OFCCP Replaces Controversial Directive on Contractor Pay Equity Audits

Seyfarth Synopsis. On Thursday, August 18, the Office of Federal Contract Compliance Programs (“OFCCP”) replaced its Directive 2022-01, entitled “Pay Equity Audits” (effective March 15, 2022, the “March Directive”), with a new Directive 2022-01, entitled “Advancing Pay Equity Through Compensation Analysis” (“New Directive”).

The New Directive provides that the OFCCP will not require contractors to produce privileged pay analyses as proof of their compliance with 41 CFR §60-2.17(b)(3). Section 60-2.17(b)(3) requires contractors to undertake an “in-depth analysis” of their total employment process to ensure nondiscrimination, including compensation systems. Contrary to the March Directive, the New Directive expressly recognizes a contractor’s right to assert both the attorney-client privilege and attorney work product doctrine with respect to their compensation analyses. In addition, the new Directive eliminates the March Directive’s statements that assume, without authority, that contractors are required to perform an undefined “pay equity audit,” and replaces that term with “compensation analyses.”

Few subjects have monopolized the attention of the contractor community like “Directive 1.” Originally, the March Directive stated that, in order for contractors to meet their obligation to analyze compensation, they had to conduct a “pay equity audit” and, further, that they were required to “provide a complete copy” of that audit to the OFCCP. Because of the overreach of the March Directive, the U.S. Chamber of Commerce retained Seyfarth Shaw LLP as counsel to present its comments to the OFCCP and senior officials at DOL.

Issues raised by the March Directive included the stated policy that assertion of attorney privilege regarding the content and methodology of any compensation reviews conducted would result in a “negative inference” to be drawn against the contractor. In addition, the March Directive suggested that compliance with 41 CFR 2.17 (b) (3) required the submission of any compensation review or audit, whether conducted pursuant to OFCCP regulations or for general business and human resource purposes. These and other issues, as set forth in the Chamber of Commerce letter of May 5, 2022, as well as other comments, resulted in the OFCCP and Department of Labor officials engaging in good faith discussions regarding the appropriate scope of a compensation analysis Directive.

OFCCP Will Not Request Contractors’ Privileged Pay Equity Audits

The thrust of the New Directive is apparent from its opening line. Its subject changed from “Pay Equity Audits,” in the original version, to “Advancing Pay Equity Through Compensation Analysis,” in the revision. A footnote to the new heading highlights its most clear articulation of purpose:

OFCCP has revised and reissued the Directive [2022-01] to update and clarify its guidance. This revised Directive explicitly reaffirms OFCCP’s position that it will not require the production of privileged communications or attorney work product.

The OFCCP maintains its interpretation of the regulations that it will require audited contractors to produce written proof that they have analyzed their compensation as part of an annual Affirmative Action Program (“AAP”). The Agency describes this “compensation analysis” as “an important component of the contractor’s [AAP].” Dir. p. 1.

“Contractors will not be found in compliance with their compensation analysis obligations if they simply invoke privilege and provide OFCCP with no or insufficient documentation of compliance. Id. p. 4. However, this obligation does not signal a change in OFCCP policy regarding its audit reviews. The August Directive makes clear that the OFCCP no longer requires contractors to conduct ”pay equity audits”, however defined. As stated in a companion blog published by OFCCP Director Yang on August 18:

In addition, although the original Directive used the phrase “pay equity audit” to refer to contractor’s obligations under 41 CFR 60-2.17(b)(3), this revised Directive instead uses the term “compensation analysis” to avoid any confusion regarding the nature of a contractor’s obligation.

