Buckle Up, Federal Contractors – It's a Bumpy Road Ahead

The U.S. Department of Labor's Office of Federal Contract Compliance Programs (OFCCP) had a relatively unsurprising 2021. Not so for 2022. The agency has been hard at work issuing new and extremely ambitious policies. Together, the changes are once again reorienting OFCCP toward more aggressive tactics and more pervasive monitoring of federal contractors and subcontractors.

What is less clear is the effect of these changes on OFCCP's stakeholders. Under the Trump Administration, OFCCP had record-breaking recoveries, with its two highest-ever years in 2019 and 2020, and from 2017 to 2020, the agency exceeded the monetary recoveries of the previous nine years combined. The agency also made strides in transparency and predictability, and it worked down a substantial backlog of aged investigations. OFCCP's recent changes indicate a new regime of more flexibility for the agency but more rigidity toward contractors. Only time will tell whether these changes will inure to good or ill for contractors and their employees.

Below is an analysis of OFCCP's top five developments so far in 2022.

1. The "Pay Equity" Directive

OFCCP directives are issued by OFCCP to provide guidance to OFCCP staff and contractors on enforcement and compliance. Directives do not change the laws or affirmative action regulations, and they do not have the force and effect of law. Because directives formalize OFCCP policy and practice, contractors should look carefully to these directives to understand what lies ahead with respect to OFCCP policy and the practical aspects of developing plans and defending OFCCP compliance evaluations.

OFCCP Director Jenny Yang issued Directive 2022-01, "Pay Equity Audits," on March 15, 2022. OFCCP's stated purpose for the directive is to "provide guidance on how OFCCP will evaluate federal contractors' compliance with pay equity audit obligations and clarify OFCCP's authority to access and review pay equity audits" under federal contractor regulations. The directive also addresses how OFCCP will address a federal contractor's claims of attorney-client privilege with respect to compensation analyses conducted through counsel.

Contractors have long been required to conduct reviews of their compensation practices. Affirmative action regulations (41 C.F.R. § 60-2.17(b)(2)) require that federal contractors "evaluate compensation system(s) to determine whether there are any gender-, race-, or ethnicity-based disparities." In connection with OFCCP compliance evaluations, OFCCP sends to contactors a standard scheduling letter and itemized listing of support data to submit to OFCCP. Item 19 of that itemized listing directs contractors to provide detailed employee compensation data. OFCCP will then analyze compensation pursuant to Directive 2018-05, "Analysis of Contractor Compensation Practices During a Compliance Evaluation." If OFCCP's review identifies disparities in pay, it frequently seeks additional information from contractors, including the results of a contractor's internal pay analysis. Contractors that conduct such analyses under attorney-client privilege have typically objected on grounds that the analysis is privileged.

In Directive 2022-01, OFCCP explains that it has the "authority to review the contractor's pay equity audit conducted" pursuant to 41 C.F.R. § 60-2.17(b)(2), and that it "will request that the contractor provide a complete copy of the pay equity audit(s) conducted … that shows all pay groupings that were evaluated, any variables used, and the results of the analyses, including any disparities found." OFCCP further explains that while it "recognizes that federal contractors often retain counsel to assist with the preparation of the pay audit," federal contractors "must maintain and make available to OFCCP documentation of their compliance." OFCCP further states that "contractors cannot withhold these documents by invoking attorney-client privilege of the attorney work-product doctrine."

Contractors are now faced with balancing the goal of maintaining certain aspects of a compensation analysis as privileged, while at the same time being prepared to show compliance with 41 C.F.R. § 60-2.17(b)(2) by responding to OFCCP's request to review the pay equity audit and related documentation. The strategy for achieving these objectives should be set by the contractor and its counsel when developing affirmative action plans and responding to OFCCP compliance evaluations. The strategy will depend on, among other factors, the contractor's existing compensation system, the statistical methodology used by the contractor and the feasibility of conducting two compensation reviews – one privileged, one not privileged – or some other hybrid approach. The strategy may also depend on the size and structure of the organization, as a contractor has the obligation under affirmative action regulations to conduct a compensation review for each individual establishment, as opposed to a single pay equity audit that covers the entire workforce across multiple establishments. In compliance evaluations or in litigation, contractors should confer with counsel on a strategy for challenging OFCCP's stated position on the attorney-client privilege, given that this position is set forth in a directive that does not have the force and effect of law. Eventually, legal challenges to OFCCP's position will likely provide further guidance to contractors on how to address this complex issue.

2. The "Effective Compliance Evaluations and Enforcement" Directive

OFCCP issued Directive 2022-02, "Effective Compliance Evaluations and Enforcement," on March 31, 2022. The directive repeals four Trump-era directives that, together, gave contractors more notice of OFCCP investigations and more transparency into how the agency conducts and closes out audits. These were known together as the "four pillars" of the agency's Certainty, Efficiency, Recognition, and Transparency (CERT) initiative. The new directive replaces those directives with a new regime that may cause contractors more difficulty than before.

Directive 2022-02 rescinds the 45-day delay between OFCCP publishing its scheduling list for contractors (known as the Corporate Scheduling Announcement List, or CSAL) and auditing those contractors. It similarly repeals the automatic 30-day extension for audited contractors to produce whatever data is initially requested by the agency – except in "extraordinary circumstances" such as medical absences of key personnel, disaster, deaths, unexpected turnover or military service. While OFCCP was once faulted by a government watchdog for allowing delays in the production of a contractor's affirmative action program (a regulatory requirement), the directive's stringent timelines for production of data goes far beyond that item and does not account for any difficulties companies may have in pulling the information together from disparate sources in a short time.

