March 2012 If You Give A Moose A Muffin...OFCCP's New Style of Compensation Audits…and How Federal Contractors May Defend Against Them

OFCCP is now monthly changing its audit processes. While OFCCP's audit tone is changing (to become more directive, more wooden, more demanding, and more strident--causing many (very many) contractors to now ruefully label OFCCP a "Bully"), the substance of OFCCP audits is also changing. With a Presidential election nearing, OFCCP has "gone Ollie North": i.e. OFCCP now just does what it has the physical power to do, regardless whether it has the legal authority to do it. Said another way, OFCCP is just "jamming it through", while relying on contractor cooperation and goodwill to permit the agency to run roughshod over good-natured contractors.

Despite the defeat of the Pay Check Fairness Act (PCFA) in the Congress, OFCCP is now administratively implementing the PCFA, piece by piece: "PCFA through a Thousand Cuts", if you will (in much the same way that my friend Steve Suflas at Ballard Spahr in Philadelphia has observed that the National Labor Relations Board (NLRB) is now administratively implementing, little by little, the also defeated Employee Free Choice Act (EFCA): "EFCA by a Thousand Cuts"). OFCCP's "bullying" of matters not yet in final form in statutes or regulations has thus far proved somewhat successful for OFCCP (even while raising tremendously the friction-level among federal contractors and reducing the respect many federal contractors formerly had of OFCCP) as contractors seek to avoid confrontation and get along with an agency which previously showed a willingness to "partner" with the contractor community in joint pursuit of common objectives.

I wanted to write this month about what OFCCP is currently doing in compensation audits, and what federal contractors/subcontractors can do to defend these new-style audits and to deal with the "bullying" which is now commonplace in them. Before you read any further, though, I recommend you quickly review the compensation-related policy, administrative and regulatory initiatives OFCCP accomplished in 2011 and which OFCCP yet promises in 2012. I catalogued these initiatives in my first column for the Local JobNetwork™ in January.

OFCCP's Current Federal Contractor Compensation Audit Process

Here is OFCCP's current 2-part Desk Audit process for all "Supply & Service" contractors (i.e. not "construction contractors") subject to audit.

1. OFCCP issues its Office of Management and Budget (OMB) approved audit Scheduling Letter and attached "Itemized Listing" to contractor.


2. Contractor responds with documents responsive to OFCCP's audit Scheduling Letter and to Paragraphs 1-11 of the "Itemized Listing."

OFCCP then conducts a 4-part Compensation Desk Audit process for all "Supply & Service" contractors subject to audit.

1. The OFCCP District Office reviews, among other things, the contractor's compensation data (Itemized Listing Para 11) response to identify all reporting units where compensation (of men v woman) or (of all minorities v all non-minorities) reveals a disparity of at least 2% or $2,000.


2. OFCCP then sends to the contractor one of several different "mini-regression" compensation data request letters seeking information which OFCCP, in its experience, feels might reveal any legitimate reasons for the noted pay disparities.


3. After the contractor responds, the OFCCP District Office then sends the contractor's data to OFCCP's National Office Division of Statistics and Technology (DST) for analyses.


4. As to compensation disparities which remain following the "mini-regression analysis", OFCCP then asks the contractor to "articulate the legitimate non-discriminatory reason(s)" for each. OFCCP calls these "Cohort Analyses".
   
   NOTE: Many OFCCP District Offices in OFCCP's New York Region have recently begun to skip the "mini-regression" letter and accelerate right to a demand for Cohort Analyses as to specific pay disparities of interest to the OFCCP Compliance Officer assigned to that particular audit. This approach allays the criticisms of those contractors concerned that gathering data responsive to the "mini-regression" analysis is burdensome and costly. Skipping the "mini-regression" step also speeds the audit to conclusion, but at the cost of perhaps performing more Cohort Analyses.

The Contractor's 4 major response options include:

1. Make OFCCP happy. Comply with OFCCP's demands for "mini-regression" data, and (later) for "articulated legitimate non-discriminatory" reason(s) for each remaining disparity troubling OFCCP ; or


2. Resist and tell OFCCP to "Pound Sand". Cite to the Frito-Lay case decision, distinguish the USA case decision, and force OFCCP to either become more reasonable in its demands or to Recommend Enforcement to its Solicitors (more about this option, below); or


3. Seek to negotiate an intermediate position with OFCCP. For example, if OFCCP identifies to the contractor, perhaps, 10 reporting units to be of interest (and let's say those 10 reporting units collectively involve 150 employees of interest), either negotiate with or deliver to OFCCP, perhaps, only 4 reporting units involving (perhaps) only 60 employees of interest to OFCCP (we use various negotiating techniques to sell this "truncated investigation pending proof of need" approach into OFCCP, and thus far we have been very successful, although not uniformly so); or


4. Tell OFCCP to Come On-Site and Review the Raw Pay and Performance Data Instead of Turning the Contractor's HR Department into "Fetch and Gopher" Paralegals for OFCCP at the Desk Audit Stage. This approach may be more expensive and time-consuming than just collecting, organizing, analyzing and spoon-feeding the data to OFCCP.

The real problem with all of these four approaches is that OFCCP has rejected the brilliance of the Clinton Administration in realizing that OFCCP very rarely finds unlawful discrimination, even during On-Site audits. The Clinton Administration's answer was not, at great cost and time-delay, process non-meritorious 100% "Quality-control check" audits of contractors, but rather to fashion "audit filters" which helped OFCCP determine when to stop investigating and when to continue. The Clinton Administration called this the "tiered-review process" which caused its investigations to get quickly and continually more narrow so as not to plaque either OFCCP or the contractor with wasted investigations where preliminary testing of data showed no substantial promise of a violation. The Bush Administration took this winnowing approach to an even higher-level as it evolved several different and more sophisticated data-testing regimens and drove back-pay collections to historic highs only dreamed about in the Clinton Administration and so far beyond the reach of this Administration, even with 25% more OFCCP Compliance personnel.

If You Give A Moose A Muffin...It Comes Back For More And Different Things

Laura Numeroff's 1991 children's classic book...If You Give a Moose a Muffin...has prophetically foreshadowed the result of contractors in OFCCP Desk Audits which voluntarily give OFCCP more information and more data than OFCCP is entitled to access.

As a result, the average non-problematic OFCCP compensation audit (and over 99% of them are not problematic in this Administration thus far) are costing federal contractors on average $30,000-$50,000 more than in the Clinton and Bush Administrations based on informal surveys of contractors I have conducted.

At the same time, the large diversion of OFCCP resources to investigate non-problematic compensation pay disparities is costing the taxpayers millions of dollars in lost OFCCP productivity. While increasing OFCCP compliance staff by 25%, OFCCP in budget documents last year predicted that in this current in-progress Fiscal Year 2013 that it would undertake about 9% fewer audits than in its prior FY). OFCCP justified this "less with more" result by explaining that it was diverting resources to review virtually all compensation decisions of contractors under audit and would dig deeper than in previous Administrations, both Republican and Democratic.

And while it does not have its new hoped-for Supply & Service audit Scheduling Letter yet approved (which would require contractors to deliver to OFCCP, during the Desk Audit, "employee-level" data--which OFCCP is currently obtaining inappropriately via the ruse of the "mini-regression letter data requests")--and it lacks legal authority to demand, during the Desk Audit, more information than the Itemized Listing requests, OFCCP is nonetheless "jamming ahead" in thousands of Supply & Service audits each year to collect detailed employee-level compensation data during the Desk Audit.

And, is this large diversion of OFCCP resources yielding either large or numerous unlawful compensation discrimination findings or back pay collections? No. OFCCP, however, points to its highly publicized AstraZeneca settlement as OFCCP's flagship compensation settlement/prosecution. This Bush-era audit and resulting lawsuit generated, however, just barely $2,000 for each of the 124 alleged female victims (and then almost 25% of that came in the form of interest because of the lengthy delay in prosecution). This settlement in the summer of 2011 was and is OFCCP's high-water compensation settlement/prosecution to date. In FY 2012, 3 full years into this Administration, it does not appear that OFCCP collected even $1M in back pay for unlawful compensation in either audits or lawsuits. And, even assuming approximately only 5,000 OFCCP audits per year, federal contractors are bearing costs easily exceeding $150 MILLION per year in compensation audits!

So, What Is A Well-Intentioned Contractor To Do In The Face Of OFCCP's Expensive And Relentless Search For Non-Existent Wide-Spread Systemic Compensation Discrimination?

Contractors have choices. How to respond to an over-reaching and resource-wasteful OFCCP compensation audit is a policy-decision for affected federal contractors to make. I always like to ask the question: "What do you value and what do you fear?" Of course, every federal contractor I have ever represented wishes it could cooperate with OFCCP and work out differences in audits on a reasonable basis. At the same time, I can only think of two clients which were indifferent to OFCCP compliance costs (they were both large federal contractors which had unusual "cost-plus" contracts which paid the contractor to comply with OFCCP's requirements).

How a contractor balances OFCCP compliance costs with its instinct to cooperate is the critical decision. The point I made in my February Local JobNetwork™ column was that contractors have far less flexibility to cooperate in compensation audits because of the two unique pressures which come to bear when OFCCP asks federal contractors to "play ball with it" to voluntarily adjust pay (i.e. morale problems associated with "just writing a check" for certain employees of concern to OFCCP merely to appease OFCCP and the "add to base pay" and long term budget increases an "add to base" foreshadows).

So, like offering a Moose a Muffin, contractors have come to realize that the critical decision is the first one: do you cooperate at all and allow OFCCP, like the veritable Moose, to start down a known path of demanding more and more detailed information and data in search of more fuel amid growing collateral damage and costs?

As one reviews the contractor's four major options listed above, Option "D" (invite On-Site) is not very appetizing, effectively leaving Options A, B or C. Since Option A is increasingly less appetizing, the choice is increasingly between Options B (Pound Sand) and C (negotiates delivering to OFCCP fewer and smaller "ransom muffins"). But this is why you have to read (or re-read) Ms. Numeroff's Moose/Muffin book to realize and understand why this technique usually fails...as English Prime Minister Neville Chamberlain learned the hard way in negotiating the Munich Pact with Fuhrer Adolph Hitler to secure peace "for all time" (only for Hitler to then turn around and invade Poland)...appeasement rarely works with bullies...rather, it plays into their hands because dominating and getting what they want is the end objective.

So, what do I do? I advise my clients to watch the Indiana Jones and the Last Crusade movie. I suggest they carefully note the scene in which the German Colonel seeks to pick out the Holy Grail from among numerous assembled challises. I then suggest my clients review the above list of 4 major compensation audit options and to then (unlike the German Colonel) "choose wisely".

Thanks...John

THIS COLUMN IS MEANT TO ASSIST IN A GENERAL UNDERSTANDING OF THE CURRENT LAW AND PRACTICE RELATING TO OFCCP. IT IS NOT TO BE REGARDED AS LEGAL ADVICE. COMPANIES OR INDIVIDUALS WITH PARTICULAR QUESTIONS SHOULD SEEK ADVICE OF COUNSEL.