OFCCP Issues New Directive on Pay Equity Audits

New Directive From OFCCP Signals the Biden Administration's Prioritization of Pay Equity

In Short

The Situation: The Biden Administration recently issued its first Office of Federal Contract Compliance Programs ("OFCCP") Directive addressing pay equity audits, which formally announced OFCCP's view that pay equity audits completed to satisfy contractor compliance obligations are not protected by the attorney-client or attorney work-product privileges, although the agency acknowledged separate compensation analyses may be. 

The Result: The OFCCP Directive signals the Administration's focus on pay equity and eliminating disparities in gender, race, or ethnicity. Covered contractors on the Corporate Scheduling Announcement List should expect to be asked during their desk audits to provide OFCCP with any pay equity analyses demonstrating compliance with OFCCP regulations, or risk noncompliance. 

Looking Ahead: Contractors should consult counsel to ensure they are able to satisfy their regulatory obligations if audited by OFCCP and have developed and maintained complete Affirmative Action Programs in compliance with OFCCP requirements. While contractors risk consequences for asserting privilege over pay equity audits performed to comply with OFCCP requirements, contractors should be mindful to preserve any privileges for purposes of obtaining legal advice with respect to other, or more nuanced, compensation analyses. 

On March 15, 2022, to coincide with this year's "Equal Pay Day," the OFCCP issued a new Directive on pay equity audits. Its stated purpose is to "provide guidance on how OFCCP will evaluate federal contractors' compliance with pay equity audit obligations and clarify OFCCP's authority to access and review pay equity audits conducted pursuant to 41 CFR 60-2.17(b)(3).1." This marks the Biden Administration's first OFCCP Directive.

This guidance document reiterates federal contractors' obligation per OFCCP regulations to perform annual "pay equity" audits—that is, "in-depth analyses" of their compensation systems—"to determine whether there are gender-, race-, or ethnicity-based disparities." 41 CFR 60-2.17(b)(3).

Going forward during desk audits, OFCCP will request from the contractor a pay equity audit that demonstrates all pay groupings, variables, and results found, including any disparities. OFCCP may also seek model statistics for all variables or model comparisons for any compensation regression or statistical analyses. OFCCP further may ask contractors for additional information regarding how any disparities were resolved. This is the first time OFCCP has formalized its policy that such analyses will routinely be part of information collected during a desk audit. 

Importantly, the agency's pronouncement also reflects its view that contractors may not assert either the attorney-client or attorney work-product privilege over such analyses. This shift will hamper contractors' ability to shield routine, OFCCP compliance-oriented, pay equity audits from the federal government during desk audits and in litigation brought by the agency. Indeed, if a contractor refuses to provide such audits, OFCCP will deem it an admission of noncompliance.

The Directive acknowledges that contractors routinely use counsel to help with annual pay equity obligations. But the agency will no longer accept contractors invoking the attorney-client privilege or the attorney work-product doctrine for audits done to satisfy OFCCP regulations. 

Notwithstanding this encroachment on privilege, the Directive does allow a contractor to perform "separate" pay equity audits "for the purpose of obtaining privileged legal advice, and not for demonstrating compliance with OFCCP regulations." Id. The Directive indicates that OFCCP will not demand production of these separate audits so long as the contractor can demonstrate they were conducted under privilege. It is unclear whether OFCCP will apply this Directive retroactively.

Contractors should also expect to see an increase in OFCCP compliance evaluations, and less transparency into OFCCP's audit procedures and determinations. Just two weeks ago, OFCCP announced a proposal to roll back the prior Administration's final rule aimed at providing transparency in OFCCP enforcement. The new proposal, open for public comment until April 21, 2022, endeavors to increase the number of contractors OFCCP will evaluate and audit. Among other changes, the proposal removes the "quantitative" and "qualitative" evidentiary requirements set forth in the prior rule and restores the Predetermination Notice response period from 30 to 15-calendar days. If the proposal is finalized as is, OFCCP will no longer be required to provide contractors with quantitative and qualitative evidence before issuing a Predetermination Notice or a Notice of Violation. Moreover, contractors will have no certainty as to OFCCP's evidentiary standards. For example, under the 2020 Rule ("Nondiscrimination Obligations of Federal Contractors and Subcontractors: Procedures to Resolve Potential Employment Discrimination"), quantitative evidence required a statistical standard deviation of two or more. This proposal will eliminate such thresholds and empower OFCCP to issue more Notices with less evidence. 

Three Key Takeaways:

  1. Covered contractors should be prepared to turn over any pay equity analyses they conduct pursuant to their annual OFCCP obligations during their desk audits—or risk noncompliance. Covered contractors should expect that OFCCP will dispute any claim of privilege over such analyses, which may result in a longer audit and additional litigation.
  2. Covered contractors should not only expect and prepare for an increase in OFCCP compliance evaluations, but also less clarity and certainty into OFCCP's audit procedures and determinations. 
  3. OFCCP's first Directive makes clear that it will be prioritizing pay equity in gender, race, or ethnicity. To the extent covered contractors have not been conducting pay equity analyses, contractors should work with counsel to establish an annual process to ensure that this annual obligation is being satisfied.   
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