six months of 2011, the
OFCCP initiated 44 financial conciliation agreements and more than doubled the
financial remedies.
Companies should expect a rigorous and thorough examination of their
compensation programs. The three major focus areas include:
 Expanded compensation data elements
 W2 & 1099 inclusion for analysis
 Disparate pay practices
Expanded Compensation Data Elements
The OFCCP has significantly expanded the data they may require of companies.
Reportable data elements will now include base salary, holiday pay, overtime pay,
any other paid leave, hourly wages, shift differential, commissions, stock options,
short- and long-term incentive plans, merit increases, bonuses, and health and
retirement benefits.
Potential reporting categories may include EEO-1 job categories, Affirmative
Action program job groups by salary bands, Standard Occupational
Classification codes, salary bands within EEO codes, individual job titles or
individual job titles within EEO-1 job categories.
The OFCCP also allows contractors to provide additional data on factors to
determine compensation. This additional data can include education, past
experience, duty location, performance ratings, department or function, salary
range and grade titles. While no immediate requirement exists for these particular
items, the OFCCP does not preclude the necessity to collect this information if
they find your submission “incomplete” or containing disparate impact issues.
W2 & 1099 Inclusion for Analysis
The OFCCP didn’t require the inclusion of 1099’s for analysis in the past but that
has changed. They are concerned about employees being misclassified as 1099
contractors. Contractors will have to report all of their W2 and 1099 income
compensation data going forward.

3. Disparate Pay Practices
There may be many legitimate reasons why two employees with the same job title
or job grade are paid at different levels in your company. But as a federal
contractor, you must be ready to defend this disparity if there is more than a $2,000
(or 2%) difference in salary. For example, if the higher paid employee works in
San Francisco while another works in Charleston, S.C., the significant difference in
the Cost of Living Adjustment for those two regions might justify the disparity.
Perhaps it is a difference in education or experience or some other factor.
Regardless, the OFCCP will require a sound explanation in order to defend the
disparity.
Enforcement Actions
The OFCCP is no longer “screening/testing” for potential pay practice violations.
Instead, the OFCCP’s new audit framework – Active Case Enforcement – allows
for the collection of all of your compensation data.
So, how is all of this compensation data collected? First, beginning in February
2012, the OFCCP plans to launch a web portal data collection tool. This tool is
expected to impact about 100,000 federal contractors. Those selected will be
required to annually report all compensation data to the OFCCP through this web
portal. Second, the OFCCP has a new 2012 audit scheduling letter that calls for the
same data and further expands the scope of the required information. Third, the
OFCCP is also expanding its relationship with other government agencies for
compliance enforcement. For example, in 2011, they announced cooperative
efforts with the IRS to review and report employees who are potentially
misclassified as 1099 contractors.
Additionally, also proposed is the requirement for contractors to submit their
compensation data as part of any new Request For Proposal (RFP) process for
submission on future federal contracts.
Those federal contractors who used to gamble and wait to see if they were audited
before collecting, analyzing, and reporting data no longer have that option.
What Potential Problems Do You Face?

4. The new OFCCP web portal, the scheduling letter, the expanded data collection
requirements, and the potential identification of misclassified employees as 1099
contractors all require federal contractors to take action now. In general, there are
four potential problems areas:
 Lack of understanding
Misunderstanding how the OFCCP is going to view contractors’ employee
compensation data could create a significant problem. Contractors should
understand the risk of sending compensation data (to an OFCCP web portal or as
an active audit response) without conducting an internal “discovery audit” to
identify potential problems. By sending compensation data without any prior
analysis, contractors may be inadvertently handing the OFCCP everything they
need to “discover” potential disparate impact and pay discrimination challenges.
 Lack of infrastructure
While large companies usually have their own compensation departments with an
infrastructure to absorb regulatory changes, many small- to mid-tier
federal/defense contractors do not. They will find they are ill-prepared for the new
audit requirements because they do not have a compliant compensation program in
place. Not having a defensible infrastructure will make a valid compensation
analysis (and report) impossible.
 Lack of data
Contractors are likely to have difficulty responding and reporting to the new
expanded compensation information demands. Sometimes companies function on a
corporate memory basis and don’t have everything documented. But the OFCCP
will require fully-documented plans and programs for audit responses and the web
portal input.
 Lack of time
Currently, the OFCCP scheduling letter requires a response within 30 days or less.
Contractors report receiving OFCCP Corporate Scheduling Announcement Letters
telling them to prepare for audits. Do not expect the OFCCP to grant any time
extensions for responses.

5. How Can You Prepare?
The OFCCP has hired and trained more than 200 new auditors. The OFCCP states
on their website that in 2011 alone, they sponsored more than 194 outreach events,
reaching more than 254 organizations, including other Department of Labor
agencies, faith-based organizations, tribunals and unions. So, how can you
prepare?
 Develop a Compliant Compensation Program
Contractors who do not have a compliant compensation program in place often use
government contract job titles as their classification system for a compensation
analysis. This is a burning platform and cannot be sustained. Contractors using this
approach will struggle to explain and defend their compensation practices. Using a
contract’s job title approach will require a separate infrastructure and analysis for
each contract. This approach is neither scalable nor useful for contractors with
more than one federal contract. It lacks any support for business development
efforts and employment activity risk reduction. Finally, it exposes more
“discovery” opportunities for auditors on each contract and more company analysis
work to identify problems on each contract.
Instead of the burning platform approach, contractors need a business-building
platform. They must develop a compliant compensation program. Moving
employees to a compliant compensation program with a benchmarked, well-
documented “market survey-based compensation infrastructure” has numerous
advantages. It allows contractors to map employees to job titles and grades, salary
ranges, etc. based on their academics, years of experience, special skills,
certifications, geographic locations, and other relevant factors. Only then can a
contractor begin to defend their pay practices and provide a factual response to
OFCCP potential disparate impact challenges. The business-building platform also
adds value to the company by supporting business development opportunities
including RFP labor category pricing support and reduced risk for employment
activities.
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