Client Alert

OFCCP Signals Return to More Aggressive and Less Transparent Audits

05 Apr 2022

In the last three weeks alone, OFCCP has issued two significant Directives and a notice of proposed rulemaking, signaling its intent to be far more aggressive and less transparent in compliance evaluations than under the Trump administration. These developments include:

  • Issuing, on March 15, 2022, Directive 2022-01, providing OFCCP’s view that its regulations require contractors to perform quantitative analyses of their compensation practices each affirmative action plan (AAP) cycle and that those analyses cannot be withheld from OFCCP during audits, even if performed under attorney-client privilege;
  • Publishing, on March 21, 2022, a Notice of Proposed Rulemaking (NPRM), seeking to rescind important evidentiary and procedural requirements for contractors before OFCCP issues Pre-determination Notices (PDNs) or Notice of Violations (NOVs) that were adopted by the previous OFCCP Director Craig Leen in November 2020;
  • Releasing, on March 31, 2022, Directive 2022-02, rescinding Directives from the Trump administration aimed at providing contractors more transparency, consistency, and clarity in compliance evaluations and indicating OFCCP’s intent to conduct more thorough audits with seemingly less transparency and cooperation.

These new developments are a clear departure from the four pillars (transparency, certainty, efficiency, and recognition) that were adopted by Director Leen under the prior administration and that were largely welcomed by the contractor community. Contractors should now prepare for longer and more searching audits, with less transparency and less cooperation than were commonplace under the Obama Administration. If the NPRM is implemented as proposed, contractors will no longer be able to rely on the procedural and evidentiary protections that have been critical for contractors defending OFCCP PDNs and NOVs. Instead, contractors may face an uphill battle trying to effectively respond to OFCCP’s alleged findings in a PDN since they will likely have less information about those findings, a shorter time for responding, and no guarantee that OFCCP will not raise new allegations later. Contractors should also review their pay equity practices and analyses and ensure that they can demonstrate that any pay analyses withheld from OFCCP during audits are covered by the attorney-client privilege.

New Directive 2022-01 on Pay Equity Audits and Privilege

As the first OFCCP directive under the Biden Administration, Directive 2022-01 provides an initial glimpse of OFCCP’s view on contractors’ compensation practices. Directive 2022-01 shows the broad and expansive scope OFCCP will take in reviewing compensation during audits under Director Yang’s leadership and challenging assertions of privilege over pay equity studies.

  • Broad and Aggregated Review of Compensation: OFCCP states that it will “look broadly at contractors’ workforce (across job titles, levels, roles, positions, and functions) to identify patterns of segregation” and “use regression and other systemic analysis to look for disparities in patterns of assignment or in salary aid across similar functions and positions.” Interestingly, although OFCCP seems to indicate that it may be returning to the more highly aggregated pay analysis that was used under the Obama Administration, OFCCP refers contractors to the previous Trump administration’s Directive 2018-05 for how OFCCP will assess compensation during compliance reviews. Whether OFCCP will keep Directive 2018-05 remains to be seen.
  • OFCCP Will Seek Additional Pay Data When Disparities Are Found: Directive 2022-01 also provides insight into how OFCCP will proceed with requesting additional compensation information from contractors after receiving data in response to Item 19 of OFCCP’s scheduling letter. If OFCCP finds pay disparities, it says it may request additional information, including (without limitation), “additional compensation data, follow-up interviews, and additional records and information from the contractor, including its pay equity audit conducted pursuant to [41 C.F.R. 60-] 2.17(b)(3)” as well as the factors not provided to OFCCP as part of the response to Item 19 of the scheduling letter. Examples of circumstances in which OFCCP might request additional compensation information include the following:
    • Evidence of potential pay discrimination among similarly situated employees based on race or gender;
    • Anecdotal evidence of pay discrimination, including allegations by employees of pay discrimination;
    • Inconsistencies in how the contractor is applying its pay policies; and/or
    • Statistical analyses or other evidence that a group of workers is disproportionately concentrated in lower paying positions or pay levels within a position based on a protected characteristic.
  • Quantitative Analysis of Pay Expected Under 41 C.F.R. 60-2.17(b)(3): As part of their annual AAP cycle, contractors are required to review their compensation practices in accordance with 41 C.F.R. § 60-2.17(b)(3). That regulation provides, in pertinent part:

    The contractor must 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: . . .

