Take Steps to Comply with Pay Discussion Rule

By Rosemarie Lally, J.D. Oct 14, 2016
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A new interim rule barring federal contractors from retaliating against employees and job applicants who discuss compensation with their colleagues is noteworthy because of its breadth, extending pay discussion protections to managers.

The rule will require changes to interview discussions, job descriptions, offer letters, retention agreements, new-hire materials and policies, among other applicant and employee communications, legal experts say.

Interim Rule

The interim rule—which takes effect prior to public comments and a final rule—amended the equal opportunity clause of the Federal Acquisition Regulation (FAR) by adding protections for employees and job applicants who discuss or disclose their compensation or the compensation of another employee or applicant. FAR is the main document that ensures uniform policies and acquisition procedures by all executive agencies.

Prior to this expansion, FAR 52.222-26 prohibited discrimination in employment based only on race, color, religion, sex, sexual orientation, gender identity or national origin.

Issued by the FAR Council (made up of the Defense Department, the General Services Administration, and the National Aeronautics and Space Administration), the interim rule amended the FAR equal opportunity clause as follows: "The contractor shall not discharge or in any other manner discriminate against any employee or applicant for employment because such employee or applicant has inquired about, discussed or disclosed the compensation of the employee or applicant or another employee or applicant."

It also added definitions of the terms "compensation," "compensation information" and "essential job functions" to FAR. The rule applies to solicitations and contracts issued on or after Sept. 30, 2016. Further, contracting officers and their contractors are expected to modify existing contracts to include the amended clause, to the extent feasible.

The expanded protections were necessary to implement a "very far-reaching" 2014 Executive Order, E.O. 13665: Non-Retaliation for Disclosure of Compensation Information, as well as a final Department of Labor (DOL) rule, according to Jaime Ramón, an attorney with Dykema Cox Smith in Dallas. 

Although the new rule "is fairly straightforward, simply amending the equal opportunity clause to include what the Executive Order already prohibits, it is a very, very broad rule," he said. E.O. 13665 "went way beyond what is required by the NLRA [National Labor Relations Act]—which protects the right of employees to discuss their compensation—and extended that protection to every employee, including supervisors and managers, as well as every applicant," he noted.

"The [change] for contractors is that this rule protects executive and management employees, so executive-level retention agreements and bonus arrangements will be in play," said Jim Murphy, an attorney with Ogletree Deakins in Washington, D.C. He added that the rule changes the expectations of confidentiality regarding these executive agreements.

Murphy sees the initiative as "part of a broader narrative" in which the Obama administration is pushing for increased pay transparency across the board to further its ultimate goal of greater pay equity. He referred to the interim rule as being "issued on a kind of emergency basis." He placed it in the context of a slew of recent initiatives, including a rule mandating paid sick leave for federal contractors and the Fair Pay and Safe Workplaces rule, which requires federal contractors to disclose labor law violations to the federal government.

Potential Impact

"The new rule has the potential to seriously impact contractors because now they can't have a policy in any form or fashion that prohibits anyone working for them or applying for a job with them from sharing compensation information," Ramón said. "It's a minefield to the extent that contractors aren't aware of the new rule as it applies to all employees and applicants, who can now disclose this pay information through any avenue—oral, written [or] social media."

However, Murphy expressed his belief that most contractors are ready for the interim rule because the DOL rule, which went into effect in January, has already triggered a lot of compliance activity.

David Goldstein, an attorney with Littler in Minneapolis, agreed, saying that he doesn't anticipate a serious impact on contractors. However, he expressed concern that the regulation's extension of protection from discrimination to job applicants "opens the door to the possibility of industrial espionage."

Goldstein stressed that employers must be extremely discreet in what they communicate to applicants in interviews. "Nondisclosure agreements aren't that unusual with higher-level job applicants, so perhaps a carve-out is needed for a nondisclosure agreement under the new rule," he said. "However, even if there is no carve-out, it's hard to imagine anyone running to the EEOC [Equal Employment Opportunity Commission] to complain about being asked to sign a nondisclosure agreement."

Update Job Descriptions, Employee Materials

The anti-discrimination protections don't apply in situations where an employee discloses information about other employees' compensation obtained as part of his or her essential job functions, unless the disclosure is made in response to a formal complaint or charge or in furtherance of an investigation.

In light of this exception, sophisticated employers will want to specifically document in job descriptions, such as for human resource positions, that a job requires confidentiality with regard to information acquired in carrying out the job functions, Goldstein recommended.

Contractors must inform employees and applicants of the prohibition on discrimination by incorporating the changes into existing employee manuals, he stressed. They also must post copies of the Office of Federal Contract Compliance Programs (OFCCP) pay transparency provision in conspicuous places, either electronically or in the physical workplace. Goldstein noted that companies with online careers pages also should include the OFCCP provision with their online application form.

Ramón added that the EEOC policy posting already required in workplaces also must be amended to include the new anti-discrimination protections.

In addition, contractors should review all their written employee communications, including offer letters, retention agreements and new-hire materials, and eliminate any confidentiality language, Murphy urged. He also suggested that employers rethink the need for confidentiality clauses in certain documents.

For example, although severance agreements aren't specifically included in the definition of compensation, they are generally negotiated as confidential arrangements. In light of the interim rule, he suggested that it might be wise to omit any mention of severance being paid on the basis of an individual's service with the company and instead state that it is being offered in exchange for a release of any claims against the employer.

Employee Training Is Critical

It is critical that contractors train their supervisors and managers on the requirements of the rule, Murphy said: "Robust communication with supervisors and managers is essential to ensure that they appreciate these changes."

Because the interim rule protects an employee's right to share information obtained legally, employers can't discipline employees in situations where compensation information is accidentally found and subsequently shared, Goldstein said. For this reason, employers should establish general policies and practices stating that employees shouldn't go into colleagues' desks or rummage through their trash. Further, sensitive documents should be shredded or placed in a secure receptacle for shredding, rather than being thrown in the trash, he said.

"Put general policies and practices into place that will limit the likelihood of employees accidentally learning of their colleagues' compensation and then train your employees to properly follow the policies and practices," Goldstein stated.

Cost Estimate

The Labor Department estimates that implementation of the rule will affect about 500,000 contractors at a first-year cost to each firm of roughly $85. Goldstein, Ramón and Murphy disputed the cost estimate as being much too low.

"The estimated cost is way, way below any actual costs incurred in the real world," Ramón said, noting that consulting legal counsel, revising postings and amending handbooks would add up to much higher compliance costs.

The FAR Council will accept public comments on the interim rule until Nov. 29.

Rosemarie Lally, J.D., is a freelance legal writer and editor based in Washington, D.C.

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