OFCCP Clarifies Federal Contractors’ Compensation Compliance

Allen Smith, J.D. By Allen Smith, J.D. August 29, 2022
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U.S. Department of Labor headquarters

​The Office of Federal Contract Compliance Programs (OFCCP) has issued a revised directive on compensation compliance, addressing concerns federal contractors had about a previous directive issued earlier this year. Some contractors were concerned that the prior version of the directive intruded upon communications protected by attorney-client privilege.

On the same day the revised directive was issued, OFCCP Director Jenny Yang wrote in a blog post that a top priority for the OFCCP is combating agency pay discrimination.

"Contractors therefore should review the directive and ensure they are engaging in compensation analyses as required by the regulations and be prepared to respond to questions regarding those analyses that are detailed in the directive," said Guy Brenner, an attorney with Proskauer in Washington, D.C.

"Federal regulations require contractors periodically—or OFCCP interprets now as annually—[to] review their compensation systems to determine whether there are gender, race or ethnicity-based disparities in compensation," said Sheila Willis, an attorney with Fisher Phillips in Columbia, S.C.

Attorney-Client Privilege Concerns

The main point of the revised directive is that contractors would not have to provide a self-audit when that information is privileged, said Craig Leen, an attorney with K&L Gates in Washington, D.C., who is a former head of the OFCCP. The OFCCP heard contractors' concerns and modified the directive on compensation analysis accordingly, he noted.

One concern with the original directive was that it appeared to favor statistical analyses from a compliance perspective, even though the regulations don't indicate the specific type of review needed. Another concern was that the original directive indicated that contractors could be asked to turn over pay equity self-audits done for compliance purposes without regard to attorney-client privilege, he said.

"Because many companies conduct pay analyses under privilege, this was a significant concern," Willis said.

With the newly revised directive, the OFCCP clarified "a poorly worded and implemented directive," said Joanna Colosimo, SHRM-SCP, vice president of workforce equity and compliance strategy as well as principal consultant with DCI Consulting Group in Washington, D.C. "OFCCP hopefully learned to engage stakeholders before issuing guidelines and directives to ensure future clarity of communication."

Nonetheless, Leen said it was good to see the agency's responsiveness to contractors' concerns about the original directive. "It shows how important it is for contractors and other stakeholders to engage with the agency and provide feedback on guidance that is issued," he said.

Moreover, the agency's recognition of attorney-client privilege will likely lead to enhanced self-audits by contractors, which should improve pay equity, he added.

Alternative Methods

The revised directive provides alternative, nonprivileged documentation federal contractors can supply to the agency during a compliance audit that would demonstrate to the agency that the contractor is satisfying its compliance with the compensation regulations when it has conducted compensation reviews under the attorney-client privilege, Willis noted.

She said these alternative methods include:

  • Providing a redacted version of a review, removing the confidential and privileged portions.
  • Conducting a new, separate audit that is not privileged.
  • Providing the OFCCP with an affidavit regarding compliance.

"Contractors should ensure that, when reviewing their compensation systems, they have a privileged and nonprivileged approach to demonstrating their compliance obligations or that they plan to create a second, nonprivileged analysis that they may provide to OFCCP," Willis said.

Information Provided to the OFCCP

She added that, regardless of the method used, the information provided to the OFCCP should identify:

  • When the compensation analysis was completed.
  • The number of employees included in the compensation analysis and the number and categories of employees excluded.
  • Which compensation was analyzed and how it was combined or separated—for example, base pay alone or base pay combined with bonuses.
  • That compensation was analyzed by gender, race and ethnicity.
  • The statistical method used.

The OFCCP regulations do not indicate that a statistical analysis has to be done to comply with the in-depth compensation analysis requirement, so the acknowledgment about a cohort analysis being an acceptable method was important, Leen said.

Terminology Changes

The revised directive changes the terminology used in the original version, replacing the term "pay equity audits" with "compensation analysis," Brenner said.

"The latter term mirrors the language in the applicable regulation, and the change is intended to avoid confusion about the type of analysis the regulations require," he said. "The original directive suggested contractors were required to engage in full-scale pay equity audits in order to comply with their regulatory obligations."

Colosimo said, "The title of the original directive itself caused confusion for some in the contractor community. For example, the term 'pay equity audit' was not found in the regulatory text, but it was the title of the original directive."

More Guidance Needed

More guidance is needed from the OFCCP on how contractors can conduct compensation analyses of themselves in a manner that the OFCCP will not second-guess, according to Leen.

"Contractors would like regulations addressing this, but they want to have input regarding them. The way to do this is through a notice-and-comment rulemaking where federal contractors and other stakeholders provide feedback that the agency incorporates," he said.

One reason more guidance is needed is "the revised directive makes clear OFCCP will be aggressive in seeking information regarding compensation and compensation analyses during audits," Brenner said.

Moving the Needle

"All federal contractors, and really all employers, need to prioritize pay equity compliance," said Lynn Clements, director of audit and HR services for Berkshire, based in Columbia, Md. "Moving the needle on this issue is a priority for the Biden administration at both OFCCP and EEOC [Equal Employment Opportunity Commission]."

Many states and localities are also passing laws related to pay equity.

"These laws focus on pay reporting, pay transparency and pay analyses to advance pay equity for women and minorities. Every employer needs to be looking at this issue within their organization to evaluate risk, identify any problem areas and develop a plan for remedying any concerns," she said.

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