    (3) Compensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities . . .

    Nothing in this section requires contractors to perform any certain type of analysis when reviewing their compensation practices. Although Directive 2022-01 does not go as far as requiring a specific pay analysis to meet this regulatory requirement, OFCCP strongly suggests that contractors should be doing a more sophisticated statistical analysis, including regression analysis, to satisfy this requirement. This is a departure from OFCCP’s longstanding interpretation of 41 C.F.R. § 60-2.17(b)(3) not requiring any specific analysis or method. 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.”). While a quantitative analysis may not technically be required, contractors should consider what type of analysis they will perform each AAP cycle in light of this policy change.

  • Privilege Cannot Shield Pay Analysis Under 41 C.F.R. 60-2.17(b)(3): OFCCP has also said that it may request a complete copy of any “pay equity audit(s) conducted pursuant to 2.17(b)(3),” including any “pay groupings” or “variables used, and the results of those analyses,” and information about the “frequency of pay equity audits, the communication to management, and how the results were used to rectify disparities. . .” OFCCP states that it will challenge any refusals by contractors to provide their analyses performed to meet that regulatory requirement based on claims of attorney-client privilege or attorney work product. OFCCP believes that contractors cannot cloak those pay reviews with privilege since they are required by OFCCP’s regulations and will consider a refusal to provide the analysis as “an admission of noncompliance with these regulatory requirements.” Importantly, OFCCP concedes that it will generally not seek other privileged pay analysis if the contractor “demonstrates that it also conducted a properly privileged pay equity process with an attorney.”

    Now more than ever, it is critical for contractors to be conducting proactive audits of their pay equity practices under attorney-client privilege. Contractors will be better positioned to defend an OFCCP audit if they identify any flags before OFCCP comes knocking and either can rectify or have solid explanations for those issues. Waiting until an audit to perform this analysis can make it more difficult to defend potential disparity findings by OFCCP. Contractors should consult with counsel on how to update their practices for reviewing compensation during their annual AAP cycles so that they have an analysis with which they are comfortable and that can be provided to OFCCP to show compliance with 60-2.17(b)(3). Although OFCCP’s authority for requesting pay analyses protected by the attorney-client privilege or work-product doctrine is questionable, contractors are well advised to ensure that they can properly demonstrate and document attorney-client privilege for any pay equity analysis that are being withheld on the basis of privilege. Contractors should also consult with counsel before responding to any OFCCP request for privileged materials and documents.

Notice and Comment to Rescind PDN Rules

A PDN provides contractors an opportunity to respond to OFCCP’s preliminary findings of discrimination before OFCCP issues an NOV. During the Trump Administration, OFCCP had issued Nondiscrimination Obligations of Federal Contractors and Subcontractors: Procedures to Resolve Potential Employment Discrimination (the “PDN Rule”). The PDN Rule codified important procedural and evidentiary standards for PDNs and NOVs that provide contractors with transparency on OFCCP’s statistical and anecdotal evidence as well as requiring OFCCP to show that the alleged disparity is statistically and practically significant under Title VII standards. The PDN Rule had received high praise from the contractor community for providing more transparency, more consistency, and mandatory standards for OFCCP discrimination findings.

The NPRM seeks to rescind those procedural and evidentiary protections. In a recent U.S. Department of Labor Blog post, Director Yang said that the PDN Rule “unduly constrained OFCCP’s broad enforcement discretion” and “imposed inflexible evidentiary requirements.” The NPRM seeks to change the PDN Rule in several significant ways:

