Companies Brace for the Office of Federal Contract Compliance Programs’ List of Compliance Evaluations

October 1 marks the beginning of a new annual enforcement cycle for the U.S. Office of Federal Contract Compliance Programs as the agency unfurls a long list of companies selected for compliance evaluations.

The last cycle, which covered nearly 5,000 employers, ended with a series of million-dollar settlements against companies that could not adequately defend their hiring practices against charges of systemic discrimination.

Companies selected for the new round of evaluations may see nothing more than a desk audit of their hiring procedures. But such an audit could evolve into a highly invasive on-site investigation, with federal agents conducting face-to-face interviews with hiring managers who must defend their selection criteria.

Agency staff have consistently rejected any criteria that may be subjective or “tainted” by the potential for systemic discrimination. In fiscal year 2007, systemic-discrimination charges accounted for 98 percent of the agency’s record $51.7 million in back-pay collections.

The Office of Federal Contract Compliance Programs defines systemic discrimination as a pattern or recurring practice of discrimination against a protected group.

“The OFCCP is now focused on becoming the premier agency for systemic discrimination,” says Julia Judish, counsel, employment and labor law, at Pillsbury Winthrop Shaw Pittman in Washington. “The EEOC’s [Equal Employment Opportunity Commission’s] focus is on individual charges. By contrast, the OFCCP is looking to put its limited resources to the best use by concentrating on federal contractors with systemic discrimination.

“The OFCCP has made it clear that it wants to pursue big cases.”

Self-audit protection
Employers on the OFCCP compliance list receive a letter stipulating that the agency will conduct an evaluation. The list is based on a mathematical analysis of the Employer Information Report (EEO-1) forms that companies submit as part of their federal contract obligations.

“You can’t predict whether you will receive a letter, so aim as if you might and attempt to limit the impact to a desk audit,” Judish advises.

Every federal contractor should conduct regular self-audits in anticipation of a compliance review.

“The goal of a self-audit is to position the company so that if a letter comes, the company will be ready to respond,” Judish says.

A self-audit need not be as elaborate and expensive as the multiple regression analysis of compensation data that the OFCCP recommended in its 2006 Voluntary Guidelines for Self-Evaluation of Compensation Practices, Judish notes. “Attention to a few key areas can go far in avoiding OFCCP actions, even without professional statisticians.”

The self-audit for hiring procedures should cover three key areas: evaluating technical compliance; identifying any sign of adverse impact; and reviewing compensation data for any evidence of discrimination that can be traced back to hiring.

“The OFCCP will look for technical compliance with applicant tracking and recordkeeping on race, gender and ethnicity because it affects the agency’s ability to monitor employers,” Judish says. “The company must have the right infrastructure in place. The agency also sees technical compliance as a sign of a contractor’s overall attitude and willingness to comply.”

To determine if recruiting and hiring policies and practices have had an adverse impact on a protected group, Judish advises employers to look at the numbers in the company’s annual affirmative action plan.

“Determine if there is a job group that is underutilized for females or minorities,” she says. “If you see a disparity, you have an obligation to determine its cause.”

The disparity may originate in the applicant pool or the selection process.

“Attempt to spot the areas that the OFCCP might see as problem areas and take steps to remedy them,” Judish says. “The OFCCP appreciates steps to remedy any disparity. This can make the difference between a desk audit and a full on-site audit.”

The final step in the self-audit is reviewing compensation data.

“The two big money areas for the OFCCP are hiring discrimination and compensation discrimination,” Judish says. “Generally, compensation discrimination is a separate issue, but compensation can tie into hiring if the disparities in pay are based in hiring decisions.”

If pay disparities exist, the agency will look for possible explanations.

“One explanation that the OFCCP is not receptive to is starting salaries,” Judish says.

When an employer capitulates to a male candidate who demands a higher starting salary than an equally qualified female candidate, the potential for discrimination claims appears.

In addition, if a new hire from a protected group received an artificially low and potentially discriminatory salary in a previous job and the current employer perpetuates that pay level, the employer may be open to OFCCP charges.

