Pay Analysis Groupings

July 22, 2019

Dear Name*,

This letter responds to your request for an opinion concerning Pay Analysis Groupings (PAGs). In particular, this letter seeks to address your inquiry as to whether contractors can work with OFCCP to develop a PAG structure that OFCCP would accept as valid for use in future OFCCP audits.

BACKGROUND

The Office of Federal Contract Compliance Programs enforces Executive Order (E.O.) 11246, as amended; Section 503 of the Rehabilitation Act of 1973, as amended; and the Vietnam Era Veterans' Readjustment Assistance Act of 1974, as amended. Collectively, these laws prohibit federal contractors and subcontractors from discriminating in employment based on race, color, religion, sex, sexual orientation, gender identity, national origin, disability, or status as a protected veteran. Contractors also are prohibited from discriminating against applicants or employees because they inquire about, discuss, or disclose their compensation or that of others, subject to certain limitations. OFCCP's laws further require federal contractors and subcontractors to take affirmative steps to ensure equal employment opportunity in all aspects of their employment practices.

GENERAL LEGAL PRINCIPLES

In its compliance evaluations of contractors' compensation systems, OFCCP aligns its procedures with the principles of Title VII of the Civil Rights Act of 1964, 42 U.S.C. §§ 2000e et seq., which prohibits both disparate treatment discrimination and disparate impact discrimination.

The equal opportunity clause contained in E.O. 11246 includes a ban on compensation discrimination, and pay discrimination is a key enforcement priority for the agency. See E.O. 11246 § 202; 41 C.F.R. § 60-1.4(a).

On February 28, 2013, OFCCP issued Directive 2013-03,^[1] which put in place a variety of case-specific investigative and analytical tools that compliance officers (COs) were to use when evaluating contractor compensation systems and practices. When preliminary analysis revealed race- and/or sex-based compensation disparities, COs were to develop PAGs^[2] in order to test the statistical significance of the disparities. Directive 2013-03 mandated the creation of PAGs when possible to facilitate OFCCP's ability to identify systemic discrimination warranting further review and potential remedy. PAGs could potentially be composed of groups of employees from multiple job titles, units, categories, and/or job groups who were comparable for the purposes of the contractor's pay practices. Under Directive 2013-03, OFCCP developed PAGs that evaluated broader pay differences by considering numerous elements, such as the particular industry, the types of jobs and compensation at issue, the contractor's actual compensation practices, and available data.

On August 24, 2018, Directive 2013-03 was rescinded in part due to its failure to provide clear guidance to contractors. In its stead, OFCCP issued Directive 2018-05, Analysis of Contractor Compensation Practices During a Compliance Evaluation, to clarify OFCCP's approach to conducting compensation evaluations, set forth a framework for compliance and compensation self-analyses by contractors under applicable law, and improve compensation analysis consistency and efficiency during compliance evaluations. Directive 2018-05 aims to remedy Directive 2013-03's lack of transparency and guidance about OFCCP's approach to analyzing PAGs and improve the quality and oversight of contractor self-audits by fully seeking contractor collaboration. Through its compliance evaluations, OFCCP will continue to resolve claims of compensation disparities where there is evidence of either pattern or practice (disparate treatment) discrimination or disparate impact discrimination, or both.

Directive 2018-05 makes clear that where OFCCP identifies indicators of systemic compensation discrimination, "it will seek to fully understand the contractor's compensation system, policies and practices through interviews with the contractor's subject matter experts and employees," as well as conduct "a holistic review of the contractor's EEO [equal employment opportunity] and diversity and inclusion policies." If an audit reveals indicators of disparate impact in compensation, OFCCP will endeavor to "work collaboratively with the contractor to understand any defense" that the policy which led to the disparate impact "is job-related and consistent with business necessity, and will fully consider supporting evidence the contractor provides." The main aim of Directive 2018-05 is thus "[t]o facilitate resolution through conciliation" by being fully transparent about the methodology used to conduct compensation analyses.^[3]

