New Regulations Increase Risk of OFCCP Systemic Discrimination Allegations

On Aug. 4, 2023, the Office of Federal Contract Compliance Programs (OFCCP) promulgated a final rule that eliminated self-imposed regulatory standards for making allegations of systemic discrimination against federal contractors and subcontractors. The final rule also eliminated minimum disclosure and other transparency requirements that helped ensure contractors were provided adequate information about the legal and factual bases for allegations of systemic discrimination during audits.

Note: OFCCP compliance reviews focus on potential systemic discrimination, and OFCCP rarely alleges individual discrimination as a result of a compliance review. The requirements discussed here do not apply to OFCCP complaint investigations.

Background

The new regulations do not alter OFCCP compliance obligations but will increase the likelihood of agency allegations of systemic discrimination, which typically involve claims of hiring and compensation discrimination. To manage the increased risk, contractors should conduct privileged risk assessments of hiring and compensation data in affirmative action programs (AAPs) with larger employee headcounts. OFCCP’s systemic discrimination allegations rely heavily on statistical analyses and the privileged risk assessment should be informed by a comprehensive understanding of both OFCCP statistical practices and legal standards for statistical evidence of discrimination, which often do not coincide. Further, the immediate impact of the new regulations will primarily fall on contractors with pending OFCCP audits where the agency has found indications of potential systemic discrimination but has not yet issued a formal notice of systemic discrimination allegations.

While the new regulations do not alter the substantive legal standards governing adjudication of systemic discrimination allegations raised by OFCCP, the revisions are expressly designed to make it easier for the agency to raise such allegations and to seek settlements without fully disclosing the legal and factual bases for the allegations. These regulatory revisions will also make the process of responding to and resolving allegations of systemic discrimination more time consuming and frustrating for employers. Despite the regulatory revisions, contractors should continue to insist on a fulsome understanding of the bases for OFCCP’s systemic discrimination allegations and prepare compelling submissions to refute agency assertions and demands.

Contractors have long expressed concerns that OFCCP allegations of systemic discrimination were often inconsistent with legal and statistical standards and unsupported by the facts. See U.S. Chamber of Commerce, OFCCP: Right Mission, Wrong Tactics—Recommendations for Reform (2017). For example, OFCCP pursued settlements aggressively but refused to provide information the employer requested about the core basis for the allegations. The 2020 regulations helped remedy those historical problems by imposing binding requirements on OFCCP field personnel that contractors could enforce through legal action.  See United States v. Nixon, 418 U.S. 683, 695-96 (1974) (regulations binding on agency personnel). McGuireWoods submitted comments that helped improve the 2020 final rule and another set of comments against the 2022 proposed rescission of those minimum standards and transparency requirements.

In rescinding the 2020 OFCCP standards and transparency requirements after they were in place for only two years (one of which was during the pandemic, when audit activity largely halted), OFCCP radically changed its perspective. Under new OFCCP and Department of Labor (DOL) leadership, the benefits of the regulatory provisions to federal contractors which were the grounds for the 2020 rule were deemed to be impediments to efficient, “flexible” and timely enforcement against discriminatory employment practices in the 2023 rule. OFCCP instead summarily dismissed the concerns of employer-side commenters and offered little discussion of how eliminating the standards and disclosure requirements could support voluntary race- and gender-based remedial actions subject to Title VII disparate treatment standards. See Ricci v. DeStefano, 557 U.S. 557, 585 (2009) (requiring a “strong basis in evidence” that the challenged employment practices are unlawful under Title VII).

The 2023 Final Rule Eliminates Key Provisions of the 2020 Rule

The 2020 rule imposed three types of minimum standards and disclosure requirements for OFCCP allegations of systemic discrimination.

• First, the 2020 standards required OFCCP to frame its allegations under a recognized theory of systemic discrimination — either a “pattern or practice” of disparate treatment theory or a disparate impact theory.

• Second, the 2020 standards required OFCCP to have adequate evidence of systemic discrimination, aligned with the theory of discrimination that was the basis of the alleged violation. For pattern or practice allegations, the 2020 rule required OFCCP to have “quantitative” and “qualitative” evidence that “in combination are sufficient to support a finding by OFCCP that the contractor made intentionally discriminatory employment decisions and those discriminatory decisions caused the identified harms to the affected class.” For disparate impact allegations, the 2020 rule required OFCCP to identify a particular employment practice and demonstrate through quantitative evidence that the employment practice caused a disparate impact, unless the components of the challenged employment practice are incapable of separation for analysis.

• Third, the disclosure mandates of the 2020 rule operated in parallel to the minimal standards. OFCCP was required to disclose “the quantitative and qualitative evidence relied on by OFCCP” to make allegations of systemic discrimination and the disclosure must provide “sufficient detail to allow contractors to investigate allegations and meaningfully respond.” Further, “upon the contractor’s request, OFCCP must also provide the model and variables used in any statistical analysis and an explanation for why any variable proposed by the contractor was excluded from that analysis.”

In the 2022 proposed rule, OFCCP asserted that the minimum standards were inconsistent with judicial interpretations of Title VII. Employer-side commenters, including McGuireWoods, disputed those assertions. Indeed, the minimum standards were entirely consistent with judicial interpretations of Title VII for pattern or practice claims and for disparate impact claims.  The 2022 proposal asserted that the 2020 rule required direct evidence of discrimination, which grossly mischaracterized the broad definition of qualitative evidence contained in that earlier rule. The 2022 proposal also wrongly claimed that the definition of quantitative evidence was unduly restrictive. In fact, the 2020 rule defined quantitative evidence broadly, requiring controls for the major factors relevant to the challenged decisions.  Indeed, McGuireWoods argued in both sets of its comments to OFCCP that the minimum standards were too broad and should have encompassed many other requirements found in judicial interpretations of Title VII.

The 2023 rule did not grapple with the employer-side comments demonstrating that the minimum standards were entirely consistent with judicial interpretations of Title VII but primarily relied on an unfortunate statement in the 2020 rule that it was “an exercise of its enforcement discretion to focus OFCCP’s resources on those cases with the strongest evidence. This approach is neither compelled nor prohibited by Title VII and OFCCP case law.”  85 Fed. Reg. at 71,554.

OFCCP’s discussion of elimination of the disclosure requirements in the 2023 rule indicates that employers can expect a general description of the agency’s preliminary findings, but not the identification of a recognized theory of discrimination or specific evidence aligned with judicial standards under either theory.  “OFCCP will continue to explain its statistical analysis in sufficient detail for the contractor to replicate the analysis and assess the merits of the agency’s Findings” and “OFCCP will also continue to explain its rationale for excluding otherwise reasonable variables from its analysis.” 88 Fed. Reg. at 51,723. However, under the new rule, the agency retains discretion (a) not to “expend resources responding to unproductive requests for further information” and (b) not to provide “further details about its modeling” deemed by field officials “unlikely to be productive.”  Id. 

Critical Changes to Predetermination Notices

The 2023 final rule retains the longstanding OFCCP sequencing of allegations of systemic discrimination with two significant alterations. OFCCP’s administrative practice has been to conduct the compliance review and, upon determining systemic discrimination exists, the agency uses a three-part process to notify the contractor and clarify the issues. Each step in the process affords the contractor an opportunity to respond to OFCCP’s allegations and seek to convince the agency that the allegations are not well-founded or are refuted by information provided by the contractor. The three-part process has been: (1) issuance of a predetermination notice (PDN) providing the initial allegations of systemic discrimination; (2) issuance of a notice of violation (NOV) after consideration of the contractor’s submission in response to the PDN; and (3) issuance of a show cause notice (SCN) after consideration of the contractor’s response to the NOV and/or the parties’ inability to reach a settlement.

The new regulations make two significant changes to OFCCP’s longstanding process. First, the new regulations afford OFCCP discretion to issue a PDN earlier in the review process and based on a lower general standard, in addition to the elimination of the more specific standards discussed above. Under the 2023 rule, OFCCP may issue the PDN merely “[i]f a compliance evaluation by OFCCP indicates preliminary findings of potential discrimination.”  88 Fed. Reg. at 51,725.  OFCCP explains that the PDN will be issued “only after OFCCP has reviewed the available evidence related to any disparity or other indicators and concluded that the record available suggests potentially unlawful discrimination.” Id. However, “the final rule allows OFCCP to provide contractors with earlier written notice of preliminary findings of potential discrimination. This focuses the contractor’s attention on specific issues as early as possible, allowing a more streamlined and efficient transfer of information.” Id.

Second, OFCCP may include new allegations in an NOV that were never included in a PDN, which may encourage field personnel to end run the PDN requirement by issuing a vague PDN followed by a more detailed NOV.

Mach Mining Conciliation Standard Purportedly Adopted

In addition to the above, the 2023 final rule lowers the standard for adequate conciliation efforts by the agency, seeking to foreclose contractor arguments that OFCCP personnel failed to satisfy mandatory conciliation obligations. Executive Order 11246 requires OFCCP to engage in “reasonable efforts” to conciliate alleged violations. E.O. 11246, § 209(b). The 2023 final rule “clarif[ies] that the ‘reasonable efforts’ standard that OFCCP must satisfy when attempting to secure compliance with its authorities through conciliation and persuasion should be interpreted consistent with Title VII language requiring EEOC [the Equal Employment Opportunity Commission] to ‘endeavor to’ remedy discrimination through conciliation, persuasion, and conference.”  88 Fed. Reg. at 51,728.

The U.S. Supreme Court interpreted the conciliation provisions of Title VII, which never reference “reasonable efforts,” and found that the scope of judicial review of EEOC conciliation efforts “is narrow, thus recognizing the EEOC’s extensive discretion to determine the kind and amount of communication with an employer appropriate in any given case.” Mach Mining, LLC v. E.E.O.C., 575 U.S. 480, 483 (2015). In that case, the Supreme Court analyzed the specific text of Title VII and rejected arguments that the conciliation obligation is either minimal or subject to the good faith bargaining obligations imposed on parties negotiating a collective bargaining agreement under the NLRA. Id. at 489-94. The Supreme Court was certainly aware of the possibility of a reasonableness standard but did not adopt it. See Mach Mining, 575 U.S. at 485 (“The trial court agreed with Mach Mining that it should review whether the Commission had made ‘a sincere and reasonable effort to negotiate.’”) and id. at 485 n.1 (“EEOC v. Asplundh Tree Expert Co., 340 F. 3d 1256, 1259 (11th Cir. 2003) (holding that the EEOC must, among other things, ‘respond in a reasonable and flexible manner to the reasonable attitudes of the employer’)”).

Under the deference doctrine, courts defer to reasonable agency interpretations of ambiguous terms of executive orders the agency is charged with enforcing. See Udall v. Tallman, 380 U.S. 1, 16–17 (1965). OFCCP’s new regulation has interpreted the term “reasonable efforts” to mean the deferential standard the Supreme Court applied when it declined the reasonableness standard. An interpretation that gives the interpreted term no content and effectively makes the term superfluous is plainly not a reasonable interpretation. See Hibbs v. Winn, 542 U.S. 88, 101(2004) (“[a] statute should be construed so that effect is given to all its provisions, so that no part will be inoperative or superfluous, void or insignificant …”). Accordingly, OFCCP’s new regulatory position is quite vulnerable to challenge and contractors should continue to emphasize that the “reasonable efforts” text of E.O. 11246 at least requires OFCCP to provide sufficient information about the legal, statistical and factual bases for agency allegations.

Employer Response Strategies to the 2023 Final Rule

• Contractors should consider privileged risk assessments of hiring and compensation data in AAPs with headcounts exceeding 250 employees. The risk assessment should be led by counsel with extensive experience applying judicial standards of statistical evidence in actual litigation settings, including in administrative enforcement litigation with OFCCP.

• Contractors should insist on a fulsome understanding of the bases for any OFCCP allegations going forward and prepare compelling submissions refuting agency allegations. While it is in no party’s interests, including OFCCP’s, to engage in costly administrative litigation, contractors that demonstrate to the agency a resolve to decide whether to negotiate a potential settlement based on the legal, statistical and factual merits of the matter (and not on a threat profile) likely will be more successful convincing agency personnel to disclose comprehensive information about the bases for any PDN or NOV claims.

• Contractors should negotiate reasonable response timetables in light of the scope of the OFCCP allegations of systemic discrimination, the complexity of the legal, statistical and factual issues involved, and the prior interactions with the agency during the audit. This may include sequential responses based on the timing of disclosures by OFCCP to requests for additional details regarding allegations. Further, there are effective strategies that can be employed to address agency attempts to impose unreasonable timetables.

• Contractors should continue to assert that OFCCP failed in its duty under E.O. 11246 to engage in reasonable conciliation efforts where the agency refuses to provide information regarding the legal, statistical and factual bases for allegations of systemic discrimination.

• Contractors may also want to consider discussions with trade organization as to potential legal challenges to the 2023 rule. Indeed, there are structural, procedural and substantive challenges to the new regulations that could be brought directly in federal district court.