On July 17, 2013, the Office of Federal Contract Compliance Programs (OFCCP) issued a new directive on how to calculate back pay for victims of employment discrimination. The Directive serves at least two purposes. First, it memorializes current practices in the calculation of monetary remedies at OFCCP. Second, it resolves some open questions or variations in the approach to the basic calculation of remedies between the Regions. The Directive is intended to improve consistency in the methods used to calculate back pay. Federal Contractors who have consistently requested more consistency in agency practices from Region to Region should appreciate the issuance of this guidance. However, more guidance also affects the flexibility in remedy negotiations should you ever find yourself in the undesirable position of needing to resolve finding of discrimination against your company.

Basic Principles

The Directive reaffirms the fundamental principle that Federal Contractors can expect back pay to always be a part of make-whole relief where there have been monetary losses. Make-whole relief is relief intended to put victims in the position they would have enjoyed in the absence of discrimination. The Directive reaffirms that back pay can cover a liability period beginning as early as two years prior to the receipt of the scheduling letter and ending when the discrimination has ended either by an act of the contractor or by administrative or court action such as conciliation agreements or court orders. Unlike the Federal Contract Compliance Manual (FCCM), the new directive does not specifically discuss how the contractor can stop the accrual of back pay. The FCCM directly states that a bona fide, no strings attached offer of the employment position at issue can stop the accrual of back pay liability whereas the Directive makes only an oblique reference to the contractor ending the discrimination. This defense to further accrual of back pay liability is based on well settled case law so its omission from the directive may simply mean that the agency felt the guidance in the FCCM on this was sufficient. The guidance does not expressly rescind the current FCCM Chapter on remedies and does not explain its relationship to that Chapter. Presumably, any direct conflict between the two documents would best be resolved by following the new Directive. The omission is not a direct conflict so both the FCCM and the Directive should be read together on this issue.

Consistent with the FCCM, the new Directive states that victim-specific relief cannot be interchanged with formula relief. The remedy is calculated under one method or the other, not an amalgam of both. A Federal Contractor can still argue, in a formula relief situation, whether a given individual belongs in the affected class in the first place, but will not be heard on whether any particular individual would have actually earned an amount equivalent to his or her share of the remedy in the absence of discrimination. Formula relief focuses on the monetary harm visited on the affected class as a whole and divides that amount across the affected class. In contrast, in victim-specific relief, the remedy should be tailored to what the particular victim would actually have earned had discrimination never occurred.

The Directive definitively states that interest is to be calculated on the adjusted back pay amount after mitigation has been deducted. When I was Regional Director and put this question to a former Director of Policy, I was given verbal instructions that the remedy was to be calculated on the unmitigated amount and added to the adjusted back pay after mitigation. However, this instruction was only verbal and was a one-on-one inquiry. The Directive resolves this question and memorializes that resolution. Running the interest after deducting mitigation makes sense. Back pay interest is intended to compensate the affected class for the loss of the use of the money they would have earned in the absence of discrimination. The mitigation amount is what they were reasonably expected to have earned during the liability period and thus, not reflective of their monetary losses. Interest rate calculations continue to be at the IRS rate for underpayment of taxes and continue to be compounded quarterly.

The agency specifically rejects mitigation of benefits as part of the back pay award absent specific evidence that the victims of discrimination obtained these benefits. Contractors should expect that there will be virtually no mitigation of benefits in formula cases since formula relief does not rely on victim-specific factors. This position is consistent with the agency’s past practices and is now part of its written guidance.

The agency also restates its position that compensation discrimination occurs every time a payment impacted by a discriminatory compensation decision is issued and that the usual rules about the period for which back pay can be recovered and about continuing violations apply in compensation cases.

