OFCCP softens controversial Directive on “pay equity” audits

Some relatively good news from the OFCCP. 

The Office of Federal Contract Compliance Programs revised its Directive around contractors’ evaluations of their compensation systems. Directive 2022-01, formerly titled “Pay Equity Audits,” is now called “Advancing Pay Equity Through Compensation Analysis” and modifies the OFCCP’s approach regarding how contractors can demonstrate compliance with this regulatory obligation.

The March 2022 Directive

To understand the changes and their import, let’s first review the original Directive, which was issued on March 15.

OFCCP regulations require contractors to “evaluate” their “[c]ompensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities.” 41 C.F.R. § 60-2.17(b)(3). The regulations do not provide any specific methods or tools that must be used to conduct this evaluation. The OFCCP’s March 2022 Directive referred to these evaluations as “pay equity audits,” which seemed to be a misnomer, as the regulations do not mandate analyses of that type.

Most significantly, through the March Directive, the OFCCP put contractors on notice that it expected contractors to provide evidence that they complied with this regulatory requirement during compliance evaluations, even if the evaluations were conducted under the attorney-client privilege. According to the agency, if contractors wanted to conduct privileged analyses, they were free to prepare separate and distinct analyses for that purpose. However, contractors who failed to provide their compensation evaluations would be considered non-compliant.

Suffice it to say that contractors were not pleased with this development.

The "walk-back"

Now, five months later, the OFCCP has walked back its position on this issue. The revised Directive covers three main points:

  • An explanation of how the OFCCP will review contractors’ compliance with the requirement to evaluate compensation systems.
  • The OFCCP’s authority to compel contractors to produce documentation of their compensation evaluations.
  • An affirmative statement that the OFCCP will not require contractors to produce material protected by the attorney-client privilege.

The revised Directive explains that the OFCCP may request a contractor to provide documentation regarding its compensation evaluation if the agency uncovers “disparities in pay or other concerns about the contractor’s compensation practices” during the desk audit phase of a compliance evaluation. Although the OFCCP encourages contractors to provide their “full compensation analysis,” contractors who believe their analyses are protected by the attorney-client privilege may satisfy this requirement in any of three "alternative" ways:

  • By producing a redacted version of the analysis.
  • By producing a separate analysis conducted during the affirmative action plan period that is not privileged.
  • By producing an affidavit that establishes compliance.

Regardless of the option chosen, the information provided must include all of the following:

  • When the compensation analysis was completed.
  • The number of employees included and excluded from the analysis.
  • The forms of compensation that were analyzed and, where applicable, how the different forms of compensation were separated or combined for analysis (e.g., base pay alone, base pay combined with bonuses, etc.).
  • That compensation was analyzed by gender, race, and ethnicity.
  • The method of analysis employed by the contractor (e.g., multiple regression analysis, decomposition regression analysis, meta-analytic tests of z-scores, compa-ratio regression analysis, rank-sum tests, career-stall analysis, average pay ratio, cohort analysis, etc.).

Significantly, the list of mandatory information does not include the results of the contractor’s evaluation. Nonetheless, the OFCCP notes that it may request documentation of the contractor’s efforts to correct problem areas identified in its evaluation. This documentation must show all of the following:

  • 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.
  • Whether the contractor investigated the reasons for any pay disparities found.
  • That the contractor has instituted action-oriented programs designed to correct any problem areas identified.
  • 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.
  • How the contractor intends to measure the impact of these programs on employment opportunities and identified barriers.

Finally, the revised Directive reiterates the agency’s position that, because contractors have a regulatory obligation to conduct compensation evaluations and to provide documentation of compliance, they may not rely on the attorney-client privilege in refusing to produce evidence that they have complied. “[A] contractor may generate, maintain, and produce to OFCCP documentation of the compensation analysis it conducted without disclosing privileged attorney-client communications.”

Thus, upon request by the OFCCP, contractors will either have to provide one of the forms of evidence outlined above or be considered non-compliant with this portion of the regulations. However, the OFCCP will not compel a contractor to disclose information protected by the attorney-client privilege.

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