Directive 2022-02 also rescinds the helpful framework laid out in Directive 2018-08 for OFCCP audits. The old directive laid out simple and clear steps for agency personnel to follow before requesting additional information from contractors, the requirement to share essential source data so that contractors can assess OFCCP's statistical findings and instruction to collaborate constructively during conciliation. Directive 2022-02 leaves these things more to investigators' discretion.

Directive 2022-02 also contains several new and aggressive provisions:

• The directive states that OFCCP can request data post-dating the audit scheduling letter. OFCCP does not have subpoena authority, and this provision may prove contentious.
• The directive promises a new scheduling methodology "to reach a broader universe of contractors and subcontractors and to identify those with greater risk factors for noncompliance with nondiscrimination and affirmative action requirements." A common complaint from contractors is that OFCCP audits the same limited pool over and over again, so some contractors may welcome this change. Others may not, especially subcontractors, who traditionally have received little attention from OFCCP.
• The directive states that OFCCP may request personal contact information for former employees, including Social Security numbers. Employers and employees may both bristle at this provision.
• The directive asserts, by reference to an American Law Reports entry and a model legal ethics rule, that the employer has no right to be present for interviews of former employees.

Altogether, in both its tone and its specific repeals and new provisions, Directive 2022-02 suggests that OFCCP plans to both wields its own discretion more broadly and to be more rigid with employers. Contractors should be ready for tighter timelines, more demands and a more aggressive stance from OFCCP during audits.

3. The Pending Revision of the Predetermination Notice Rule

Late in 2020, OFCCP issued the Predetermination Notice (PDN Rule) that codified its review processes and established legal standards for how it would adjudge discrimination for purposes of conciliation and, if need be, litigation.¹ The regulation has three key features: 1) codifying when and how OFCCP escalates an audit to the next stage,² 2) requiring OFCCP to disclose to the contractor its statistical methods for arriving at its conclusions³ and 3) requiring OFCCP in most instances to not rely on statistical evidence alone in findings of potential discrimination.⁴

OFCCP issued a proposed rule on March 22, 2022, that would largely rescind the PDN Rule.⁵ In general, the proposed rule would rescind the second and third features – the requirements that OFCCP disclose its statistical data and rely on more than statistics when finding potential discrimination. It also makes smaller adjustments to the audit process such as giving contractors only 15 days instead of 30 to respond to a predetermination notice.

Similar to other changes in the works by OFCCP, the proposed revisions of the PDN Rule appear calculated to grant the agency more flexibility, both legally and procedurally.

4. The Affirmative Action Verification Initiative (AAVI)

OFCCP has implemented the long-awaited Affirmative Action Verification Initiative (AAVI) and has established its online portal for contractors to verify that they have an affirmative action program in place. Under this program, a federal contractor must certify on an annual basis that it is meeting its obligations to develop and maintain affirmative action programs. From March 31, 2022, through June 30, 2022, federal contractors must access this portal and certify the status of their affirmative action programs. The certification process does not require that the contractor submit its affirmative action plans to OFCCP – that obligation arises only in connection with compliance evaluations. The portal includes additional information such as OFCCP answers to frequently asked questions and "how to" videos.

In connection with this certification process, a contractor must certify as to one of the following three categories: 1) the entity has developed and maintained affirmative action programs at each establishment, as applicable, and/or for each functional or business unit, 2) the entity has been party to a qualifying federal contract or subcontract for 120 days or more and has not developed and maintained affirmative action programs at each establishment, as applicable or 3) the entity became a covered federal contractor or subcontractor within the past 120 days and therefore has not yet developed applicable affirmative action programs. By certifying that it has developed and maintained affirmative action programs, the contractor is stating that it has developed affirmative action programs under Executive Order 11246, the Vietnam Era Veterans Readjustment Assistance Act (VEVRAA) and Section 503 of the Rehabilitation Act.

5. A Potential Rule on Subcontractor Coverage

As both Directive 2022-02 and AAVI indicate, OFCCP is looking to expand its enforcement footprint against subcontractors. This expansion of enforcement may be enlarged further still by a potential rule in the near future. For the first time in the Fall 2021 Regulatory Agenda, OFCCP listed a proposed rule that "would add provisions[] to the regulations implementing Executive Order 11246 requiring contractors to provide notice when they award supply and service subcontracts." The listing further states that "the notice would include information currently unavailable to OFCCP, enabling it to schedule supply and service subcontractors for compliance evaluations."

Executive Order 11246 has always covered subcontractors, but OFCCP traditionally has done little to audit them. This potential rule, along with AAVI, would provide a way for OFCCP to begin doing so in a systematic way. This would be a dramatic expansion of OFCCP's jurisdiction in practice. Further, it could catch many subcontractors unawares, as many depend on contractors flowing down clauses to them to be aware of their potential federal obligations.

Conclusion

As anticipated, OFCCP under Director Yang will be more aggressive, with a focus on compensation issues and overall contractor compliance. With these new directives and initiatives (and a June 30, 2022, deadline for certifications under AAVI), contractor should take steps now – including conferring with counsel on strategic approaches to OFCCP's requirements – to ensure compliance and to prepare for potential compliance evaluations.

If you have any questions about OFCCP and these requirements, please contact the authors.

Notes

¹ See Nondiscrimination Obligations of Federal Contractors and Subcontractors; Procedures to Resolve Potential Employment Discrimination, 85 Fed. Reg. 71553 (Nov. 10, 2020).

² See generally 41 C.F.R. § 60-1.33.

³ See id. § 60-1.33(a)(4).

⁴ See id. §§ 60-1.33(a)(2)(ii), (3)(iii).

⁵ See Pre-Enforcement Notice and Conciliation Procedures, 87 Fed. Reg. 16138 (March 22, 2022).

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.