The Fox OFCCP Report


February 2012

Why OFCCP Audits of Compensation Are Entirely Different From Those Alleging a Failure of Affirmative Action or a Failure To Hire…and the "Tough Row to Hoe" which lies ahead for Both OFCCP and Federal Contractors as to Compensation Audits

Friends: This is my second column for discussing OFCCP developments. I appreciate the overwhelmingly generous response to my first column.

This month, I want to discuss why OFCCP's audits of the compensation federal contractors pay to their employees and of federal contractor compensation systems are very different from OFCCP audits in which OFCCP alleges only a failure of "Affirmative Action" or an unlawful "failure-to-hire" (typically blue-collar unskilled entry-level laborers). The single difference I will identify below, as simple as it is, leads, however, to a totally different mindset among defending federal contractors. This single difference also exposes two unique problems with which federal contractors have to specially grapple in compensation cases. Unfortunately, too, this difference "raises the stakes" for most federal contractors in a way which will force most contractors OFCCP accuses of unlawful compensation discrimination into uncomfortable, but necessary, confrontations with OFCCP. And, OFCCP is learning that compensation audits in which OFCCP alleges unlawful compensation discrimination are suddenly almost always hard fought scrimmages as to which it is not going to be a rollick in the park.

Next month, I will discuss how to defend against OFCCP's new style of compensation audits…which will be particularly timely if OFCCP is able to publish by then it's long overdue new (hoped-for) revised audit Scheduling Letter (which is all and only about compensation audits…and is still not yet published).

That single difference in OFCCP compensation audits is that most contractors facing "inadequate affirmative action efforts" or "failure to hire" audits typically cooperate very easily and fluidly with OFCCP to settle them. Cooperation with OFCCP is rarely the case in compensation audits, however, as I note more fully below. Most federal contractors in non-compensation-related audits have historically willingly (although generally begrudgingly) agreed to sign an OFCCP Conciliation Agreement (CA) to conclude the audit where OFCCP has claimed a violation, even when OFCCP's claim of unlawful discrimination lacks merit.

"Rolling over" and "writing the check" to make OFCCP sign a CA and go away has therefore become a long and time-honored federal contractor tradition. Typically, contractors sign OFCCP CAs because there are either very clear and simple affirmative action violations and/or there is only a small amount of (backpay) money, at-issue. As a result, it is typically simply far cheaper and more prudent to just agree with OFCCP, even if it means writing a relatively small check even in the absence of a bona fide finding of unlawful discrimination. (It is typically a much cheaper option for a federal contractor to just "write a check" rather than to adopt the alternative of paying lawyers to defend the contractor or seeking to further reduce claimed damages from an alleged, perhaps, $30,000 violation to some lesser backpay number).

When contractors "just roll over" to appease OFCCP in these "affirmative action failure" and/or alleged small-value unlawful "failure-to-hire" cases, though, no other employees are typically affected or "get hurt" by the contractor's agreement with OFCCP. Indeed, that is what makes these CAs with OFCCP so politically expedient: they are win-win because OFCCP gets a CA (and sometimes some small amount of backpay) and the contractor suffers a one-time cost but also closes the audit regardless whether there are true violations of OFCCP's program authorities or not. And, there are no lasting undesirable policies or practices which OFCCP has mandated adversely affecting other employees in the future.

When the contractor agrees in an OFCCP CA to fix an affirmative action violation, it is committing to do (going forward) only that which OFCCP's regulations had mandated the contractor should have been doing previously anyway. So, contractors are quick to offer OFCCP these "sleeves off their vest" settlement offers. And when it happens that a contractor "writes the check" in a failure-to-hire case (accounting for typically 95% of OFCCP's backpay collections in any given year), the contractor merely distributes typically a very small payment to a relatively large number of rejected Applicants, most of whom will never have further contact with the company. What those rejected Applicants got paid is of no ongoing concern to the company. The payments are merely "deal points" to get the CA signed and the OFCCP audit closed…with no lasting effect on the company other than that one-time charge to the contractor's treasury.

Out of the Frying Pan and Into the Fire

PUNCH LINE: In compensation cases, however, contractors typically cannot simply "write a check" to make the OFCCP audit of compensation practices go away unless there is a bona fide and true unlawful pay practice in need of an honest remedy. This is true for two different reasons.

First, the other "similarly situated" or "comparable employees" OFCCP identified in its audit who were allegedly unfairly earning more money than the at-issue "protected group members" OFCCP is championing, will suffer a very large morale problem if and when they learn that their fellow (previously lesser-paid) co-workers are suddenly making as much as the previously higher paid "comparators". If the contractor merely "writes a check" to make the OFCCP audit go away without any true liability for the disparities in pay between the protected group OFCCP has championed and the previously more highly paid comparators, enormous unrest will break out within the work unit. In such a case, the contractor will have solved one problem, but will have created another different, larger and on-going problem.

