The OFCCP released Directive 2022-01 (the first of Director Yang’s tenure as the Head of the OFCCP) early on March 15th, 2022 – Equal Pay Day. The new Directive is immediately effective and “provide[s] guidance on how OFCCP will evaluate federal contractors’ compliance with pay equity audit obligations and clarif[ies] OFCCP’s authority to access and review pay equity audits conducted” by a contractor to comply with the obligation to review its compensation systems as part of its Executive Order 11246 AAP.
Directive 2022-01 does not replace Directive 2018-05, the current directive that describes how OFCCP will perform compensation analyses during an audit. However, the new Directive provides guidance on how Directive 2018-05 is being enforced by OFCCP and clarifies how OFCCP views privilege for compensation analyses.
Background: Under Executive Order 11246, supply and service contractors are required to perform an in-depth analysis of their total employment practices to determine whether and where impediments to equal employment opportunity exist. This includes a “review” of “compensation systems to determine whether there are gender-, race-, or ethnicity-based disparities.” 41 CFR 60-2.17(b)(3). The Directive released today refers to this requirement as a "pay equity audit.”
The new Directive clarifies how OFCCP will review a contractor’s compensation practices during audits and explains OFCCP’s authority to request and access the methodology and results of a contractor’s in-depth compensation review performed to comply with 41 CFR 60-2.17(b)(3).
Today’s Directive also provides additional insight into how OFCCP utilizes Directive 2018-05 during an audit. The agency reviews a contractor’s Item 19 Compensation Data snapshot: (1) To enforce the agency’s commitment to ensuring pay equity in the workplaces of Federal contractors, and (2) “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 new Directive makes clear that OFCCP will utilize regression and other systemic analyses whenever possible to evaluate wage disparities across “similar functions and positions.”
- There is no change to Compensation Directive 2018-05; however, Directive 2022-01 clarifies that the agency reviews a contractor’s Item 19 compensation snapshot to:
- Check for pay disparities that need to be remediated
- Check for other systemic concerns such as steering, hiring barriers, assignment patterns, and other indications of the company’s compensation philosophy/policies being applied differently on the basis of ethnicity, race, and/or gender
- OFCCP provides example evidence the agency may cite to request more information from a contractor during an audit:
- Pay disparities or other evidence of potential pay discrimination
- Employee complaints of pay discrimination or other anecdotal evidence
- Inconsistencies in how a contractor applies pay policies
- Statistical analyses or other evidence that a group of workers is clustered in lower paying positions
- Directive 2022-01 emphasizes that OFCCP has the authority to review a contractor’s compensation analysis performed to comply with 41 CFR 60-2.17(b)(3) and that contractors cannot assert Attorney-Client Privilege for these analyses:
- Importantly, the new Directive does not proscribe a particular analysis that contractors must use to conduct the required review of their compensation systems.
- According to OFCCP, the agency has the right to review a contractor’s compliance with this requirement, and therefore documents regarding compliance with this requirement cannot be withheld under the attorney-client privilege or attorney work-product doctrines.
- OFCCP expects to understand the pay groupings used, variables used as job-related controls, and the results.
- If the review includes a regression analysis, OFCCP may ask to see all related model statistics.
- Finally, OFCCP may ask for information related to frequency of analyses, how the information is communicated to management, and how the results were used to remediate differences.
- If a contractor prepares additional pay equity analyses (for example, a full organization equity analysis that is not based on AAP plan) OFCCP states these analyses can be privileged if the confidential communications are between attorney and client for the purpose of obtaining legal advice. If privilege is “properly invoked” and “the contractor has produced an acceptable pay equity audit sufficient to demonstrate compliance with 2.17(b)(3), OFCCP will not require production of these separate pay audits.”
Berkshire’s Compensation Services team recommends all contractors evaluate how their organization complies with the requirement to conduct an in-depth review of their compensation systems, as outlined in 41 CFR 60-2.17(b)(3). In many cases, any analysis of compensation data prepared for compliance with the annual affirmative action requirements will be prepared by AAP Plan (Functional or Establishment based).
Contractors also should consider the value of preparing a more robust pay equity analysis under attorney-client privilege. This proactive analysis need not be prepared by AAP Plan and is often prepared on a broader basis, such as company-wide or by business unit.
Contractors should ensure that any pay analyses completed for purposes other than compliance with the affirmative action regulations be “properly privileged” and prepared for the purpose of providing legal advice.
Berkshire’s Compensation Services team will continue to monitor this release and will alert our customers to additional changes or interpretations as they become available.