Formula Relief

In contrast to the Federal Contract Compliance Manual (FCCM), the new directive shifts the emphasis away from victim-specific relief as the preferred method of remedy calculation and treats it as simply an alternative method of remedy calculation. The FCCM states, “The victim-specific model, which provides make whole relief for identified victims of discrimination, is the primary one for remedy in a pattern and practice case which focuses on individual victims. It is the preferred approach and should be used whenever feasible.” FCCM 7F11.

The new Directive’s shift in focus from victim-specific to formula relief reflects the actual emphasis in relief calculations at OFCCP. Formula relief is used in almost all OFCCP remedy calculations. As complicated as formula relief can be, the data collection and the calculations in formula relief are significantly more manageable than comparable calculations using victim-specific relief in a large class case. The fact that OFCCP reviews rely extensively on statistical triggers means that often affected class members are not even aware of the discrimination and quite often are no longer easy to find. It is much more efficient from an enforcement perspective to calculate the remedy based on reasonable assumptions than to pursue individuals for specific information concerning their earnings’ history. There are benefits to this from the contractor’s perspective as well, since calculating the remedy without input from the affected class members minimizes the prospect of stirring up additional potential litigation.

At the end of the day, OFCCP makes the choice of which method of relief to seek. Both the new directive and the FCCM clearly state that the determination of which formula to use in calculating back pay rests with the agency and not the contractor.

The directive identifies five situations that call for formula relief:

  1. When calculating individual back pay relief for numerous aggrieved individuals is difficult because complete information or documentation (i.e., timecards, payroll records, tax returns) is unavailable or missing;
  2. When using the individual relief model to calculate back pay for each class member will likely cause significant delay or create an undue burden on individual class members to provide documentation to support their compensation and/or interim earnings;
  3. When the number of class members exceeds the number of employment opportunities that are available;
  4. When the reconstruction of the employment decision is speculative (e.g., in the instance when there are no lines of progression), which makes it difficult for the CO [compliance officer] to determine at what specific stage in the employment process the adverse action actually occurred, or any other situation in which (especially for jobs with few minimum qualifications) it would be impossible to determine which class members would have been hired absent discrimination; and/or
  5. When the losses can be calculated on a class-wide basis from available data, as may be the case with compensation issues.

Basically, unless you have less than five affected class members, you should expect the remedy calculation to always be based on formula relief. Even where the class is less than five, the agency may opt for formula relief if the determination of actual individual monetary loss would otherwise be difficult or time-consuming to calculate.

Identifying Victims

According to the new Directive, the first step in applying formula relief is to identify the victims of discrimination. It states, “In formula relief cases, OFCCP will include all individuals who meet the case-specific criteria of potential victims, without requiring evidence that they were specifically discriminated against.” This formulation is somewhat different than the discussion of potential victims in the back pay section of the FCCM. The FCCM provides examples of affected classes such as “all Blacks who failed an unvalidated [sic] pass-fail test”, “all Hispanics that were eligible for promotion”, and “all women denied reinstatement following maternity leave.” In these contexts, “case-specific” criteria means a case challenging the test that had a disparate impact on Blacks, or a case about discrimination against Hispanics in promotions, or a case about discrimination in the terms of maternity leave. The scope of the violation pretty much establishes the scope of the class. It is not clear what “without requiring evidence that they were specifically discriminated against” actually adds to this explanation of who the victims are.

Presumption of Continuous Employment

The new Directive states that OFCCP will operate under the presumption of continuous employment throughout the back pay period unless the Federal Contractor presents sufficient evidence to overcome that presumption. Basically, the agency will assume that the entire affected class continued to work for the contractor until the end of the back pay period. Contractors can and have overcome this presumption by presenting evidence that the attrition rates and average tenure of comparators who were not in the affected class is shorter than the period of time for which back pay is sought.

