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Compensation Compliance for Federal Contractors The Rules Have Changed! by williamsjohnseo


									   Compensation Compliance for Federal Contractors: The Rules Have
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

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 In 2010, they rescinded those guidelines, stating that the guidelines didn’t give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

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

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 in San Francisco while another works in
Charleston, 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

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.

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.

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