OFCCP Issues New Directive Aimed at Collecting the Results of Federal Contractor Pay Equity Analyses During Compliance Reviews

Seyfarth Synopsis:  Federal supply and service contractors and subcontractors undergoing compliance reviews with the Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) will now be expected to provide all information related to internal pay equity analyses, including documents that may contain legal advice.

On March 15, 2022, OFCCP issued Directive 2022-01: Pay Equity Audits. The new directive, which is the first to be issued under Director Jenny Yang’s leadership, reiterates the OFCCP regulatory requirement to perform an “in-depth analysis” of compensation systems and practices to determine whether any gender, race, or ethnicity based disparities exist. The directive also details OFCCP’s position that it has the authority to obtain and review a contractor’s pay equity analysis when disparities in pay are found during an OFCCP compliance review. A brief overview of Directive 2022-01 is provided below.

OFCCP Compliance Reviews

During an OFCCP compliance review, supply and service contractors are required to provide certain information, policies, and data pursuant to the agency’s scheduling letter and itemized listing. A contractor’s compensation policies and employee level pay data are included in this desk audit submission. OFCCP then reviews the submission to determine whether the contractor is meeting its affirmative action and nondiscrimination obligations, and analyzes a contractor’s compensation data using regression and other analyses to look for disparities in pay when comparing employees by gender and race/ethnicity. 

It has been OFCCP’s standard practice that if its compensation analysis reveals disparities in pay based on the contractor data provided, the agency would request additional information to determine compliance that includes additional compensation factors ( e.g., performance ratings, merit increases, prior experience, and education) and compensation manager interviews. Increasingly, OFCCP has also asked for information regarding contractor pay equity analyses, including the results of such analyses. In recent years, contractors have often successfully objected to OFCCP’s request explaining that such analyses were conducted under attorney-client privilege. However, OFCCP now takes the position that it has the authority to review a contractor’s pay equity analysis to: (1) verify regulatory compliance; and (2) understand the contractor’s methodology utilized to review pay.

What Does This Mean for Contractors?

As a threshold matter, contractors may wish to push back- but may face threats of, and actual, enforcement actions by the Solicitor of Labor’s office in doing so. OFCCP Directives do not have the legal status of a regulation or law, and, when challenged in court, this Directive may not survive. No court of law has defined what is specifically required by the affirmative action regulations’ requirement of “an in-depth analysis” of a contractor’s “compensation system to determine whether there are gender-, race-, or ethnicity-based disparities” and there is a reasonable position that regulations requiring review of a “compensation system” do not require a specific pay equity analysis of pay data.

Many contractors have been conducting attorney-client privileged multi-variate regression analyses of pay of their global or US based workforce. Given the new Directive, we would caution contractors from producing these analyses to defend pay in an OFCCP audit as the attorney-client privilege would be waived. Moreover, for multi-establishment contractors, the scope of an OFCCP audit of a single establishment will be smaller than the entire workforce, so the results of a pay analysis only for the audited workforce may be different. Sometimes, for example, the factors or variables used in the workforce model may need to be adjusted to better reflect the determinants of pay at each establishment.

Should contractors decide to develop pay equity analyses that are not privileged and can be used to defend their OFCCP compliance evaluations, there are options to consider. There are two perspectives to keep in mind: one purpose of this effort is to maintain annual compliance and another is to be able to respond and defend during an OFCCP audit.

For each company establishment, in conjunction with the annual affirmative action plan (AAP) development, contractors may use a basic averages analysis and initially conduct this work under attorney-client privilege.  Under such a review, a contractor can compare employees based on race/ethnicity and gender by the job group and salary grade or pay band in which they sit. Contractors can then determine the pay difference threshold (e.g. 5%) it wants to use to identify any problematic areas in pay that warrant further investigation by, for example, conducting a multi-variate regression analysis on only those groups. Once this exercise is complete, remediation may be considered effective as of the AAP start date for unexplained pay disparities. If any establishment is audited, that analysis could be re-run without attorney-client privilege after the remediation has occurred, and produced in the audit.

Another alternative that may be preferable for audit defense of a limited number of establishments (but may be cumbersome for annual compliance where all establishments must be covered), is conducting multi-variate regression analyses for each separate establishment. If the contractor has already been conducting these analyses as a best-practice and has worked to refine the appropriate model for the workforce including appropriate pay groupings and variables, this model could be leveraged for establishments under audit and those included in OFCCP’s Corporate Scheduling Announcement List (CSAL) of establishments likely to be audited.

As may be obvious, for locations under audit or on the CSAL, contractors should consider remediating pay -- possibly retroactively to the AAP start date -- that cannot be justified by a well-designed model refined by additional factors that explain pay differences. It is important to note that the date of the data analyzed in the pay review is the start date for the AAP under audit, which may present challenges to effectively remediating pay. At the very least, however, remediation implemented after the AAP start date would likely limit damages alleged by OFCCP.

Another related consideration for contractors is how their AAP job groups relate to the groupings most appropriate for conducting their pay analysis. Contractors may wish to evaluate bringing their AAP job groups into better alignment with their pay structures.

At Seyfarth, our discussions about how to navigate this newest OFCCP Directive are in the early stages. We look forward to talking with you about any particular questions you have.