For example, if the average comparator only stays on the job for six months, it may suggest that back pay based on 2 years of monetary losses is more than what would have been earned in the absence of discrimination. Of course, the agency will examine closely the evidence presented to overcome the presumption. If the evidence shows that minorities tended to stay on the job much longer than comparator non-minority employees, statistics about the tenure of non-minorities may be viewed as understating the likely average tenure of the affected class. In the example above, if non-minorities stayed an average of six months but minorities stayed an average of two years, the argument based on a six month tenure would be rejected. Of course, evidence of attrition and tenure that are themselves impacted by or caused by discriminatory actions, such as discriminatory lay offs, will not be accepted as sufficient to overcome the presumption of continuous employment. The Directive also notes that evidence that a few individuals left the workforce will not be as probative as evidence that a significant number of people left the jobs in question. Finally, the Directive notes that arguments about attrition rates may impact total losses, but will not “artificially” shorten the period over which those losses were considered to have occurred. In other words, where the average tenure is six months, the agency will not assume that the liability period runs six months from the date of the first discriminatory employment event, but instead will factor in the impact of attrition on, for example, a year by year basis over the entire liability period.

Calculating Remedy

The Directive explains the shortfall method of calculating monetary losses and the averaging method. The shortfall method is applicable where affected classes are discriminatorily deprived of an employment opportunity. The shortfall is calculated by determining the number of affected class members that would have been expected to be accorded the employment opportunity in the absence of discrimination and subtracting from that number the number of actual class members who were given the employment opportunity. The difference is the shortfall. So, for example, if 10 men and 10 women, equally qualified applied for the same job, you would expect 5 women and 5 men to be hired in a fair world. If only one woman is hired, the difference between expected hires and actual hires is 4; thus, the shortfall is 4. To devise a remedy, the agency would calculate the monetary value of the shortfall of jobs plus interest and divide this money among the 9 women who were not hired since the agency does not know which of these women would have been hired in the absence of discrimination.

The averaging method is basically applicable in compensation cases since you are trying to correct the disparity in the average pay of two comparable groups of workers. For example, if the average pay of men is $50,000 a year and the average pay of women (all things being otherwise equal) is $45,000, the men on average make $5,000 more than similarly situated women. The back pay remedy would be calculated to bring the women’s pay up to match the average pay the men earned plus interest. There are some variations on this theme, but essentially this is how the two main calculations work.

Mitigation

Victims of discrimination are required to make reasonable efforts to find alternative employment. Contractors are permitted to raise as an affirmative defense that the amount the victims either earned or could have earned with reasonable diligence should be deducted from the back pay that might otherwise be owed.

The Directive memorializes the fact that the contractor is required to plead and prove that a mitigation factor should be deducted from the back pay remedy. In the prior administrations, it was assumed that contractors would always raise mitigation so the agency simply factored mitigation in up front. The agency changed this practice with the present administration and presented its initial calculations of remedy without deducting a mitigation factor.

All contractors should be prepared to offer a reasonable argument for a mitigation deduction. Failure to do so is kind of crazy. The mitigation factor must be based on likely interim earnings rather than other payments such as unemployment benefits, workers compensation, pensions, Social Security and any other public assistance. I have had Federal Contractors try to add these into the mitigation figure; the Directive simply reaffirms the longstanding position that such payments are not to be included in mitigation. Part time job wages that could have still been earned even in the absence of discrimination are not to be deducted as mitigation since they would have been earned anyway. OFCCP will continue to use the minimum wage as the default figure for mitigation calculations unless a contractor can offer a sufficiently persuasive alternative.

Unemployment Period

OFCCP usually does not allow a mitigation deduction for the period of time it would have taken the average, reasonably diligent applicant to find a comparable job. The Directive memorializes this practice. Further, the Directive states that all applicants will be assumed to be unemployed absent reliable evidence that they continued their employment after applying for the position. This is a meaningful change. Previously, applications were accepted as evidence showing whether or not the affected class applicant was employed at the time of application. In negotiations, OFCCP would sometimes forego the unemployment period of no mitigation for applicants whose applications indicated current employment on the assumption that they would more than likely have simply continued working in the job they had when they applied until they found another job. This will no longer be acceptable. Unless, the contractor can specifically show these individuals are still employed using evidence other than the application, everyone will be considered to have a period of time when no deductions should be made for mitigation. I expect this to eventually be challenged by Federal Contractors since the applications are evidence and may be the only evidence available to the agency on the question of whether some significant portion of the affected class was employed at the time of the discriminatory hiring event. Like the agency, the contractor is not required to prove any fact beyond a reasonable doubt. Proof in civil rights cases is about most likely scenarios rather than moral certainties.

