The Washington Post

Executive order: Contractors must allow employees to discuss pay with each other

U.S. President Barack Obama signs an Executive Order and a Presidential Memorandum at an event marking Equal Pay Day in the East Room of the White House in Washington, D.C., U.S., on Tuesday, April 8, 2014. Obama signed two executive actions today designed to shed light on the pay practices of federal contractors, which he said will help eliminate salary disparities between men and women. (Pete Marovich/Bloomberg) (Pete Marovich/Bloomberg)

President Obama’s mandate that federal contractors must let their employees discuss compensation might be minor for most businesses, but the heavy lifting is yet to come.

By itself, the order has a “pretty small impact” on most businesses, said Alan Chvotkin, executive vice president of contractors’ trade group Professional Services Council — especially since it simply prohibits contractors from retaliating against discussions about pay, but doesn’t yet require them to report compensation data.

“Very, very few companies have an affirmative policy that prohibits conversation about pay,” he said, noting that smaller companies are more likely to feel the effects of the order “because of the often close working environment of their employees, whereas larger companies have a larger and often more distributed workforce, even if located in the same building or complex.”

In an attempt to discourage pay discrimination, Obama last week signed an executive order requiring federal contractors to allow employees to discuss their compensation with each other, known as “Non-Retaliation for Disclosure of Compensation Information.” He also signed a memorandum instructing the Labor Department to draw up regulations under which federal contractors would be required to submit compensation data by race and sex.

Once the Labor Department creates those rules — which would be used to ensure compliance with equal pay laws — Chvotkin says he expects contractors to push back. New reporting requirements could force contractors to spend money on new payroll processing systems or on new employees to collect and analyze the data. “Most company payroll systems don’t capture data that way [by sex and race],” he said.

Chvotkin noted that federal contractors are also dealing with another requirement from the Labor Department, effective since late March, under which they must collect and report compensation data for employees with disabilities.

“It’s been a cumulative burden over the last couple of years, at a time when federal spending is going down and the competition for those federal dollars is increasing,” he said. “I think there are going to be some additional companies that will continue to shy away from doing business with the federal government” as reporting requirements increase, he added.

The mandate could serve as a warning for companies that pay employees different wages for similar roles without a sound justification, Deltek Vice President of Information Solutions Kevin Plexico said. He recommended that those companies “quickly evaluate their compensation practices and make changes before it becomes an issue.”

(Deltek provides weekly content for Capital Business.)

As reporting requirements grow, businesses should consider compensation transparency as the cost of doing the business with the government, said Hope Lane, a partner at Rockville-based accounting and consulting firm Aronson.

“Executives have had to learn that their salaries are going to be public knowledge,” Lane said. “No one ever likes for people to talk about salaries, but it is a highly regulated environment that we have had to increasingly grow accustomed to.”

And while new rules could boost business for consulting firms such as Aronson, which help contractors wade through accounting regulations, they could create a greater opportunity for companies specializing in human resources, Lane said. “Contractors will need to decide, ‘How do you handle this organizationally, to mitigate any potential issue that may come from this information becoming exposed?’”

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