OFCCP Compensation Directive Focuses on Pay Equity Audits

Allen Smith, J.D. By Allen Smith, J.D. March 24, 2022
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​A recent Office of Federal Contract Compliance Programs (OFCCP) directive focuses on pay equity audits and indicates that the agency will contest attorney-client privilege over self-audits more regularly.

"The directive signals that pay equity compliance is a definite priority of the agency," said Roselle Rogers, SHRM-SCP, vice president for diversity, equity and inclusion at Circa in Milwaukee.

"The agency will now start requesting these self-audits more routinely as a matter of policy and will contest privilege more often," said Craig Leen, an attorney with K&L Gates in Washington, D.C., and a former director of the OFCCP. He said this "will likely cause more disputes regarding privilege and could lead to longer audits."

Pay Equity Audit Not Required

Although the term "pay equity audit" was used by the OFCCP's directive, the agency did not impose a new requirement to conduct pay equity audits, noted Lynn Clements, Esq., director of audit and HR Services with Berkshire in Columbia, Md.

Under Executive Order 11246, supply and service contractors must perform an in-depth analysis of their total employment practices to determine whether and where impediments to equal employment opportunity exist, she explained. Since the early 2000s, this includes a review of compensation systems to determine if there are gender-, race- or ethnicity-based disparities.

"The agency's new directive refers to this requirement as a pay equity audit, but the agency's use of that term is an overstatement of the actual regulatory requirement," Clements said. "Importantly, the OFCCP has never prescribed a particular way for how a review of compensation systems should be conducted, and that remains true under the new directive as well."

OFCCP Asserts Authority to Review Pay Equity Audits

In the directive, the OFCCP said it recognizes that federal contractors often retain counsel to assist with the preparation of the pay equity audit and compliance records. Federal contractors must maintain and make available to OFCCP documentation of their compliance, the agency said.

"Contractors cannot withhold these documents by invoking attorney-client privilege or the attorney work-product doctrine," it stated. Nonetheless, "the contractor may conduct a separate pay equity audit for the purpose of obtaining privileged legal advice and not for demonstrating compliance with OFCCP regulations."

"It's clear the OFCCP wants contractors to prepare pay equity analyses through regression or other quantitative techniques," Clements said. "However, the approach the agency took in the new directive—attacking a contractor's ability to evaluate its compliance with the assistance of legal counsel—really undermines a contractor's incentive to undertake that robust type of analysis to comply with their affirmative action obligations."

Companies must conduct a review of their compensation system as part of their annual affirmative action plan process, Leen said. "These reviews can be qualitative in nature and do not necessarily require a regression analysis under the supervision of counsel who uses it to provide legal advice."

For situations where a contractor consults with an attorney to advise them on pay equity, and the attorney wishes for the company to conduct a pay equity self-audit under the attorney's supervision, this still could be set up under attorney-client privilege, he said.

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More Disputes Over Attorney-Client Privilege Likely

Clements agreed, saying, "The OFCCP does not have the legal authority to change what material is subject to the attorney-client privilege. A contractor can still assert privilege, although the new directive makes clear that the agency is not likely to accept that argument during a compliance review."

Privilege disputes could delay audits and lead to unnecessary litigation, according to Leen. "In OFCCP audits, there is not a judge present during the audit to rule on privilege disputes," he noted. This can occur only if the OFCCP brings an access claim before an administrative law judge, who can take a long time to resolve a simple privilege issue.

He predicted that the agency and contractors will work together to reach a common ground on privilege as a result.

"In order to ensure that they are evaluating employee groupings of similarly situated employees, most organizations should be analyzing pay by job titles, and they should be prepared to submit that analysis to the OFCCP," said Joshua Roffman, an attorney with Roffman Horvitz PLC in McLean, Va. "To the extent that analysis shows disparities, the employer also should show that it investigated and addressed any areas flagged in that analysis."

He added that if an employer wants to do a systemic analysis using the approach that the OFCCP uses to determine how the compensation component of an OFCCP compliance review might proceed, the employer should do that separately and under attorney-client privilege.

"Organizations subject to OFCCP jurisdiction do need to think strategically about what pay analysis they are covering under attorney-client privilege and what type of compensation analysis is being used for OFCCP compliance purposes," said Joanna Colosimo, SHRM-SCP, vice president of workforce equity and compliance strategy and a principal consultant with DCI Consulting in Washington, D.C.

Proposed Rule to Identify and Remedy Discrimination

In a proposed rule issued March 21, the OFCCP called for rescinding "inflexible evidentiary requirements" early in the compliance evaluation process.

The OFCCP said that rigid evidentiary standards and definitions imposed by a 2020 rule impede its ability to provide contractors with early notification of indicators of discrimination. The standards also unnecessarily divert agency and contractor resources away from addressing discrimination and are inconsistent with evidentiary standards under Title VII of the Civil Rights Act of 1964, the agency stated.

"The 2020 rule implemented a number of reforms to improve the transparency and efficiency of the agency's compliance reviews, [and] to provide greater certainty as to the specific procedures and Title VII standards OFCCCP applied in compliance reviews," Leen said. Ultimately, the 2020 rule facilitated "early resolution of cases for the benefit of employers and employees alike, while preserving scarce agency resources for cases that could not be resolved," he added. "Many of these reforms came from suggestions by stakeholders and career staff at the agency."

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