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 In 2010, they rescinded those guidelines, stating that the guidelines didn’t give the OFCCP the ability to conduct a thorough compensation analysis.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.
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.
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 inSan Franciscowhile another works inCharleston,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?
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.
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.
- Proactively Prepare for an Audit
If your company proactively prepares for an audit you will be able to identify and correct potential problems long before an audit is initiated or before your data is reported via the web portal. Preparing for a compensation audit will require information regarding employees’ job titles, job grades, salary bands/ranges, years of experience, previous salaries, academic credentials, certifications, start dates, starting salaries, etc. This should be easily completed when starting with an appropriate compensation infrastructure as described above.
Other reportable compensation information may include total compensation, paid leave, health and retirement benefits, average pay raises, average bonuses, minimum or maximum salary, employee demographic data, average tenure, average compensation data by job series, etc. These might include all engineers within a particular department or all administrative assistants throughout the establishment.
The OFCCP will want to know if and how performance drives pay in your compensation program. Information concerning your company’s performance plans and your employees’ performance ratings will be reviewed. Be prepared to capture performance ratings data for each employee and resulting corresponding increases in salary.
Potential disparate impact challenges from the OFCCP will require a contractor response with logical, factual data, and fully-documented rationalization (explanation) responses.
- Prepare Your Documents
You will also be asked for formal documentation (policies, and procedures, etc.) for any compensation infrastructure plans, bonus plans and stock plans. The OFCCP will require complete transparency for all compensation programs.
- Ensure Electronic Records are Secure
The OFCCP allows companies to store important data electronically; however, it must be stored securely. If a company is unable to retain, preserve, retrieve or reproduce their records, then they will not be accepted by the OFCCP. In the event of a DCAA (Defense Contract Audit Agency) audit, these records must provide all the information that they need in a concise and easy-to-read form.
To that end, it is extremely important to ensure that all of the data in your software is well integrated and easily attainable. If, for example, you do not have a timekeeping system that integrates with your accounting system, you could have some difficulties should you need to provide that information, as the potential for discrepancy is much higher than in a fully-integrated system.
In addition, if you are using software from a vendor, you should remember that you are ultimately responsible for all of your records. Therefore, it is important to carefully research potential software to make sure it can properly secure your business data, particularly if you’re using Software-as-a-Service and it’s being stored on the software provider’s servers.
Finally, you must have an adequate records management system in place. Automated software with daily reporting requirements and approvals systems in place can make this requirement much easier and less time consuming for your business.
- Expand Your Regulatory Response Team
Contractors need to begin expanding their company regulatory compliance environment and response preparation. You must be prepared to respond quickly with factual information including plan documents and implementation analysis/results to auditors’ requests. The same information will be required for the OFCCP compensation data collection compliance portal.
What’s the Good News?
Contractors should realize that having a compliant compensation program in place offers huge advantages to a company. One of the most appealing advantages is in the area of bidding on contracts or GSA schedule development.
A compliant compensation program will include national market-pricing survey data. This survey data provides direct RFP labor category pricing support. So when you are ready to bid on a federal contract, this reliable information is available to you immediately. This will meet the audit requirement from DCAA, which is another plus.
Regulatory and compliance requirements often serve many positive purposes and ultimately provide better conditions for employees and businesses. Compensation programs and compliance activities can be leveraged into the company’s productivity toolset for competitive advantages and business continuity.
Conclusion
The OFCCP has made compensation audits, disparate impact testing and regulatory compliance and enforcement a major initiative. Companies should expect a rigorous and thorough examination of their compensation programs. Contractors who ignore these signals or wait for an OFCCP audit notice to establish their compensation programs and compliance efforts will struggle to defend their actions.
Federal contractors should act immediately to ensure they can meet regulatory compensation and compliance requirements. A high level of preparedness on your part will mirror the level of intensity on the part of OFCCP.
By Jim Jutzin, Vice President of Business Services, HR-3D and Curt Finch, CEO, Journyx
About the Authors:
- Jim Jutzin has more than 25 years of in-depth experience in all aspects of human resources. He serves as the Vice President of Business Services for HR-3D. HR-3D is a consulting company specializing in compliance, compensation services, AAP, and RFP Pricing Support. HR-3D serves federal contractors, private industry, and non-profits in locations across the nation and internationally.
- Curt Finch is the CEO of Journyx. Journyx helps customers automate payroll, billing and cost accounting for compliance with DCAA and other government regulations. Founded in 1996, Journyx has been providing time management solutions to government contractors for nearly 15 years.