Those familiar with Executive Order Number 11246, prohibiting employment discrimination based on race, color, religion, sex or national origin by federal contractors know that the OFCCP, (the enforcement agency) can and does award back pay to victims of discriminatory practices. Back pay (often referred to as “make whole relief”) is meant to make the victim(s) whole, putting them in the position they would have been in had they not been discriminated against in the first place. While that may sound straightforward enough, the challenge lies in calculating back pay. Directive No. 310, the newest OFCCP directive designed to eradicate discriminatory practices, (whether discovered through an audit or a complaint) provides internal guidance as to how the OFCCP will calculate back pay in such cases. Prior to issuing this new directive, the OFCCP relied on back pay principles set out in Title VII of the Civil Rights Act of 1964 or cases interpreting Title VII. With this new directive, the agency now makes its reliance on those same principles “official”.
Directive 310 provides two models for calculating back pay awards and indicates criteria to be used in determining the circumstances under which each model is appropriate. The OFCCP may calculate a back pay award using either a “formula relief” or “individual relief” model.
The Formula Relief Model
The “formula relief” model applies in cases of systemic discrimination, and calculates a total amount of back pay for an affected class of alleged discrimination victims. The total award will be divided among all the class members, either pro rata or in some other appropriate manner. Classes often include people similarly situated to one another even without “evidence that they were specifically discriminated against”. For example, if a significant number of African Americans have not advanced to certain positions; they may be included in a class of employees impacted by discriminatory practices, and awarded back pay, even though there is no evidence that each and every member has actually suffered from the alleged discriminatory practice(s). The OFCCP recommends this model when it is “unrealistic to attempt to compute individual losses with accuracy” or when using the individual model “will likely cause significant delay or create an undue burden on individual class members to provide documentation or support their compensation and/or interim earnings. Calculating back pay individually might be difficult due to incomplete information or documentation, such as missing timecards, payroll records or tax returns. Formula relief will also be appropriate when the number of class members is more than the number of available employment opportunities, or when the OFCCP can calculate the losses on a class-wide basis using available data.
The OFCCP endorses two methods of back pay calculation under the Formula Relief Method: (1) Shortfall Method; and (2) Averaging Method. The Shortfall Method is meant for use in situations involving job opportunities such as hiring or termination and where the number of opportunities is less than the number of victims. The OFCCP defines “shortfall” as the difference between the actual number of people in the non-favored group selected for employment and the number that would have been expected to have been chosen in proportion to their representation in the pool of qualified candidates, absent discrimination.
The Averaging Method is appropriate where the relevant numbers depend upon the number of discrimination victims and not on the positions at issue. One such situation would be where a group of victims were subject to sex-based discrimination (i.e., Corporate Management Reviews AKA Glass Ceiling Reviews); to calculate back pay, the Contractor would compare the average salary of the male employees with the same seniority as the women, and the difference in the average salaries would be the measure of back pay to be awarded to each woman.
Under either method of calculation, an employer has the option of introducing mitigation as a means to reduce the amount of back pay owed to victims. Victims possess a duty to use reasonable diligence to seek other employment during the back pay period, and their failure to do so can be used to reduce back pay awards. It must be noted that victims are only required to accept employment that is the same or substantially similar to that employment that was sought or held with the Contractor. The Contractor holds the burden to show that the victim could have found such employment with reasonable diligence. Similarly, the burden is on the Contractor to show any interim earnings taken in by the victims. Such earnings do not include unemployment or other public assistance, and earnings generated from employment that is not a true substitute for employment with the contractor will not qualify as interim earnings.
In calculating back pay, the OFCCP will assume a period of unemployment for all victims, even where they were employed at the time they applied (unless there exists reliable evidence that an applicant continued employment after applying). The OFCCP usually relies on national or state unemployment averages to determine the period of unemployment.
The Individual Relief Model
This model is generally used where a single victim or small group of victims (fewer than five) has been identified, where calculation of individual economic losses is feasible and can be documented, and where the liability period is short (fewer than six months).
After gathering relevant documents (including payroll records and collective bargaining agreements), the Compliance Officer (CO) must determine the amount lost by the victim as a result of the discrimination. For example, the CO could compare the wages and benefits of employees who were hired or promoted at approximately the same time as the person who was not. By tracing the employees’ pay history and the value of their benefits, the CO can determine back pay owed to the victim.
As with the Formula Relief model, mitigation is available to a Contractor under the Individual Relief model. A Contractor may request from the victim evidence of interview statements, as well as copies of job applications and rejection letters.
Interest and Taxes on back pay
Finally, interest must be computed on any back pay amount, less any mitigation amounts. Both models provide for interest on back pay to be calculated beginning on the date of the loss and compounded quarterly using the rate set by the U.S. Internal Revenue Service (IRS) for underpayment of taxes.
The final total is subject to Federal Insurance Contributions Act (FICA) and other taxes, and contactors must pay their share of all relevant taxes while also withholding the employees’ share. When distributing funds under the Formula Relief method, the total amount must be divided among the class members on an equitable basis.
For your information –
More details, such as how compensation is defined, how to determine the time period for calculating back pay, how and when to account for attrition and other uncertainties can be found in the full text of the Directive 310, by clicking here.
This newest Directive shows that the OFCCP will continue to proactively investigate and pursue monetary options in cases of discriminatory employment practices. It also aligns the OFCCP and the EEOC in terms of enforcement of employment discrimination laws, perhaps ensuring similar outcomes. Federal contractors should therefore review their selection and compensation practices to ensure compliance with Executive Order 11246, immediately eliminate potentially discriminatory practices and thoroughly document legitimate, nondiscriminatory reasons when appropriate.
If you have any questions or comments regarding this Directive, please feel free to contact Ahmed Younies at 714-426-2918, Ext. 1, or email him at [email protected]