On March 15, 2022, the US Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) issued a new directive putting federal contractors on notice that it will more closely scrutinize their pay equity audits. Making headlines, the directive states that federal contractors are expected to hand over information about their internal pay analyses when being audited by the office, including documents that are protected by the attorney-client privilege and/or work product doctrine.

Background

Executive Order 11246 requires affirmative action and prohibits federal contractors from discriminating on the basis of race, color, religion, sex, sexual orientation, gender identity, or national origin. Contractors also are prohibited from discriminating against applicants or employees because they inquire about, discuss, or disclose their compensation or that of others.

As part of their affirmative action obligations, supply and service contractors are required to perform an in-depth analysis of their total employment practices to determine whether and where impediments to equal employment opportunity exist. This includes conducting an in-depth analysis of their compensation systems to determine whether there are gender-, race-, or ethnicity-based disparities, as provided in 41 CFR 60-2.17(b)(3).3.

To comply with the regulations, most companies doing business with the federal government  conduct an evaluation of their pay practices for potential gender, race, or ethnicity-based disparities.  Oftentimes, these analyses are performed with the help of outside counsel who provides legal advice regarding, among other things, compliance with the requirements enforced by OFCCP. And, until now, these pay audits have been considered privileged and confidential.

Impact of the new directive

During a compliance evaluation, a supply and service contractor is required to provide OFCCP with compensation data. In addition to requesting additional compensation data, interviews, and employment records, the OFCCP is now making explicit that it may also seek the contractor’s evaluation under § 60-2.17(b)(3), which the OFCCP calls the “pay equity audit.”

The OFCCP explains its mandate as follows:

OFCCP has the authority to review the contractor’s pay equity audit conducted pursuant to 2.17(b)(3) to understand the methodology used and verify compliance with this requirement. OFCCP will request that the contractor provide a complete copy of the pay equity audit(s) conducted pursuant to 2.17(b)(3) that shows all pay groupings that were evaluated, any variables used, and the results of the analyses, including any disparities found. For compensation regression or statistical analysis results, OFCCP may request the model statistics (such as b-coefficients, significance tests, R-squared, adjusted R-squared, F-tests, etc.) for all variables or comparisons in the model. OFCCP may also request information relating to the frequency of pay equity audits, the communication to management, and how the results were used to rectify disparities based on gender, race and/or ethnicity.

But what about legal privilege?

The OFCCP takes the position that contractors’ pay equity analyses are not privileged because contractors are legally required to conduct the analyses and to provide records to the OFCCP upon request. 41 C.F.R. § 60-2.10(c). The directive posits that this legal obligation defeats any expectation that the pay equity audit and compliance records prepared with the assistance of counsel would remain confidential.

The directive includes a warning to comply: “[f]ailure to provide the required pay equity audit will be considered by OFCCP as an admission of noncompliance with these regulatory requirements.”

An open question

Interestingly, the directive recognizes that contractors “may conduct a separate pay equity audit for the purpose of obtaining privileged legal advice, and not for demonstrating compliance with OFCCP regulations.” And, “[w]here the contractor has produced to OFCCP an acceptable pay equity audit sufficient to demonstrate compliance with 2.17(b)(3), OFCCP will not require production of these separate pay equity audits, to the extent that the contractor can verify that they were conducted under privilege.” Given this distinction, it will be crucial for contractors distinguish their OFCCP compensation reviews from their privileged pay equity audits. However, it remains an open question as to how the OFCCP will interpret and enforce the differentiation.

Key takeaways

Last year, OFCCP Director Jenny Yang told Bloomberg Law that the OFCCP would prioritize equal pay and workforce diversity efforts. (Previously, Yang held the top role at the Equal Employment Opportunity Commission, where she led the collection of pay data from private employers as a method of addressing systemic gender and racial pay gaps. This initiative was later quashed by the Trump administration.) This directive (the first of Yang’s tenure) is in line with our expectation that we will see heightened pay equity enforcement under the Biden administration, including through OFCCP activities.

Of course, time will tell if the directive is ultimately struck down. We will continue to monitor this development and share updates on The Employer Report.