The U.S. Equal Opportunity Commission has finalized the revised EEO-1 Form, which will require employers and federal contractors with 100 or more employees to include pay data, categorized by gender, race and ethnicity, in their reports for the first time. The new form will apply to calendar year 2017, and the first report must be submitted by March 31, 2018.

Despite strong opposition from many business groups, the final form is little changed from the EEOC’s initial proposal, except in two notable respects: First, the new annual reporting deadline is March 31 (beginning with calendar year 2017). This change will at least allow employers to use the same calendar-year W-2 information that is used for tax purposes. However, the EEOC did not move from its position that W-2 earnings will be the basis on which alleged pay discrimination will be analyzed, despite the strong recommendation of the National Academy of Sciences (“NAS”), as well as employer groups, that “rate of pay” (i.e., annualized base pay) be used as affording a more reliable basis for comparison than W-2 earnings. Because W-2 earnings include all forms of compensation, including those affected by employee choice, such as voluntary overtime and benefit selections, the number of variables makes any statistical analysis of those earnings more problematic and potentially less probative than using rate of pay, and is likely to yield anomalous comparisons and skewed results. The EEOC apparently turned a deaf ear to these legitimate concerns.

Second, the EEOC has confirmed that employers can use a standard number of hours for exempt employees in completing the report: 40 hours for full-time and 20 hours for part-time. Since most employers do not record actual hours worked by exempt employees, this change makes it administratively easier for employers to complete the form. However, the formulaic solution offered by the EEOC disregards a potentially significant variable in explaining differences in W-2 earnings; actual hours worked by exempt employees can have an impact on total earnings depending on an employer’s compensation practices. For example, even exempt employees can be paid additional sums for working beyond a certain number of hours without losing their exempt status; they can also be paid discretionary bonuses for working harder. Under these circumstances, actual hours worked could explain pay differences.

Numerous other employer requests for revisions to the EEOC’s original proposal were simply ignored, including requests to adjust what are perceived to be overbroad pay bands, to increase the employee threshold for required compensation reporting, and to address the lack of safeguards for protecting the confidentiality of pay data, especially for data released to the OFCCP.  Finally, the EEOC did not follow the recommendation of the NAS that the EEOC develop a comprehensive plan for using employer data before imposing a collection tool.

Before the first EEO-1 Report is submitted, employers should conduct a privileged review, under the direction of counsel, to get a handle on what the W-2 earnings comparison looks like and how it might be used by the EEOC as evidence of pay discrimination. If this preliminary analysis suggests the existence of potential issues, an employer should prepare legitimate explanations for any apparent discrepancies or consider appropriate adjustments. A note of caution: while the EEOC commentary states that an employer will have an opportunity to submit additional information and to “explain its practices” before any finding of discrimination will be made, the clear objective of the reporting requirement is to help the EEOC and the OFCCP conduct targeted investigations of alleged equal pay violations.

The EEOC will offer free webinars for employers on October 20 and October 26, 2016.

FAQ’s are also posted on the EEOC website.