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Employment attorneys say corporations are bracing themselves for audits that could disclose flaws in how they pay employees and trigger future discrimination lawsuits. The anticipated audits grow out of federal proposals to adopt new standards for analyzing systemic pay discrimination among federal contractors, which make up about a third of all Fortune 500 companies. The U.S. Department of Labor proposals are pending approval by the Office of Management and Budget. What’s got employers nervous, lawyers say, is a government recommendation that federal contractors evaluate their own compensation practices to catch any potential discrimination. The fear, they note, is that information obtained in the self-audits will eventually wind up in the hands of plaintiffs’ attorneys looking to file discrimination suits. “The downside is that plaintiff lawyer coming in and saying, ‘Aha! These guys have been set up beautifully now for a class action lawsuit. I now I have an admission that I can put forward to a jury.’ You’re vulnerable to a private-sector attack,” said John C. Fox, who chairs the employment and labor group at Manatt, Phelps & Phillips in Los Angeles. Out with controversial theory At the heart of the proposed regulations is a plan to eliminate the government’s controversial “pay grade theory,” which for years has been used to enforce equity by lumping employees in dissimilar jobs and professions in the same pay grade. For example, an accountant and engineer could fall under the same pay range even though their jobs are entirely different. Attorneys note that employers have long argued that this theory is inconsistent with the Civil Rights Act of 1964, which called only for employees who have similar responsibilities and who do similar work to be treated similarly. Meanwhile, the Labor Department’s Office of Federal Contract Compliance Programs (OFCCP), which investigates contractors’ pay practices, has proposed replacing the pay-grade theory with a system known as “regression analysis.” This method allows employers to compare the salaries of employees who perform similar work, have similar responsibility levels and possess similar qualifications and skills. “Now we’re going to compare apples to apples,” said Kenneth Stein, managing partner of the New York office of Ford & Harrison, which represents employers in labor and employment matters. Stein believes the contractor community will embrace the Labor Department’s recommendations to use regression analysis to explain how they make pay decisions. He noted the proposed model also allows employers to take into account factors such as tenure, performance and experience. “I think they would rather have the new standards than have this apples-and-oranges approach,” Stein said. “They now have a much more objective way of looking at their data.” Stein also believes that employers will now be motivated to make corrections before the OFCCP comes in and finds discriminatory practices. “You don’t have to be a rocket scientist to say, ‘Let’s fix it before the government comes in and says fix it,’ ” Stein said. “ The object is to bring about affirmative action through voluntary compliance by contractors.” Stein, however, does anticipate some resistance by smaller employers who may feel overwhelmed by the costs and time associated with self-audits. His advice to them? “Your option is: Don’t do business with the government.” But the Labor Department’s proposals have raised several concerns for the contractor community, noted William E. Doyle Jr., a partner in the labor and employment practice group in the Washington office of Morgan, Lewis & Bockius. Doyle said the self-audit recommendation could be very costly for some companies-costing potentially hundreds of thousands of dollars or more-especially if they don’t have good data to work with, or if they have a complex pay structure. Regression analysis also involves hiring costly statisticians and lawyers who understand class action litigation and how courts look at statistical analysis, he said. “A lot of employers have expressed significant concern about absorbing those burdens of doing that type of analysis,” Doyle said. Then there’s the fear of payroll statistics ending up in discovery in litigation, Doyle said, adding that there should be some protection afforded to companies that voluntarily conduct audits themselves. “There should be a self-analysis privilege which would keep the audit findings confidential and out of the reach of plaintiffs’ lawyers,” he said. But David Frank, deputy director of the OFCCP, noted that “federal contractors-employers-should have a compensation system that does not violate the nondiscrimination laws. If they have a discrimination problem in their compensation system, they are already at risk of a lawsuit by plaintiffs’ attorneys. “Part of OFCCP’s job, by regulation, is to evaluate compensation plans,” Frank said. “Federal contractors need to be in compliance. If anything, by transparently setting out the methodology and legal standard that OFCCP expects itself and contractors to live by, that ought to, over time, lessen the likelihood of lawsuits.” But employment practitioner Larry Lorber believes that the government’s call for companies to conduct compensation analyses is too demanding, arguing that the government is acting like a plaintiff’s attorney. “The government, in effect, has become the plaintiffs’ attorney treating every contractor as if they’re a defendant in a class action lawsuit, requiring that they produce reams of complicated data,” said Lorber, a partner in New York-based Proskauer Rose’s Washington office.

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