Contractors Must Have (Separate) Documentation of Their AAP Compensation Analyses

What should contractors expect in forthcoming OFCCP audits? The OFCCP still believes the most “useful form of documentation” a contractor can provide is its “full compensation analysis.”[1] Contractors are “encouraged” to provide their full analyses, so OFCCP can understand their compensation systems and run a “more efficient compliance review.” If, however, the contractor takes the position that this full analysis is privileged, OFCCP will accept certain “other documentation” as proof that it has conducted a compensation analysis. This “alternative” documentation should include at least the following informational elements:

1. When the compensation analysis was conducted;
2. The number of employees included, and the number and categories of employees who were excluded from the analysis;
3. Which forms of compensation were analyzed, and how they were separated or combined (e.g., base pay along, or base pay plus bonus, etc.);
4. That compensation was analyzed by gender, race, and ethnicity; and
5. The method of analysis employed (multiple regression, average pay ratio, cohort analyses, etc.).[2]

OFCCP suggests that contractors can satisfy these requirements in “several ways.” One option would be to provide a redacted version of its privileged analysis -- though contractors should be wary of waiving future claims of privilege over the full assessment. Another option is to conduct a wholly separate analysis, not under privilege, and provide that to OFCCP. A third option, would be “a detailed affidavit that sets forth the required facts… but does not contain privileged materials.” 

OFCCP also “recommends” that contractors disclose (1) all employee pay groupings evaluated, (2) an explanation of how and why they were grouped this way, (3) which variables, factors, measures or controls were considered and how they were incorporated (e.g., experience, education, tenure, performance); and (4) the model statistics for any regressions or global analyses conducted for race-, ethnicity-, or gender-based variables (b-coefficients, significant tests, etc.). As the OFCCP has expressly noted in the New Directive, these categories may well fall into the category of privileged information not subject to production. 

Contractors Must Address Problem Areas

If the contractor’s analysis identifies problem areas, like disparities against a particular group, OFCCP will request documentation of the company’s “good faith efforts” and “action-oriented programs” to correct them. This is similar to the process through which contractors respond to placement goals. The New Directive provides that the documentation should demonstrate:

1. The nature and extent of any pay disparities found, including the job categories where they were found, the degree of the disparities, and the groups adversely affected;
2. Whether the contractor investigated the disparities;
3. That the contractor instituted action-oriented programs “designed to correct any problem areas identified,”
4. The nature and scope of such programs, including the applicable jobs and any changes made to compensation policies, procedures, or systems; and
5. How the contractor will measure the impact of these programs on employment opportunities and identified barriers.

OFCCP’s Authority to Pursue Enforcement as Described in the New Directive

Some of the criticisms levied at the March Directive claimed OFCCP exceeded its authority in demanding contractors’ pay equity audits. OFCCP’s New Directive maintains an explanation of its ostensible authority in this regard.

41 CFR §60-2.10(c) requires contractors to “maintain and make available to OFCCP documentation of their compliance” with sections 60-2.11 through 2-.17. Section 60-2.17(b)(3), in turn, sets forth an obligation to assess employment processes, including compensation, for potential disparities, and to address any problems identified. Accordingly, OFCCP takes the position that actions taken to comply with a regulatory obligation are “not inherently privileged,” and are not “communications” covered by the attorney-client privilege. The Agency also notes that companies should have no expectation of confidentiality over AAP analyses, since contractors know they must make records available to the OFCCP. Notwithstanding the contradictory language found in the August Directive and the Yang blog, it is clear that information subject to privilege is not subject to production and the OFCCP cannot invoke any negative inference from the good faith assertion of privilege regarding any component of the contractor’s compensation analysis.

Contractors should look closely at what they are doing to satisfy OFCCP’s regulatory requirement to assess compensation, separate and apart from the more involved, privileged analysis they may conduct through counsel. Contractors should decide, before they are noticed for audit, what “documentation” they could provide to satisfy the informational suggestions set forth in the New Directive. And, at all times, contractors should be mindful of the risks relating to waiver of any privileges that may apply to analyses performed, at least in part, to provide the contractor with legal advice.

 

[1] Note that, as set forth in the Directive, these documents are intended only to provide guidance to OFCCP staff and contractors and are not to be deemed to set or amend any regulation or otherwise establish any legally enforceable rights or obligations (emphasis added). Nevertheless, guidance directives influence the OFCCP’s audit and enforcement activities and thus have significant impact on contractor compliance.

[2] However, this information is often included in counsel direction and deemed privileged. And, as noted in the Directive and footnote 1, the Directive is only a suggestion, not legally binding on contractors.