The agency also specifically identifies the Bureau of Labor Statistics’ Current Population Survey as a common and acceptable source to determine average unemployment periods. The Directive specifically rejects the use of unemployment insurance payment data for measuring periods of unemployment. This guidance is also helpful since Federal Contractors and OFCCP have been in different camps about which data to rely on for average time to find a comparable job.

Taxes

OFCCP basically restates what is and is not taxable in monetary relief. The contractor is responsible for paying the employer share of any applicable taxes on top of any settlement amount and for providing withholding and reporting as required by the IRS. Unlike EEOC’s Regional Attorney’s manual which states with respect to non-wage money remedies that “the employer should determine in what circumstances it is required to provide a Form 1099 for such relief”, OFCCP specifically states when an IRS form 1099 should be provided to the affected class members. The Directive instructs the compliance officer to contact the Solicitor’s Office to ensure that conciliation agreements handle any tax issues appropriately. This suggests that tax forms and the like will be directly discussed in conciliation agreements, rather than left to the company’s tax lawyers.

Victim-Specific Individual Relief

The Directive identifies three factors to be considered in determining whether victim-specific relief is appropriate:

  1. The total class size is small (e.g., fewer than 5 members);
  2. The liability period is of short duration (e.g., fewer than six months); and/or
  3. The economic losses for each individual victim can be traced and supported with documentation.

The basic difference between formula relief and victim-specific relief is that in victim-specific relief, you need to determine as near as possible what this particular individual victim would have earned in the absence of discrimination. The biggest difference comes in calculating the actual interim earnings of each victim. You need documentation that basically only the victim can provide.

Summary

The new Directive provides a useful guide to the general contours of OFCCP remedy construction. Here are a few things to remember if you find yourself in remedy negotiations with OFCCP:

  1. Identify the rebuttable presumptions in calculation of remedies and be prepared to make a persuasive case concerning their applicability to the facts of your case;
  2. Review your personnel records to determine if any affected class members were subsequently hired at any of your facilities or offered positions with no strings attached that they declined, as this is likely to affect your back pay liability;
  3. Keep track of applications and any information you may have, including interview notes, that show whether the individual was employed at the time of application and how much money they were earning;
  4. Identify any delays in the entitlement to benefits, such as vesting in the retirement plan or accrual of vacation leave, as this will factor into your bottom line back pay;
  5. Always request a mitigation deduction and be prepared to present supporting evidence;
  6. Always request a list of the affected class members and the reasons for their inclusion in the class;
  7. Always request a clear explanation of how OFCCP arrived at the money figure;
  8. Always run your own remedy calculations;
  9. Be prepared to address the question of attrition rates and how they should be applied in the remedy calculation;
  10. Make the agency identify the specific employment decision that was discriminatory, especially in compensation cases, as this is crucial to the calculation of back pay. The strength and weakness of the case against you is an important factor arriving at a back pay settlement figure.

Remember, back pay is not a scientific calculation and reasonable people can disagree on how to arrive at the back pay figure. Conciliation agreements do not usually discuss the basis for the back pay figure, only the amount. You are not required to agree with OFCCP’s methodology to successfully negotiate a back pay remedy; you just need to agree on an amount. Familiarize yourself with the amounts of remedy that are usually obtained by the agency in cases similar to yours and approach the negotiation with a positive outlook. The agency has its own reasons for wanting to avoid litigation. Remember most cases are resolved through settlement rather than litigation.