OFCCP’s Revised Directive Softens on Seeking Privileged Pay Analysis

On August 18, 2022, OFCCP issued a revised Directive 2022-01 (the “Revised Directive”) clarifying that contractors will not be required to provide any privileged pay analysis conducted for purposes of compliance with 41 C.F.R. § 60-2.17(b)(3). Although OFCCP’s clarification is welcome news for contractors, the Revised Directive states that contractors will still need to be able to prove the analysis was done under privilege to withhold it from OFCCP and, if withheld on privilege grounds, OFCCP will require contractors to provide various types of additional documentation and information to confirm they conducted a 2.17(b)(3) analysis. 

Background

As we previously discussed, OFCCP issued Directive 2022-01 in March 2022 (the “Directive”), addressing how it will review and request compensation information during compliance evaluations. In the Directive, OFCCP indicated that it did not believe contractors could refuse to provide to OFCCP their pay analyses done to meet the regulatory requirements under 2.17(b)(3) on the basis of attorney-client privilege and suggested that those analyses required a more fulsome quantitative analysis, such as regression analysis, to be compliant. 

After receiving negative reactions from the contractor community, OFCCP attempted to walk back from its position in several public meetings with contractors. At the National Industry Liaison Group (NILG) Conference in July 2022, OFCCP Director Jenny Yang confirmed that OFCCP does not intend to seek a contractor’s privileged pay analysis, even if it is for the purposes of meeting the requirements under 2.17(b)(3), but the agency expected contractors to provide additional details to show that they met their 2.17(b)(3) requirements. OFCCP signaled at the NILG Conference that it would be issuing additional guidance on both of these points. 

Key Changes in the Revised Directive

OFCCP Will Not Seek 2.17(b)(3) Pay Analyses That Contractors Show Are Privileged:  In the Revised Directive, OFCCP confirms that it will not require contractors to produce pay analysis or other documentation that is covered by the attorney-client privilege or attorney work product doctrine. OFCCP, however, reaffirms that contractors must show documentation to support that the pay analysis is actually privileged. The Revised Directive warns contractors that they “will not be found in compliance with their compensation analysis obligations if they simply invoke privilege and provide OFCCP with no or insufficient documentation of compliance.”

OFCCP Will Require Other Documentation to Prove the 2.17(b)(3) Analysis Was Conducted: If a contractor can show OFCCP that its 2.17(b)(3) analysis is privileged, the Revised Directive states that contractors will still need to show that they have evaluated their “compensation systems for race, gender, or ethnicity-based disparities.” Although the Revised Directive states that OFCCP still believes that providing the complete 2.17(b)(3) pay analysis is the “most useful form of documentation” to confirm compliance to OFCCP during compliance evaluations, it identifies the following three methods that contractors can use to show OFCCP that it complied with its regulatory obligations to conduct the pay analysis without waiving privilege:

1. Make available a redacted version of its compensation analysis, provided that the non-redacted portions include the required facts described below;

2. Conduct a separate analysis during the relevant affirmative action plan (AAP) period that does not implicate privilege concerns and provide that analysis to OFCCP in full; or

3. Generate a detailed affidavit that sets forth the required facts described below but does not contain privileged material.

Regardless of which alternative method a contractor chooses, the Revised Directive states that a contractor must provide at least the following documentation to OFCCP to demonstrate that it has met its obligations to conduct a pay analysis under 2.17(b)(3):

1. When the compensation analysis was completed;

2. The number of employees the compensation analysis included and the number and categories of employees the compensation analysis excluded;

3. Which forms of compensation were analyzed and, where applicable, how the different forms of compensation were separated or combined for analysis (e.g., base pay alone or base pay combined with bonuses);

4. That compensation was analyzed by gender, race, and ethnicity; and

5. 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, or cohort analysis).

Additionally, to assist OFCCP in understanding how contractors evaluate their compensation systems in practice, the Revised Directive states that contractors should provide the following information, as applicable:

1. All employee pay groupings evaluated;

2. An explanation of how and why employees were grouped for the analysis;

3. Which, if any, variables, factors, measures, or controls (e.g., tenure, education, structural groupings, performance ratings, or prior experience) were considered and how they were incorporated in the analysis; and

4. The model statistics for any regressions or global analyses conducted (e.g., b coefficients, significance tests, or F-tests) for race, ethnicity, and gender-based variables.

OFCCP Suggests that Quantitative Analysis Is Required for 2.17(b)(3) Compliance: The Revised Directive introduces new terminology by replacing the term “pay equity audit” with “compensation analysis,” when referring to contractors’ obligations under 2.17(b)(3). Despite this new terminology, the Revised Directive continues to suggest quantitative methods of analysis (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, or cohort analysis) when providing examples of the types of analyses OFCCP believes are required by 2.17(b)(3). 

The Revised Directive also states that 41 C.F.R. 60-2.17(c) requires contractors to provide documentation that demonstrates they have developed and executed action-oriented programs to correct any problem areas identified in their 2.17(b)(3) analysis. The Revised Directive identifies the following types of documentation that are needed to show compliance with this requirement:

1. 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;

2. Whether the contractor investigated the reasons for any pay disparities found;

3. That the contractor has instituted action-oriented programs designed to correct any problem areas identified;

4. The nature and scope of these programs, including the job(s) for which the programs apply and any changes (e.g., pay increases and amendments to compensation policies and procedures) the contractor made to the compensation system; and

5. How the contractor intends to measure the impact of these programs on employment opportunities and identified barriers.

What Does This Mean for Contractors?

OFCCP has stated numerous times that pay discrimination is the top focus under the Biden administration and the Revised Directive underscores the more aggressive approach OFCCP is taking to enforcement around compensation. Contractors will need to have documentation ready to support any claims of privilege for withholding pay analysis. It will also be important for contractors to think through the type of analysis they will perform to meet the 2.17(b)(3) requirement and the type of documentation they will have available to prove to OFCCP that analysis was conducted if they plan to withhold that analysis on privilege grounds.