OFCCP Pay Equity Directive: New Challenges for Contractors and Subcontractors

On March 15, 2022, the Office of Federal Contract Compliance Programs (“OFCCP”) issued its first Directive under the Biden Administration.  Directive 2022-01, Pay Equity Audits (the “Directive”) makes clear that pay equity is at the forefront of the OFCCP’s enforcement agenda, and issues a shot across the bow in the Agency’s longstanding battle with contractors regarding whether internal pay equity analyses must be produced to the Agency during an audit. 

In light of this Directive, contractors should expect that OFCCP will aggressively and expansively examine not only employee compensation, but also assignment and promotion practices as elements of compensation systems, and will demand the production of any company pay equity analyses should the Agency’s initial assessment of compensation data indicate any disparities.

OFCCP regulations require contractors to analyze their “compensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities” 41 C.F.R. 60-2.17(b)(3), and to “develop and execute action-oriented programs designed to correct any problem areas.”  41 C.F.R. 60-2.17(c).  The Directive casts this obligation as a requirement that contractors perform a pay equity audit, and reiterates the OFCCP’s intent to conduct “an analysis of the contractor’s compensation practices” during compliance reviews.  Most notably, the Directive describes an expansive approach to what the OFCCP will evaluate in the context of assessing pay practices, stating that “OFCCP will also look broadly at a contractor’s workforce (across job titles, levels, roles, positions, and functions) to identify patterns of segregation by race, ethnicity, and gender, which may result from assignment, placement, or upgrading/promotion barriers that drive pay disparities.”  The Directive states that “[w]here possible, OFCCP will use regression and other systemic analyses to look for disparities in patterns of assignment or in salary paid across similar functions and positions,” but offers no other guidance as to how the Agency will assess these broader issues. 

Most importantly, the Directive states that where the OFCCP identifies potential pay concerns, it has broad authority to dig further into a contractor’s methodology and data, including a right to obtain a contractor’s internal pay equity analyses, which many contractors currently conduct pursuant to the attorney-client privilege.   The Directive asserts that the OFCCP has the “authority” to obtain such materials “to understand the methodology used and verify compliance with” 41 C.F.R. 60-2.17. 

The Directive indicates that the OFCCP “will request that the contractor provide a complete copy of the pay equity audit(s) conducted pursuant to [41 C.F.R. §] 2.17(b)(3) [including] all pay groupings that were evaluated, any variables used, and the results of the analyses, including any disparities found.”  It also notes that “for compensation regression or statistical analysis results, OFCCP may request the model statistics (including b-coefficients, significance tests, R-squared, adjusted R-squared, F-tests, etc.) for all variables or comparisons in the model,” in addition to information relating to the frequency of pay equity audits, the communication to management, and how the results were used to rectify disparities based on gender, race and/or ethnicity.  Per the Directive, the OFCCP may request such analyses “covering a period beginning two years before the date the contractor received the Scheduling Letter.” 

Not surprisingly, given this assertion of broad authority to obtain internal pay equity audits, the Directive anticipates that contractors will assert attorney-client privilege over their pay equity analyses.  The OFCCP proactively rejects that claim, and asserts that contractors must “maintain and make available” documentation of their compliance with OFCCP regulations, and that they “cannot withhold these documents by invoking attorney-client privilege or the attorney work-product doctrine.”  The Directive threatens that “failure to provide the required pay equity audit will be considered by OFCCP as an admission of noncompliance with these regulatory requirements.”  While this is the most aggressive statement to date from the OFCCP regarding its right to such analyses, the Directive does leave open one window for contractors.  The Directive states that “[p]rovided that the contractor produces to OFCCP a pay equity audit and compliance records sufficient to comply with 41 CFR 60-2.17(b)(3) in the course of its evaluation, OFCCP generally will not seek additional privileged analyses where the contractor demonstrates that it also conducted a properly privileged pay equity process with an attorney.”

The Directive sends an unambiguous, strong signal that the OFCCP will seek to obtain contractor’s internal analyses in the ordinary course of an audit.  Contractors should carefully assess their internal pay equity analyses in light of the OFCCP’s Directive and consider alternatives and modifications.  Accordingly, contractors might consider conducting one set of non-privileged analyses to satisfy regulatory obligations, limited to a contractor’s AAP establishments, and to continue conducting separate pay equity analyses at the direction of counsel for the purpose of providing legal advice.  The former could be conducted in tandem with or after the analyses that are conducted pursuant to the attorney-client privilege. 

Importantly, neither the language of the underlying regulation – that contractors must assess their “compensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities” 41 C.F.R. 60-2.17(b)(3) – nor any Administrative Law Judge (“ALJ”) or Federal court decision mandates that contractors perform sophisticated regression analyses of pay.  In addition, asserting privilege as to any population that is broader than an AAP establishment – for the purpose of providing legal advice – should provide contractors a strong defense to any claim that the analysis was done to achieve regulatory compliance and not for the purpose of providing legal advice.  Finally, contractors should note that the Directive is sub-regulatory guidance that has not been subject to notice and comment rule-making; we do not yet know how ALJs and Federal courts will treat the Directive and the OFCCP’s position as to legal privileges.  In short, although contractors that contest the OFCCP’s authority to compel production of privileged pay analyses may subject themselves to enforcement action and ultimately litigation, whether the OFCCP has authority to compel production of privileged analyses is an open question.