On January 30, 2024, the Biden administration proposed a rule (the Salary Rule) that would amend the Federal Acquisition Regulation (FAR) to “prohibit contractors and subcontractors from seeking and considering information about a job applicant’s compensation history when making employment decisions for certain positions.” The new rule would also require contractors and subcontractors to disclose compensation information publicly for open positions.

The new Salary Rule echoes the reasoning behind the 2021 Executive Order (E.O.) 14042, which mandated COVID-19 vaccines for federal contractor employees (COVID Order), by focusing on the promotion of economy and efficiency in procurement. If implemented as proposed, the Salary Rule would apply broadly to the hiring of all federal contractor and subcontractor employees to work “on or in connection with a government contract.”

The federal contractor community, however, successfully opposed the COVID Order in court. With that prior success in mind, it would not be surprising to see a similar negative reaction from industry now, if the proposed Salary Rule were to become final in its current form, given the rule’s broad reach.

Background

“Salary history bans,” as defined in the Salary Rule, are not new, and our firm has written previously about such bans in Philadelphia and Massachusetts. Numerous other states and localities have passed these types of laws. The Salary Rule itself states that there are “22 statewide bans and 22 local bans.” These laws are far from uniform, but most prohibit questions to applicants about salary history. Some laws, like that in California (California Code, Labor Code § 432.3), allow an employer to consider salary information that is voluntarily disclosed. Others, like in Colorado (Colorado Rev. Statutes § 8-5-102), prohibit an employer from relying on any wage history to determine a wage rate.

The federal government is now following this trend.

Thus, on March 15, 2022, President Biden issued E.O. 14069, Advancing Economy, Efficiency, and Effectiveness in Federal Contracting by Promoting Pay Equity and Transparency. The policy of that Executive Order was to “eliminate discriminatory pay practices that inhibit the economy, efficiency, and effectiveness of the Federal workforce and the procurement of property and services by the Federal Government.” The order directed the Federal Acquisition Regulatory Council to consider whether any new rules “should limit or prohibit Federal contractors and subcontractors from seeking and considering information about job applicants’ and employees’ existing or past compensation when making employment decisions.” The order tracked an earlier order, E.O. 14035, which directed the consideration of parallel efforts regarding salaries in the federal workforce.

Proposed Rule

The proposed Salary Rule would do the following:

(1) prohibit contractors and subcontractors from seeking and considering information about job applicants’ compensation history when making employment decisions about personnel working on or in connection with a government contract; and

(2) require contractors and subcontractors to disclose, in all advertisements for job openings involving work on or in connection with a government contract placed by or on behalf of the contractor or subcontractor, the compensation to be offered to the hired applicant, for any position to perform work on or in connection with the contract.

The Salary Rule would apply to contracts and subcontracts with values below the simplified acquisition threshold as well as larger ones. It would also apply “to both prime contracts and subcontracts for commercial products and commercial services,” including commercially available off-the-shelf (COTS) items. In addition, the rule would apply to all solicitations and contracts where the principal place of performance is within the United States, the latter of which is defined to include the 50 states, the District of Columbia, and outlying areas, i.e., territories.

The compensation disclosure obligation would have the following requirements:

The disclosure must indicate the salary or wages, or range thereof, that the contractor in good faith believes that it will pay for the advertised position and may reflect, as applicable, the contractor’s pay scale for that position, the range of compensation for those currently working in similar jobs, or the amount budgeted for the position. The disclosure must also include a general description of the benefits and other forms of compensation applicable to the job opportunity.

The Salary Rule would define the term “work on or in connection with the contract” as “work called for by the contract or work activities necessary to the performance of the contract but not specifically called for by the contract.”

The proposed rule also will have a mechanism to report suspected violations to the Department of Labor.

Takeaway

Given that many federal government contractors also have commercial business lines, too, the impact of the proposed Salary Rule, if promulgated, could potentially be far-reaching. That is especially the case because the definition of “work on or in connection with the contract” is broad, because the rule is intended to apply to commercial contracts, and because it would also apply to small contracts. In that regard, the proposed rule is reminiscent of the intended reach of the COVID Order, which was justified based on efficiency grounds. The COVID Order, however, was successfully challenged in a number of federal district courts and courts of appeals. Therefore, we anticipate a similarly vigorous litigation response to any final Salary Rule.

Nevertheless, because the Salary Rule is only a proposed rule, interested parties have until April 1, 2024, to submit comments.