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February 26, 2016Client Alert

The EEOC’s Proposal to Expand the EEO-1 Report to Collect W-2 Pay Data from Employers by Pay Band – What does it mean for you?

On February 1, 2016, the Equal Employment Opportunity Commission (EEOC), in conjunction with the Office of Federal Contract Compliance Programs (OFCCP), published a Notice of Proposed Rulemaking (NPRM) which seeks to add a significant new component – pay data and hours worked – to your EEO-1 reporting requirements. This article reviews the basics of the proposed rule and asks serious questions regarding the cost benefit of this proposal.

What will employers have to report?

a.  Component 1 Data: Employee Numbers by Job Group, Race, Ethnicity and Sex

Currently, the EEOC requires certain employers to annually report the number of employees employed in a specific work location by job group, race, ethnicity and sex. The current report format looks like this: Sample EEO-1 Form from EEOC. The new regulations call the data reported on the current EEO-1 form to be the "Component 1" data. This information must reflect data from any pay period occurring in the months of July through September 30 of the same year. The EEO-1 must be filed by September 30 of the same year. Federal contractors with 50 to 99 employees and private employers with less than 99 employees will only be required to report this data.

b.  Component 2 Data: Compensation by Pay Band within EEO-1 Category and Work Hours

Private employers with more than 99 employees will also report: (a) by specific race and gender; (b) aggregate W-2 earnings and hours worked looking back for a 12-month period from a pay period between July and September of the same year; (c) in designated bands, and; (d) in each of the 10 EEO-1 job groups. According to the EEOC, covered employers will "simply" count and report the number of employees in each pay band. For example, a sample EEO-1 job category broken down by pay band would look like this

In addition to reporting aggregate W-2 earnings by EEO-1 category and pay band, the proposal requires employers to report the total number of hours worked by the employees in each EEO-1 pay band cell. The EEOC has not yet decided how to require reporting of salaried/exempt employees and is asking for input from employers. One option identified is recording 40 hours/week for all salaried employees. Current OFCCP practice for compensation reporting during compliance reviews typically follows this model. While this approach is easier, it disregards a potentially important variable in explaining differences in compensation, even for exempt employees. Although the proposal states multiple times that “total hours worked” data is maintained by almost all payroll systems, that certainly has not been our experience for exempt positions and is not required by federal law. The EEOC also confirms that it is not proposing to require an employer to begin collecting additional data on actual hours worked for salaried workers, to the extent that the employer does not currently maintain such information.

Aside from the primary data collection, the proposal also asks employers to report the amount of employer staff time used to collect and report pay data. 

Why W-2 data?

The EEOC had numerous options in deciding what type of compensation it would collect. W-2 data was selected for two main reasons: (1) the EEOC wanted a measure that encompasses as much employer-paid income earned by an individual as possible, as opposed to base wage rate or salary, because that amount excludes overtime pay, severance pay, shift differentials, bonuses of all types and holiday bonuses; and, (2) it wanted to minimize the burden on employers.

While the W-2 data is more inclusive, one can argue whether or not this is beneficial to a statistical analysis. The EEOC approach runs contrary to the recommendations of the National Academy of Sciences for a similar proposal in 2012 (2012 NAS Report) which stated that “rates of pay,” rather than actual earnings, would be preferred for any statistical analysis. In addition, many believe the EEOC substantially underestimates the ease of pulling W-2 data mid-year. The EEOC also considered that the OFCCP's 2014 Notice of Proposed Rulemaking Equal Pay Report proposes use of W-2 earnings.

Why do they need this data?

Announcing this new proposal in conjunction with the White House commemoration of the seventh anniversary of the Lilly Ledbetter Fair Pay Act highlights the continued campaign to address pay discrimination. The EEOC announcement made clear that the EEOC and OFCCP believe this new tool will provide insight into pay disparities across industries and occupations. Compilation and publication of aggregate data will, according to the EEOC, help employers conduct their own pay practice analyses and encourage voluntary compliance activities. Both the EEOC and OFCCP have indicated this data will be used proactively – to identify existing pay disparities warranting further examination, to assess complaints of discrimination and to focus investigations. The EEOC suggests that it will be developing statistical tools to analyze this data and also encourage employers to self-monitor using this data. However, this is a tall task given that the EEOC hasn’t even determined how it will analyze the data and the job group pay bands are sure to include workers in different job titles, essential functions, experience, performance, and a host of other variables which lead to valid compensation differences.

When will the proposal take effect?

The current proposal is not yet final. The EEOC is soliciting comments by April 1, 2016. Comments may be submitted online at www.regulations.gov, the Federal eRulemaking Portal. The U.S. Chamber of Commerce has requested a 90 day extension of the comment period.

If the final regulations mirror the proposal, starting in 2017, employers that are subject to the EEO-1 reporting requirement and that have 100 or more employees will need to comply by adding Component 2 pay information. If these rules are finally approved, the revised EEO-1 report will replace the OFCCP’s Equal Pay Report for federal contractors and subcontractors.

What will the updated EEO-1 form look like?

The EEOC has published a sample form, which can be found here: www.eeoc.gov/employers/eeo1survey/2016_new_survey.cfm.

What additional time investment will be required to report this data?

That's an easy question to answer, right? The EEOC thinks so and estimates it will take your HR professional 8 hours at $47.22/hour to implement this additional data reporting. We suggest analyzing this question yourself and consider submitting comments on this estimate and the ability of the data to be collected by your organization.

What should you do now?

The OFCCP and EEOC’s focus on compensation is showing no signs of retreat. If you have not already, you should take a close look at job descriptions and compensation guidelines and procedures, including starting wage and merit, bonus and other adjustments. Those individuals within your organization who are decision makers as to compensation should receive regular training. You should also be continually reviewing compensation data to identify any pay disparities that cannot be explained by valid nondiscriminatory factors. 

 The EEOC is requesting public comment on: 

  1. Whether the proposed collection of information is necessary for the proper performance of the Commission’s function, including whether the information will have practical utility; 
  2. Improve the accuracy of the Commission’s estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; 
  3. Enhance the quality, utility and clarity of the information to be collected; and 
  4. Minimize the burden of the collection of information on those who are required to respond, including the use of appropriate automated, electronic, mechanical or other technological collection techniques or other forms of information technology, e.g., permitting electronic submission of responses.

For more information or questions, please contact your Michael Best attorney; Farrah N.W. Rifelj at fnwrifelj@michaelbest.com or 608.257.3501; or Marion C. Smith, Director of Labor Research, at mcsmith@michaelbest.com or 414.225.2760.

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