OFCCP also further elaborated on the composition of PAGs, stating in Directive 2018-05 that "OFCCP's objective is to use PAGs that mirror a contractor's compensation system" by attempting to design its analysis based on the contractor's compensation hierarchy and job structure, so long as the structure is reasonable and verifiable and the analytical groupings are sufficiently large for meaningful statistical analysis. The contractor's own compensation hierarchy and job structure would then "provide[ ] the distinct pay systems, functions, and workforce organization necessary for OFCCP to develop meaningful PAGs." OFCCP will then achieve comparisons of similarly situated employees by "statistically controlling for further structural differences among members of the PAG," for example, division, business unit, product line, or location, as well as individual employee characteristics related to pay determination, such as company tenure, prior experience, education, or grade level. Going forward, such an approach better serves OFCCP's objective of reviewing contractor compensation system practices for systemic disparities "while keeping truly dissimilar jobs with entirely separate pay models separate."

OPINION

In your request for an opinion, you inquired whether contractors can collaborate with OFCCP on valid, agreeable PAGs that OFCCP would then ratify for use in future compliance evaluations. In accordance with the language and guidance embodied in Directive 2018-05, contractors have the opportunity to submit their PAG structure for review and to receive feedback from OFCCP, which OFCCP would take into account in future compliance evaluations. The submission should include sufficient data for OFCCP to determine if the aggregation is similar to what would be available in a compliance review. OFCCP would also note, however, that it is unable to conclusively agree that it will rely upon specific, predetermined PAGs in all future compliance evaluations as there may have been material changes to factors considered by OFCCP in its initial evaluation of the contractor's PAGs. OFCCP must conduct its analyses based on the contractor's pay systems, functions, and workforce organization as they exist or existed during the period under review, and thus if those have materially changed since OFCCP's prior review, OFCCP will need to make a new determination as to whether the PAGs are appropriate.

A contractor's submission of PAGs to OFCCP for review and feedback is fully in accordance with the underlying policy embodied in Directive 2018-05 of setting forth a clear compliance framework by "seek[ing] to fully understand the contractor's compensation system, policies and practices." Moreover, a contractor's submission of its PAG structure furthers OFCCP's ability to "work collaboratively with the contractor" to understand any compensation policy or practice that has a disparate impact on a protected group but is job-related and consistent with business necessity.

Furthermore, submission of a PAG structure to OFCCP for review and feedback better serves OFCCP's objective of eliminating pay discrimination through both enforcement and proactive, self-auditing compliance. As the procedures delineated in Directive 2018-05 require OFCCP to attempt to design its compensation analysis based on the contractor's compensation hierarchy and job structure, the early review by OFCCP of a contractor's PAG structure may better help OFCCP compare similarly situated employees at the point when it selects that contractor for review.

To request assistance, please contact OFCCP's Director of Enforcement.

We trust this letter is responsive to your inquiry.

Sincerely,

Craig E. Leen
Director

*Note: The actual name(s) was removed to protect privacy in accordance with 5 U.S.C. § 552(b)(7).

[1] As discussed below, Directive 2013-03 has now been rescinded. It is still available on OFCCP's website at https://www.dol.gov/ofccp/regs/compliance/directives/dir307.htm.
[2] For the purposes of future reference and guidance, OFCCP will refer to groups of employees expected to be placed in similar categories based on job similarity and minimum qualifications as either Similarly Situated Employee Groups (SSEGs) or PAGs, as the agency views them as equivalent terms.
[3] To facilitate resolution and in accordance with Directive 2018-05, OFCCP will also include professional labor economists or statisticians from OFCCP's Branch of Expert Services in the conciliation process, as necessary, to clarify OFCCP's statistical methods and findings as well as answer appropriate questions regarding the process and factors used to calculate back pay.

The contents of this document do not have the force and effect of law and are not meant to bind the public in any way. This document is intended only to provide clarity to the public regarding existing requirements under the law or agency policies.

Last updated on July 22, 2019