Said another way, the contractor must not only resolve the OFCCP compensation audit, but it must also deploy a result in the workplace the affected employees will view as fair. While OFCCP may think the resolution is "fair", employees know what they do and how they stack up against other employees down the hall. In the real world of corporate compensation, employees are not going to stand for a "politically expedient" end to a cursed OFCCP audit the contractor will lament was biting at its ankles. Employees know what is right and what is wrong, and will demand of management that it treat them fairly, too, and not just the protected group OFCCP has chosen to champion at that moment.

Certainly, in the rare cases where the disparity in pay OFCCP identified was improperly based on race, sex, religion, national origin, color, disability or Protected Veteran status, then the contractor will have to find a firm way (consistent with privacy considerations and business decorum) to hold its ground and explain to the previously higher-paid comparators that the protected group is deserving of the pay adjustment. But, just "writing a check" without a true legal need to do so, which works so well in "failure to hire cases", almost never works out well as to incumbent employee compensation adjustment cases. Employees will challenge management to explain and hold it accountable for any "expedient settlement" with OFCCP.

Worse, as we all know, one of the reasons there is not nearly so much pay compensation discrimination as government officials suspect is that employees "vote with their feet". Suspicions and feelings of unfair pay quickly become corrosive, if not toxic, in most corporate work places. When unrest over compensation breaks out, it is not long before valued employees quietly offer their resignation letters as they seek out fairer, just and what they feel are better-managed workplaces.

The Hidden Cost of Compensation Cases

The second reason that "write the check" settlements are not typical in OFCCP audits of compensation practices is that they are MUCH more financially expensive than it costs to settle just OFCCP's back pay demand. Even apart from the morale problems which attend a contractor's decision to float an employee's compensation higher simply to appease a "charging bull" OFCCP Compliance Officer, any adjustment to the base pay of the employee is an "add to base compensation"… meaning the pay adjustment is not a "one-time" incurred cost (as is a failure to hire backpay payment). Rather, the cost of the compensation adjustment will add to budget in each succeeding year the adjusted employee remains in the workforce. CFOs ALWAYS think like this, since they look holistically at all costs which impact their budgets.

EXAMPLE: If you assume only a $5,000 pay adjustment, the true cost is not that one $5,000 backpay payment to the incumbent employee to bring him/her to parity with his/her alleged comparators. Rather, the true cost is $5,000 to adjust for this year's salary AND $5,000 in each succeeding year the employee remains on-roll. So, if the contractor can expect the employee to remain employed with the contractor for, let's say, 5 more years, the true cost of the settlement is, in fact, $30,000 for that one employee ($5,000 to adjust the pay for the year in question - or maybe even one more year back pursuant to OFCCP's 2-year statute of limitations policy - and then 5 more years going forward after the OFCCP CA x $5,000/yr=$25,000 going forward).

And, if there are even only 10 other protected group members in the class OFCCP alleges the contractor unlawfully underpaid, the true holistic cost of the settlement now suddenly swells from an apparent only $50,000 settlement (10 employees x a $5,000 back pay award to each) to $300,000 if those employees remain for another five years [($5,000+$25,000 = $30,000) x 10 employees = $300,000]. So, now we are suddenly getting into "real money" where the budget to litigate the case is much smaller than the cost of paying a $50,000/$300,000 "ransom" to OFCCP.

"No. No. Not a sixpence".

Looking at the "cost-benefit" pros and cons of making the OFCCP audit go away versus incurring ongoing costs to defend the audit, suddenly the contractor's willingness to cooperate fluidly and willingly with OFCCP locks up. No longer is the calculus a one-time cost to either negotiate an agreement with OFCCP for the contractor to undertake Affirmative Action requirements the contractor is already obligated to undertake, or to agree to a small one-time settlement payment to out-of-sight rejected former Applicants for previously available jobs. Rather, the contractor's calculus is suddenly a large impact to morale affecting quality employees and a "ransom demand" larger than the cost of letting the "dogs off the leash" (speaking fondly of contractor defense lawyers). So, there is not only principle on the line ("we have to be fair to our employees and pay them what they are worth"), but there are also changed economic considerations which tilt the cost-benefit ratio in favor of corporate resistance to an otherwise unfair result.

Meanwhile, as OFCCP now shifts and broadens its focus from "failure-to-hire" rejected Applicant cases to now also pursue compensation cases, the agency has not yet realized and internalized that the contractor calculus to settle an audit with lurking tenuous compensation claims is very different from settling an audit with tenuous "failure-to-hire" claims. As a result, OFCCP audits continue their onward march towards a lawyer's paradise.

Enjoy the splendor and spectacle of it all…and the head knocking with OFCCP to come in coming years! John

By the way, who has history finally credited for the famously defiant statement (which many claim Wikipedia has wrongly credited): "Millions for defense, but not one cent for tribute"? Try this link which succinctly explains my above subhead and reveals the true authors (plural):

Also, try this link, which I like better: