Compensation Compliance for Federal Contractors: The Rules Have Changed!


Published on

Published in: Business
  • Be the first to comment

  • Be the first to like this

Compensation Compliance for Federal Contractors: The Rules Have Changed!

  1. 1. Compensation Compliance for Federal Contractors: The Rules Have Changed!As challenging as it sometimes might be, federalcontractors must stay abreast of all new rules andregulations and take them seriously. Failure to doso could result in fines, interest, and penaltiesgoing back several years. The government can alsosuspend existing contracts and prohibit you frombidding on future government contracts.But federal contractors should also understand thathaving a compliant compensation program in place needn’t just be a defensivemove. A compliant compensation program is a huge advantage to a company whenit 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 theEqual Employment Opportunity Commission (EEOC). As part of the United StatesDepartment of Labor, the OFCCP is responsible for ensuring that federalcontractors follow the compliance requirements. Since the mid 1990’s, OFCCPaudits have focused on items such as I-9′s, underutilization of females andminorities, employment/hiring practices, and employment/termination reviews.In 2006, the OFCCP created suggested compensation audit guidelines for federalcontractors. In 2010, they rescinded those guidelines, stating that the guidelinesdidn’t give the OFCCP the ability to conduct a thorough compensation analysis.Beginning in 2010, the OFCCP expanded their audit focus to includecompensation programs in order to discover disparate pay practices under TitleVII. The Secretary of Labor suggested that 20 to 40 percent of all OFCCP financialsettlements would likely be based on compensation discrimination.
  2. 2. As a comparison, in 2009 there were two compensation cases. In 2010, the numberjumped to 10 compensation settlements. In the first six months of 2011, theOFCCP initiated 44 financial conciliation agreements and more than doubled thefinancial remedies.Companies should expect a rigorous and thorough examination of theircompensation programs. The three major focus areas include:  Expanded compensation data elements  W2 & 1099 inclusion for analysis  Disparate pay practicesExpanded Compensation Data ElementsThe 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 andretirement benefits.Potential reporting categories may include EEO-1 job categories, AffirmativeAction program job groups by salary bands, Standard OccupationalClassification codes, salary bands within EEO codes, individual job titles orindividual job titles within EEO-1 job categories.The OFCCP also allows contractors to provide additional data on factors todetermine compensation. This additional data can include education, pastexperience, duty location, performance ratings, department or function, salaryrange and grade titles. While no immediate requirement exists for these particularitems, the OFCCP does not preclude the necessity to collect this information ifthey find your submission “incomplete” or containing disparate impact issues.W2 & 1099 Inclusion for AnalysisThe OFCCP didn’t require the inclusion of 1099’s for analysis in the past but thathas changed. They are concerned about employees being misclassified as 1099contractors. Contractors will have to report all of their W2 and 1099 incomecompensation data going forward.
  3. 3. Disparate Pay PracticesThere may be many legitimate reasons why two employees with the same job titleor job grade are paid at different levels in your company. But as a federalcontractor, 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 inSan Francisco while another works in Charleston, S.C., the significant difference inthe 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 thedisparity.Enforcement ActionsThe OFCCP is no longer “screening/testing” for potential pay practice violations.Instead, the OFCCP’s new audit framework – Active Case Enforcement – allowsfor the collection of all of your compensation data.So, how is all of this compensation data collected? First, beginning in February2012, the OFCCP plans to launch a web portal data collection tool. This tool isexpected to impact about 100,000 federal contractors. Those selected will berequired to annually report all compensation data to the OFCCP through this webportal. Second, the OFCCP has a new 2012 audit scheduling letter that calls for thesame data and further expands the scope of the required information. Third, theOFCCP is also expanding its relationship with other government agencies forcompliance enforcement. For example, in 2011, they announced cooperativeefforts with the IRS to review and report employees who are potentiallymisclassified as 1099 contractors.Additionally, also proposed is the requirement for contractors to submit theircompensation data as part of any new Request For Proposal (RFP) process forsubmission on future federal contracts.Those federal contractors who used to gamble and wait to see if they were auditedbefore collecting, analyzing, and reporting data no longer have that option.What Potential Problems Do You Face?
  4. 4. The new OFCCP web portal, the scheduling letter, the expanded data collectionrequirements, and the potential identification of misclassified employees as 1099contractors all require federal contractors to take action now. In general, there arefour potential problems areas:  Lack of understandingMisunderstanding how the OFCCP is going to view contractors’ employeecompensation data could create a significant problem. Contractors shouldunderstand the risk of sending compensation data (to an OFCCP web portal or asan active audit response) without conducting an internal “discovery audit” toidentify potential problems. By sending compensation data without any prioranalysis, contractors may be inadvertently handing the OFCCP everything theyneed to “discover” potential disparate impact and pay discrimination challenges.  Lack of infrastructureWhile large companies usually have their own compensation departments with aninfrastructure to absorb regulatory changes, many small- to mid-tierfederal/defense contractors do not. They will find they are ill-prepared for the newaudit requirements because they do not have a compliant compensation program inplace. Not having a defensible infrastructure will make a valid compensationanalysis (and report) impossible.  Lack of dataContractors are likely to have difficulty responding and reporting to the newexpanded compensation information demands. Sometimes companies function on acorporate memory basis and don’t have everything documented. But the OFCCPwill require fully-documented plans and programs for audit responses and the webportal input.  Lack of timeCurrently, the OFCCP scheduling letter requires a response within 30 days or less.Contractors report receiving OFCCP Corporate Scheduling Announcement Letterstelling them to prepare for audits. Do not expect the OFCCP to grant any timeextensions for responses.
  5. 5. How Can You Prepare?The OFCCP has hired and trained more than 200 new auditors. The OFCCP stateson their website that in 2011 alone, they sponsored more than 194 outreach events,reaching more than 254 organizations, including other Department of Laboragencies, faith-based organizations, tribunals and unions. So, how can youprepare?  Develop a Compliant Compensation ProgramContractors who do not have a compliant compensation program in place often usegovernment contract job titles as their classification system for a compensationanalysis. This is a burning platform and cannot be sustained. Contractors using thisapproach will struggle to explain and defend their compensation practices. Using acontract’s job title approach will require a separate infrastructure and analysis foreach contract. This approach is neither scalable nor useful for contractors withmore than one federal contract. It lacks any support for business developmentefforts and employment activity risk reduction. Finally, it exposes more“discovery” opportunities for auditors on each contract and more company analysiswork to identify problems on each contract.Instead of the burning platform approach, contractors need a business-buildingplatform. They must develop a compliant compensation program. Movingemployees to a compliant compensation program with a benchmarked, well-documented “market survey-based compensation infrastructure” has numerousadvantages. It allows contractors to map employees to job titles and grades, salaryranges, etc. based on their academics, years of experience, special skills,certifications, geographic locations, and other relevant factors. Only then can acontractor begin to defend their pay practices and provide a factual response toOFCCP potential disparate impact challenges. The business-building platform alsoadds value to the company by supporting business development opportunitiesincluding RFP labor category pricing support and reduced risk for employmentactivities.For More Information visit: