OFCCP Now Demands Proof of Compliance With Vague Regulatory Compensation Self-Evaluation Rules

March 25, 2022

On March 15, 2022, the U.S. Department of Labor’s (DOL) Office of Federal Contract Compliance Programs (OFCCP) issued Directive 2022-01, marking a dramatic change in longstanding agency practice regarding contractor compensation self-evaluation that demands careful attention by corporate counsel and others responsible for OFCCP compliance.

Under Directive 2022-01, OFCCP asserts that:

  1. it will begin to routinely request that contractors produce materials that demonstrate compliance with the agency’s compensation self-evaluation requirement;
  2. when contractors assert that materials demonstrating compliance are privileged, OFCCP will challenge those privilege assertions where the agency finds that “the primary purpose” of the internal review was to comply with the agency regulations;
  3. even outside its investigation of contractors’ compliance with the affirmative action program (AAP) self-evaluation requirement, it has authority during routine audits to inquire generally about contractors’ privileged compensation risk assessments and audit the legal and factual basis for contractors’ privilege assertions; and
  4. the agency will deem a contractor’s refusal to produce requested materials an admission of noncompliance with the regulatory compensation self-evaluation requirement.

Since 2000, OFCCP regulations have required that each covered contractor annually “perform in-depth analyses of its total employment process to determine whether and where impediments to equal employment opportunity exist. At a minimum the contractor must evaluate … [c]ompensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities.” 41 C.F.R. § 60- 2.17(b)(3).

OFCCP has long interpreted this regulatory provision not to require any statistical analyses or other specific methodology, but has left the specific review method entirely to contractors’ discretion. See Final Rule, Discrimination on the Basis of Sex, 81 Fed. Reg. 39,108, 39,125 (June 15, 2016) (“Because the regulation does not specify any particular analysis method that contractors must follow to comply with this regulation, contractors have substantial discretion to decide how to evaluate their compensation systems.”).[1]

OFCCP has also long understood that contractors sometimes comply with the agency’s self-evaluation requirement through analyses that are protected by the attorney-client privilege and attorney work product doctrine. See Notice of Rescission, 78 Fed. Reg. at 13,516 (Feb. 28, 2013) (“In the experience of these commenters, contractors perform their compensation analysis under attorney-client privilege and wish to protect it from disclosure.”).[2] With its understanding of contractors’ assertions of privilege over such materials, OFCCP has not historically sued for access to contractors’ internal compensation review materials or otherwise seriously challenged assertions of privilege or work product protection.

Analysis of Directive 2022-01

Self-Evaluation Methodology

OFCCP’s new Directive 2022-01, the first OFCCP directive of the Biden administration, does not formally change the agency’s longstanding position discussed above, affording contractors discretion as to the method of the internal compensation review. At the same time, OFCCP has long recommended that contractors consider regression-based pay equity approaches. Indeed, OFCCP sought to incentivize regression-based pay equity studies in its 2006 Voluntary Compensation Self-Evaluation Guidelines, but rescinded those guidelines in part based on the agency’s view that contractors rarely followed them.

In its Notice of Rescission in 2013, OFCCP recommended a highly aggregated version of a regression-based approach “to assist contractors in evaluating their own practices and promoting greater voluntary compliance.” Then, in 2018, OFCCP’s Directive 2018-05 offered yet a third version of a regression-based approach to “support compliance and compensation self-analyses by contractors under applicable law, and OFCCP regulations and practices.” While recommending more sophisticated approaches to pay equity, OFCCP never mandated any particular approach, nor has it received approval by the Office of Management and Budget under the Paperwork Reduction Act of the substantial burdens that would be imposed by such a mandate.

There are some indications in the new directive that OFCCP may begin to “nudge” contractors toward more sophisticated self-evaluation approaches through future audit interactions. In particular, Directive 2022-01 provides that:

OFCCP will request that the contractor provide a complete copy of the pay equity audit(s) conducted pursuant to 2.17(b)(3) that shows all pay groupings that were evaluated, any variables used, and the results of the analyses, including any disparities found. For compensation regression or statistical analysis results, OFCCP may request the model statistics (such as b-coefficients, significance tests, R-squared, adjusted R-squared, F-tests, etc.) for all variables or comparisons in the model. OFCCP may also request 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.

Given this, OFCCP may begin to evaluate the substantive methodology the contractor used for its self-evaluation and assert that “improvements” toward more sophisticated approaches are needed. As noted above, the agency’s regulatory basis for such an assertion is questionable at best.[3]

OFCCP Evaluation of Privilege Assertions

Contractors do not necessarily avoid these potential risks by asserting that the materials demonstrating compliance with the internal self-review requirement are privileged. Under Directive 2022-01, OFCCP will now closely examine the basis for assertions of privilege to determine whether “the primary purpose” of the allegedly privileged review was to obtain legal advice and/or assess the risks of a potential OFCCP audit, or whether it was to comply with the agency regulations.

OFCCP’s new examination of contractors’ privilege assertions opens yet another area of controversy with contractors. Application of privilege and work product protections are factually and legally complex and typically not within the competence of OFCCP compliance officers. Even in articulating the standard for application of privilege protections, OFCCP has embarked on controversy. Directive 2022-01 asserts that:

In evaluating whether the attorney-client privilege applies, courts typically look at whether the primary purpose of the communication is to give or receive legal advice. See In re Grand Jury, 23 F.4th 1088, 1092 (9th Cir. 2021). Thus, if a contractor conducts an audit or analysis for the primary purpose of complying with OFCCP regulations, it will not be subject to the attorney-client privilege, even if it also implicates legal matters. See id., 23 F.4th 1088, 1092 (9th Cir. 2021) (applying the primary-purpose test to dual-purpose communications, and finding that certain dual-purpose communications were not privileged because the “primary purpose” of the documents was to obtain nonlegal advice).

However, the U.S. Court of Appeals for the D.C. Circuit has taken a somewhat more liberal view of the application of privilege in dual-purpose cases, requiring only that “one of the significant purposes” of the pay equity analyses was to obtain or provide legal advice. See In re Kellogg Brown & Root, Inc., 756 F.3d 754, 760 (D.C. Cir. 2014) (“Was obtaining or providing legal advice a primary purpose of the communication, meaning one of the significant purposes of the communication?”). The D.C. Circuit’s view is significant because review of final DOL decisions in OFCCP cases can always be brought within the D.C. Circuit.

OFCCP’s Authority to Investigate Privileged Legal Risk Assessments?

In Directive 2022-01, OFCCP suggests that it has authority during a compliance review to seek an inventory of contractors’ legal risk assessment materials and evaluate contractors’ claims of privilege and work product protections over those materials. It is unclear whether OFCCP intends to exercise that alleged authority. Directive 2022-01 provides that, if “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.” Accordingly, such inquiries may be uncommon.

However, OFCCP leaves no doubt about its position that it could make such inquiries at its discretion, stating: “OFCCP may seek records related to any or all of a contractor’s analyses” and that “the mere possibility that additional analyses may be covered by privilege does not preclude OFCCP from requesting them initially or, if OFCCP believes that the claim of privilege is legally deficient, seeking to compel their disclosure.”

OFCCP’s authority for this potential position is unclear, and if the agency pursues the approach routinely it would amount to a direct aim at the attorney-client privilege and attorney work product doctrine, both of which are central to the role of counsel in the U.S. legal system. Contractors should consult experienced counsel before responding to an OFCCP request for privileged materials.

A Potential Reinterpretation of Directive 2018-05?

Directive 2018-05 has generally been broad enough for OFCCP to conduct expansive audits and allege systemic discrimination using controversial regression models. For example, Directive 2018-05 retains aggregate “Pay Analysis Groups” (PAGs) under the same definition as Directive 307, and authorizes “regrouping” of data such as job titles, education and performance categories to meet arbitrary sample-size specifications.[4] However, aspects of the discussion in Directive 2018-05, such as the statement that “OFCCP’s objective is to use PAGs that mirror a contractor’s compensation system,” have sometimes proven useful rhetorically when interacting with OFCCP compliance officers regarding appropriate modeling during a compliance review.

OFCCP’s new Directive 2022-01 expressly endorses Directive 2018-05, but suggests the agency’s intent to reach beyond it:

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. Where 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.

This statement may portend a fulsome return to highly aggregate regression models that OFCCP favored under Directive 307 and that will be even more likely to give the appearance of statistical differences.[5]

Recommendations for Contractors

Contractors must carefully consider how to respond to these significant OFCCP developments. The issues are legally complex and there are significant trade-offs that must be evaluated and balanced. A specific approach cannot be reasonably recommended outside a particularized discussion of these issues with each client.

In most cases, producing analyses to OFCCP would preclude assertions of privilege in litigation by private plaintiffs, the U.S. Equal Employment Opportunity Commission or a state Fair Employment Practices agency, each of which could use the analysis or aspects of the analytical structures and methodology against the contractor. Contractors should also consider that OFCCP will scrutinize the analysis and the adequacy of remedial measures to correct pay disparities.[6]

On the other hand, contractors should be reticent to place sophisticated legal risk assessments at issue by claiming they satisfy the OFCCP regulatory requirement but were created for the primary purpose of obtaining legal advice. It will be initially unclear how aggressively OFCCP will pursue such analyses in practice. The dispute could lead to expensive “denial of access” litigation or an allegation of noncompliance with the AAP regulatory requirement.

Corporate counsel should also diligently manage communications with OFCCP on the topic of pay equity studies or compliance with OFCCP’s regulatory compensation self-evaluation requirement during any pending or future audit.

McGuireWoods’ OFCCP team has extensive experience advising contractors on these issues. For assistance navigating these matters, please contact the authors or other members of the McGuireWoods OFCCP team.

1. See also Voluntary Guidelines for Self-Evaluation of Compensation Practices for Compliance with Nondiscrimination Requirements of Executive Order 11246 with Respect to Systemic Compensation Discrimination, 71 Fed. Reg. 35114, 35,119 (June 16, 2006) (“OFCCP agrees that the contractor need not have relied on quantitative or statistical techniques to comply with 41 CFR 60–2.17(b)(3), as OFCCP has repeatedly noted that the contractor has the discretion to comply by using any self-evaluation technique it deems appropriate.”); Notice of Rescission, 78 Fed. Reg. at 13,517 (Feb. 28, 2013) (“In the absence of the Voluntary Guidelines, contractors may continue to choose a self-evaluation method appropriate to assess potential pay disparities among their workforce. OFCCP will not be mandating any specific methodology.”).

2. See also Voluntary Guidelines, 71 Fed. Reg. at 35,122 (June 16, 2006) (“OFCCP understands that some contractors may take the position, based on advice of counsel, that their compensation self-evaluation is subject to certain protections from disclosure, such as the attorney client privilege or attorney work product doctrine, and that these protections would be waived if the contractor disclosed the self-evaluation. OFCCP does not take any position as to the applicability of these protections in the context of a compensation self-evaluation. However, to avoid protracted legal disputes over the applicability of such protections, OFCCP will permit the contractor to certify its compliance with 41 CFR 60- 2.17(b)(3) in lieu of producing the methodology or results of its compensation self-evaluation to OFCCP during a compliance review.”).

3. A DOL ALJ suggested that a contractor that had its immediate managers review the compensation of their subordinate employees for generalized fairness and compliance with company policies, even without review based on the race or gender of the employees, may have been sufficient to comply with OFCCP’s regulatory self-evaluation requirement. See OFCCP v. Oracle America, Inc., 2017-OFC-00006, at 207 (Sept. 22, 2020) (“The regulations do not contain the sort of specific requirements that OFCCP now represents and there are at least good-faith disputes about what compliance should look like, with Oracle finding support for its position in OFCCP’s own representations. Oracle took OFCCP at its word about flexible case-by-case means of compliance, and I do not see this as evidence of generalized hostility to affirmative action or suspect intent.”).

4. Formal constraints are also expressly disclaimed in Directive 2018-05, which provides: “Nothing in this Directive is intended … to restrict or limit OFCCP’s ability to perform compliance reviews, request data, or pursue enforcement of any issue within its jurisdiction.”

5. This should not be overstated. Directive 2018-05 contained similar statements:

OFCCP considers a variety of employment practices that can lead to compensation disparities among similarly-situated employees, including inter alia:

  • Monetary compensation in the form of salary or pay rates, bonuses, commissions, pay additions, or other forms of incentive pay;
  • Training or advancement opportunities; and
  • Assignment outcomes such as placement into particular jobs or differential access to earnings opportunities such as assignment to preferred contracts or territories.

6. OFCCP regulations provide that “[t]he contractor must develop and execute action-oriented programs designed to correct any problem areas identified pursuant to § 60-2.17(b).” In the past, OFCCP has explained that “[f]ully understanding the source as well as the scope of the problem is important because sex-, race-, and national origin based disparities found as part of a self-evaluation must be corrected pursuant to paragraph 60–2.17(c).” Sex Discrimination Guidelines, 81 Fed. Reg. at 39,126. OFCCP has also suggested that appropriate remedial actions to correct identified pay disparities may include a consideration of back pay. See Voluntary Guidelines, 71 Fed. Reg. at 35,117 (“The remedial action that is appropriate will depend on the facts of the case but should include back pay and other make whole relief. See Franks v. Bowman Transportation Co., 424 U.S. 747 (1976).”).