Five Standards for an OFCCP-Compliant Compensation Self-Evaluation: Standard #2

In the previous two posts, I provided an overview of OFCCP-compliant compensation self-audits, and a discussion of the first standard. Here, I discuss the second standard: the similarly-situated employee groups (SSEGs) should be large enough for meaningful statistical analysis.

In the construction of SSEGs, employers should also keep in mind the number of employees being grouped together. While it would be inappropriate to place the CEO and the CEO's administrative support staff in the same SSEG, it would be equally inappropriate to place each employee in the organization in his or her own SSEG. The SSEGs should be "large enough" that a meaningful statistical analysis can be performed.

The definition of "large enough" is somewhat subjective. At a minimum, there must be more individuals being studied than there are explanatory factors. If there are more explanatory factors than there are individuals being studied, the "effect" of each explanatory factor cannot be calculated using multiple regression analysis.

Assuming that the size of the SSEG meets this minimum threshold for regression analysis, determining whether the SSEG is "large enough" becomes a question of judgment. Although there are no definitive rules, the OFCCP offers the following guidance on this issue:

"... SSEGs must contain at least 30 employees and at least 5 employees for each comparison group (i.e., females/males, minorities/non-minorities..."

The OFCCP recognizes that not every employee can be appropriately placed in an SSEG. The guidelines indicate that these individuals should be excluded from the statistical analysis, and their compensation should be analyzed by non-statistical methods (such as mean or median analysis). However, the OFCCP cautions that statistical analyses encompassing less than 70% of the organization's workforce would be subject to "careful scrutiny".

The construction of SSEGs is one of the most important components of the compensation self-evaluation. Errors in groupings can render the results generated from the self-evaluation meaningless. Additionally, the SSEGs constructed serve as a memorialization of the organization's view of its employees and the functions they serve. Legal counsel should be involved in the self-evaluation process from the onset to advise on issues of privilege, work product, discoverability, etc., to ensure that the interests of both the employer and the employee are protected.

A discussion of the third standard will be posted on October 22nd.