On July 22, 2013, the Office of Federal Contract Compliance Programs (“OFCCP” or the “Agency”) released Directive 310 to provide guidance on how the Agency will calculate back pay in discrimination cases. This new Directive is just one in a string of directives OFCCP has released over the last several years revealing the Agency’s aggressive posture for ferreting out discriminatory practices during audits.
Back Pay under the New Directive
Back pay is generally awarded to an individual or class of individuals whenever there is a finding that discrimination resulted in loss of compensation or benefits to that individual or class of individuals. According to the new Directive, OFCCP will be using two models to calculate back pay: the formula and individual relief models. The Agency will have complete discretion on which model to apply to a particular discrimination charge.
Formula Relief Method
OFCCP will generally use the formula relief model whenever it is “unrealistic to attempt to compute individual losses with accuracy.” Generally, this will be used whenever there is alleged discrimination against a class of five or more individuals. In formula relief cases, OFCCP will include individuals in a class based on them being similarly-situated to one another even if there is no “evidence they were specifically discriminated against.”
OFCCP will use either the shortfall method or the averaging method for calculating the appropriate amount of back pay in formula relief cases. The shortfall method will be employed in instances where the number of individuals in the class exceeds the number of job opportunities, such as in hiring or promotion situations. OFCCP will determine the back pay award under the shortfall method by calculating the “difference between the actual number of persons in the non-favored group that were selected” for the employment opportunity and “the number expected to have been selected” for that opportunity.
For example, XYZ Contractor has 20 software engineer openings. 100 qualified individuals apply for those 20 vacancies, and 50 of the applicants are male and 50 of the applicants are female. XYZ Contractor hires 19 males and only 1 female. OFCCP determines that the selections were the result of discrimination and that each female lost $100,000 in back pay earnings. Using the shortfall method, OFCCP will calculate back pay as follows:
- Expected number of hires: 10 males, 10 females
- Actual number of hires: 19 males, 1 female
- Shortfall: 9 (10 expected female hires minus 1 actual hire)
- Monetary relief: $900,000 (9 females times $100,000 in back pay)
OFCCP will use the averaging method in compensation discrimination or glass ceiling cases. Under this method, OFCCP will determine the back pay amount by the average or typical difference in pay between the favored and non-favored group. For example, the OFCCP will compare the average salary of men to the average salary of women in a given position. The difference between the salary disparities is the back pay to be awarded to each female in the class. OFCCP indicated that it would use regression models and other tools to calculate the average or typical estimate of pay disparities for the total class.
Individual Relief Method
OFCCP will use the individual relief model when the class size is small (e.g., five members or less), the duration of the liability period is short (e.g., less than six months), and there is sufficient documentation to trace the lost earnings for each class member. The Agency will calculate back pay using the individual relief method by tracing the pay history of the favored individuals and comparing it to the lost pay and benefits of the alleged victim(s).
Period of Back Pay
Back pay can be collected from the time when the discriminatory act occurred or two years prior to the date of the scheduling later, whichever occurs later, to the date when the “discriminatory action(s) is ended by the contractor or stopped as a result of a signed Conciliation Agreement, Consent Decree, or Final Court/Administrative Order.” This means that a company could be liable for back pay even if it no longer holds any federal contracts if the discriminatory act occurred at the time when the company was a federal contractor.
Interest and Taxes
Contractors saddled with back pay awards will also have to pay interest and taxes related to those awards. Interest on back pay is calculated at the IRS underpayment rate and is compounded quarterly. Contractors are also responsible for paying their share of taxes on the settlement amount and providing tax withholding and reporting in accordance with IRS laws.
Other Forms of Monetary and Non-Monetary Relief
In addition to back pay, OFCCP warned that contractors can be subject to various other forms of monetary and nonmonetary relief if their practices are determined to be discriminatory. According to the new Directive, other forms of monetary relief include “front pay or salary adjustments,” and nonmonetary relief can include “preferential hiring, preferential promotions, special training programs, reasonable accommodation, systemic injunctive relief, and EEO counseling for supervisors.”
The new Directive sends a strong signal that OFCCP intends to continue aggressively pursuing monetary penalties against contractors whenever contractors’ practices reveal potential indicators of discrimination. Over the last several years, OFCCP has issued a string of initiatives focused on the Agency conducting in-depth audits of contractors’ practices to ferret out potential discrimination or compliance violations. Most recently, OFCCP issued a directive in February announcing that it will be intensely reviewing contractors’ compensation practices during audits.
As a result of these initiatives, it is imperative for contractors to analyze their selection and compensation practices to make certain they are free of indicators of discrimination. If contractors uncover indicators of discrimination during their internal assessments, they should immediately take action to eliminate the discriminatory practices or procedures or thoroughly document the legitimate, nondiscriminatory reasons explaining those indicators.
In addition, it is yet to be seen whether compliance officers at OFCCP will consistently adhere to these methodologies. Compliance officers at OFCCP will sometimes demand back pay for all qualified applicants who were not hired even if there are more applicants than openings. In essence, OFCCP is seeking back pay for individuals even though there was no way for all of the applicants to have been selected, which is inconsistent with any of the methodologies outlined in the new Directive.