“A company cannot rely on an argument about starting salaries to get out from under its compensation obligations,” Judish warns. “Hiring must be nondiscriminatory and starting salaries must not set off compensation claims down the road.”

On-site actions
If self-audit precautions fail to head off an OFCCP on-site investigation, employers can still take steps to prepare hiring managers and protect hiring information to mitigate the potential for formal charges.

OFCCP officers may interview hiring managers, compensation directors and executives at corporate headquarters or at specific facilities.

“Typically, the compliance officers will start with the HR department and staffing manager,” says Robert Smith, partner in Morgan Lewis’s labor and employment practice, Washington.

If the OFCCP suspects discrimination, its agents will attempt to identify the exact point at which female or minority candidates are eliminated in the hiring process.

“If the elimination occurs with the hiring managers, they will sit down with the hiring managers,” Smith says. “The compliance officer will ask hiring managers to describe the hiring process, including the labor market for the jobs, the applicant pool, all pre-employment testing, the application process and the selection procedure. They will also ask the managers to produce hiring statistics.”

Companies can survive hiring-manager interviews with proper preparation.

“The employer’s attorney, whether it is in-house counsel or an outside attorney, should go in ahead of time to meet with the hiring managers,” Smith advises.

The employer’s attorney should also be present during the interviews. The OFCCP, however, can and will meet with employees without the presence of management attorneys.

The largest OFCCP compliance problems occur at companies with multiple facilities and decentralized hiring, where managers may or may not follow company policy and maintain crucial records.

“For example, a facility may accept applications on an ongoing basis but limit the actual pool to only the most recent applicants,” Smith notes. “Too often, candidate selection occurs on a ‘proximity to hire’ basis. The last warm body that walked in the door gets the job, regardless of the number of applicants that have applied for the position over the past months.”

Recordkeeping is essential for a defense against discrimination charges, but managers often fail to document each step for every hire.

“The company may have a list of the basic requirements for the job, but the hiring manager must be able to establish the actual reasons for the selection, and the criteria used must not be ‘tainted’ as biased with respect to gender or race,” Smith explains.
“For example, if a hiring manager states that a rejected candidate was simply ‘not sufficiently aggressive,’ the OFCCP will view that rejection as based on tainted gender-biased criteria.”

Employers should give recruiters and hiring managers lists of acceptable and unacceptable criteria. In addition, the job requisition should distinguish between basic requirements and preferred qualifications, all of which must be job-related.

“It can’t be emphasized too much that companies must be able to define ahead of time the entire recruiting and selection process and memorialize that process with full documentation,” Smith says.

At many facilities, troublesome habits linger on, Smith notes. Employers continue to use credit and arrest records in candidate screening, although federal enforcement agencies have long held that these records can adversely affect minorities.

“Employers cannot look at arrests and can look at convictions only in relationship to specific job criteria,” Smith says. Some state laws are even more restrictive than federal law in the use of conviction records.

Smith also notes that problems often arise when internal applicants, online applicants and those who apply in person at the site are not treated in a consistent manner.

“The documented applicant pool must contain all three groups,” he notes.

He advises employers to post positions online by requisition number so all applications can be attached to the pool for a specific job.

Also, when recruiters tap an applicant database, they must keep a record of the search terms used to find candidates.

“This becomes your pool and you must retain the results to show how the candidates were selected,” Smith says.

Smith counsels employers to test selection criteria for adverse impact and carefully analyze applicant-to-hire statistics. However, he cautions that employers must run the analyses under the direction of an attorney to ensure that the results are privileged information.

“Most large companies have their HR departments run these tests and then the results are open to discovery by the OFCCP and plaintiffs’ attorneys,” Smith warns. “It must be documented that the tests and analyses were conducted under the direction of counsel for internal purposes. The OFCCP and plaintiffs’ counsel will demand these test reports and they are discoverable unless the legal department or counsel takes control of them and they become privileged legal documents.”

An on-site audit is very invasive, Smith notes. But self-audit protections can help fend them off, and proper preparation can mitigate the risks when agents come knocking.