  • Reduces the Deadline for Responding to PDNs: The NPRM seeks to reduce the time for responding to a PDN from 30 days to 15 days. OFCCP may extend the 15-day timeline for “good cause.” The 15-day period OFCCP is proposing would make it difficult for contractors to provide a thorough response, especially considering that OFCCP would also be able to issue a PDN without any advance notice.
  • Removes Evidentiary Requirements Before Issuing PDNs and NOVs: The NPRM seeks to eliminate the evidentiary standards before issuing PDNs and NOVs, including the requirement that OFCCP show practical significance and anecdotal evidence to support its statistical findings. OFCCP alleges that those standards were inconsistent with Title VII and “led to delays” in resolving disputes between OFCCP and contractors. OFCCP also claims that providing contractors with its anecdotal evidence could disclose information about alleged victims that might discourage those witnesses from cooperating with OFCCP in its investigation. This means that OFCCP would only be required to notify contractors that it allegedly found discrimination, “describing the indicators,” without providing any other details. Without those details, contractors are at a significant disadvantage in being able to effectively respond to OFCCP’s alleged findings.
  • New Allegations Can be Raised After the PDN: The NPRM also would eliminate the requirement that all allegations in the NOV or Show Cause Notice (SCN) must have been raised in the PDN. This was an important procedural protection for contractors so they had an opportunity to fully respond to OFCCP’s allegations through the PDN process before OFCCP moved to an NOV or SCN. If the NPRM is finalized, OFCCP will be able to raise new allegations for the first time in the NOV or SCN. In addition, OFCCP is also looking to codify in its regulations its authority to issue an SCN before issuing a PDN or NOV if the contractor refuses to “provide access to its premises for an on-site review or refuse[s] to provide access to witnesses, records, or other information.”

Contractors can submit comments to the NPRM on or before April 21, 2022.

New Enforcement Directive 2022-02

Through Directive 2022-02, OFCCP sets the tone and expectations for compliance evaluations under the Biden Administration. Although OFCCP “reaffirms its commitment to providing transparency, efficiency, and clarity in its compliance evaluation[s],” it rescinds several Directives (2018-06, 2018-08, 2020-02, 2021-02) that previous Director Leen issued, aimed at enshrining in OFCCP’s policies and practices more transparency, efficiency, and clarity for contractors. Directive 2022-02 makes several notable changes:

  • OFCCP Signals More Aggressive Audits: From the outset, Directive 2022-02 makes clear that OFCCP will be taking a more aggressive stance in audits. This includes conducting “comprehensive compliance evaluations,” that seek accountability and avoid delay by requiring timely submission of information. OFCCP says it will also employ “coordinated, cross-regional” efforts where a contractor has multiple audits scheduled for a compliance review. Accordingly, contractors scheduled for compliance evaluations at multiple establishments should expect broader and deeper audits of their facilities with coordinated efforts among the OFCCP regions investigating their establishments.
  • Removal of the 45-Day Delay After CSALs: Directive 2022-02 also eliminates the 45-day period between the time when contractors receive a Corporate Scheduling Announcement Letter (CSAL) and the date when they are scheduled for a compliance evaluation. In past administrations, OFCCP has sent CSALs to contractors to inform them that they have landed on OFCCP’s scheduling list and that they may be scheduled for a compliance evaluation. Under the Trump Administration, OFCCP had given contractors at least 45 days between the date of the CSAL and the date of the scheduling letter. In Directive 2022-02, OFCCP states that contractors may be scheduled for audit immediately after publication of the contractor on the CSAL list. This means that contractors will no longer have the critical 45-day ramp up time to prepare for audit and should plan accordingly in their annual AAPs and audit preparations.
  • “Extraordinary Circumstances” Required to Extend Response to Scheduling Letter: OFCCP will no longer be freely granting contractors a one-time, 30-day extension of the deadline to respond to OFCCP’s scheduling letters. Instead, OFCCP said it will only grant extensions for responses to the scheduling letter if there are “extraordinary circumstances,” such as extended medical leave, military service, death of key personnel, or a company-specific disaster, including a flood, fire, or computer virus, that affect record collection.
  • Expanding the Temporal Scope of Audits: OFCCP said that its requests will not limit OFCCP’s “ability to request additional information or expand the investigation” for any information relevant to its investigation for the two-year period before the date of the scheduling letter as well as examining whether an observed disparity or non-compliance has continued after the date of the scheduling letter. If contractors are not able to provide OFCCP the information because it was not maintained or destroyed, Directive 2022-02 states that OFCCP will presume such information would be unfavorable to the contractor.
  • Seeking to Interview Employees/Applicants: OFCCP stated that it expects contractors to provide employee and applicant contact information, including telephone numbers, home addresses, emails, and Social Security numbers, when requested. OFCCP signaled that it will aggressively pursue enforcement proceedings where contractors refuse to provide the agency with that contact information. According to Directive 2022-02, contractor representatives are not allowed to be present during OFCCP interviews of employees or applicants. Contractor representatives are only allowed to be present for interviews of “upper-level managers and directors” when OFCCP is interviewing them in their management capacity.
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