OFCCP Issues Revised Directive Addressing Privilege Concerns, But Significant Concerns Remain

Responding to significant uproar from the federal contracting community, on August 18, 2022, the Office of Federal Contract Compliance Programs (“OFCCP”) issued a revised version of its Directive 2022-01 - Advancing Pay Equity Through Compensation Analysis, which was originally issued on March 15, 2022.  The Revised Directive is, per the OFCCP, intended to clarify its earlier guidance addressing federal contractors’ regulatory obligation to evaluate “compensation systems” as part of their affirmative action programming, and the documentation the OFCCP expects contractors to provide to the OFCCP regarding their analyses.  Most importantly, the Revised Directive steps back from the position the Agency took in the March 15 Directive with regard to the applicability of the attorney-client privilege to analyses contractors are required to undertake pursuant to the Agency’s regulations.  The Agency had previously taken the position that contractors conduct undefined “pay equity” analyses pursuant to the Agency’s regulatory obligation and, as a result, could not assert attorney-client privilege over such analyses. 

The Revised Directive also changes the OFCCP’s terminology – instead of a “pay equity audit,” the Revised Directive references “compensation analyses,” which OFCCP Director Jenny Yang noted in her accompanying DOL blog post was intended to avoid any confusion about the nature of contractor obligations.  Director Yang highlighted three “things to know” about the Revised Directive:

1. It explicitly reaffirms the agency’s position that the OFCCP will not require the production of attorney-client privileged communications or attorney work product.
2. It identifies the documentation that OFCCP will require from a contractor to determine that the contractor has satisfied its obligation to perform a compensation analysis.
3. It explains the documentation required from a contractor when its compensation analysis identifies “problem areas” to demonstrate that it has implemented action-oriented programs.

In the Revised Directive, the OFCCP clarifies that contractors that believe their full compensation analyses contain privileged attorney-client communications may provide information regarding the required evaluation of its “compensation system(s)” in a form that does not breach or waive the attorney-client privilege.  The Revised Directive now provides three ways that contractors can meet the regulatory obligation without risking a privilege waiver:

1. Submitting a redacted compensation analysis 
2. Conducting an additional non-privileged analysis 
3. Generating an affidavit setting forth the following information: 

• • When the compensation analysis was completed;
  • The number of employees the analysis included and the number and categories of employees the analysis excluded;
  • Which forms of compensation were analyzed and, where applicable, how different forms of compensation were separated or combined for analysis;
  • That compensation was analyzed by gender, race, and ethnicity; and
  • The statistical method of analysis employed by the contractor.

In addition to these details, the OFCCP recommends that contractors provide the following information, as applicable:

1. All employee pay groupings evaluated;
2. An explanation of how and why employees were grouped for the analysis;
3. Which, if any, variables, favors, measures, or controls were considered and how they were incorporated into the analysis;
4. The model statistics for any regressions or global analyses conducted for race, ethnicity, and gender-based variables.

The Revised Directive conveys the OFCCP’s recognition that contractors may consider aspects of these four categories of information privileged, and clarifies that the Revised Directive is not intended to encourage waiver of privilege, but is instead intended to help contractors recognize that, where they maintain this information in non-privileged form, providing it to the OFCCP may assist the OFCCP in conducting a more efficient compliance evaluation. 

The Revised Directive goes a long way towards addressing the contracting community’s concerns about the Directive issued by the OFCCP in March 2022.  However, contractors should not interpret this Revised Directive as fully resolving the tension between OFCCP’s desire for information and the applicability of the attorney-client privilege.  The Revised Directive provides that if the contractor’s own analysis has identified any “problem areas” based on gender, race, or ethnicity, the OFCCP will require that the contractor show proof to the agency that action-oriented programs were established – i.e., show that the contractor has taken actions beyond merely “following the same procedure” which had previously produced “inadequate results.”  According to the Revised Directive, at a minimum the OFCCP will require documentation that demonstrates:

1. The nature and extent of any pay disparities found, including the categories of jobs for which disparities were found, the degree of the disparities, and the groups adversely affected;
2. Whether the contractor investigated the reasons for any pay disparities found;
3. That the contractor has instituted action-oriented programs designed to correct any problem areas identified;
4. The nature and scope of these programs, including the job(s) for which the programs apply and any changes (e.g., pay increases, amendments to compensation policies and procedures) the contractor made to the compensation system; and
5. How the contractor intends to measure the impact of these programs on employment opportunities and identified barriers.

Depending upon how one reads these “requirements,” and the first “requirement” in particular, this part of the Revised Directive may significantly undercut the OFCCP’s professed disinterest in seeking a waiver of applicable privileges.  Requiring the disclosure of information regarding the “nature and extent” of any pay disparities revealed by an otherwise privileged analysis seems to call for the production of information and data that would be subject to the attorney-client privilege and, in certain cases, the attorney work product doctrine. 

These purported “requirements” also seem to stray from the regulatory requirements of 41 C.F.R. Section 60-2.17(b)(3) and (c), on which the Agency purports to base its Revised Directive, and may be subject to valid challenge by contractors.  The only regulatory requirements on which the OFCCP is relying are requirements that contractors: (1) “evaluate . . . [their] Compensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities” and (2) “develop and execute action-oriented programs designed to correct any problem areas identified pursuant to § 60-2.17(b).”  Importantly, when the OFCCP first included evaluations of “compensation systems” as a required element of Section 2.17(b) in 2000, the Agency declined to specify what “evaluation” must be conducted and expressly left it to the contractors to determine what evaluation was warranted.  The Agency likewise did not identify any specific “action-oriented programs” contractors should take to address any such “problem areas.”  The Agency has not – in its 2000 regulations or now – promulgated a rule requiring contractors to make the disclosures contemplated by the Revised Directive.  And, of course, contractors can take a number of programmatic measures to minimize the likelihood of compensation disparities, including instituting policies regarding setting pay upon hire and policies regarding setting pay upon promotion or during a performance evaluation cycle.  Such qualitative measures can, and should, be part of a contractor’s overall approach to ensuring an absence of discrimination in pay.

In short, while aspects of the Revised Directive are welcome news for federal contractors and subcontractors, every contractor should thoroughly review the Revised Directive, assess its pay equity programs, and consider how the contractor will both meet its regulatory obligations and protect the legal privileges that frequently attach to pay equity analyses.

Contractors should carefully consider what information they will provide the OFCCP regarding remedial efforts, and the privilege implications regarding such a disclosure.