On December 9, 2020, the Office of Federal Contract Compliance Programs (OFCCP) published its controversial final rule “Implementing Legal Requirements Regarding the Equal Opportunity Clause’s Religious Exemption” in the Federal Register. The final rule clarifies the scope and application of the religious exemption — which generally allows certain contractors to make employment-related decisions based on religion — by adding definitions to key terms and a rule of construction and severability clause.

The OFCCP reported that it intended the final rule to acknowledge case law permitting religious organizations to apply religious belief defenses to claims of alleged unlawful employment discrimination. Yet, opponents to the final rule believe it impermissibly protects the free exercise of religion above protecting the rights of the LGBTQ community. Indeed, Speaker of the House Nancy Pelosi has already publicly stated that she will work with the Biden administration to repeal this final rule and other “anti-worker” policies. As of now, the regulations will go into effect on January 8, 2021.

Executive Order 11246 & Religious Exemption

Section 202 of Executive Order 11246 generally requires that all federal contracting agencies include an equal opportunity clause in all covered contracts and subcontracts. Relevant here, Section 204(c) (religious exemption) exempts certain religious organizations from Section 202 “with respect to the employment of individuals of a particular religion to perform work connected with the carrying on” of those religious organizations’ activities. The religious exemption is codified in the OFCCP’s regulations at 41 CFR 60-1.5(a)(5).

Since Executive Order 11246’s religious exemption parallels the religious exemption in Title VII of the Civil Rights Act of 1964, the OFCCP has interpreted nondiscrimination provisions of Executive Order 11246 consistent with the principles of Title VII. However, there have been varying interpretations of the Title VII religious exemption among federal courts “and many of the relevant Title VII court opinions predate Supreme Court decisions and executive orders that shed light on the proper interpretation.”

Thus, the final rule’s intended purpose is “to clarify the contours of the E.O. 11246 religious exemption and the related obligations of federal contractors and subcontractors to ensure that OFCCP respects religious employers’ free exercise rights, protects workers from prohibited discrimination, and defends the values of a pluralistic society.” Additionally, the final rule was enacted to “correct any misperception that religious organizations are disfavored in government contracting” and allow contractors to “hire employees who will further their religious missions” so they can “expand the eligible pool of federal contractors and subcontractors.”

Clarified Definitions

While the August 2019 notice of proposed rulemaking proposed five new definitions, the final rule eliminated the proposed “exercise of religion” definition and modified the definition of “religious corporation, association, educational institution, or society.” The final rule’s addition of the following four terms helps clarify the applicability of the exemption:

• “Particular religion”

• “Religion”

• “Religious corporation, association, educational institution, or society”

• “Sincere”

Of particular note, a “religious corporation, association, educational institution, or society” is defined as a corporation, association, educational institution, society, school, college, university, or institution of learning that meets the following four requirements: (1) is organized for a religious purpose; (2) holds itself out to the public as carrying out a religious purpose; (3) engages in activity consistent with, and in furtherance of, that religious purpose; and (4) operates on a not-for-profit basis or presents other strong evidence that its purpose is substantially religious. The fourth prong shows that there “may be rare situations. . . where an organization is legally constituted as a for-profit enterprise yet infused with religious purpose.”

The final rule also recognizes that a religious organization may or may not “have a mosque, church, synagogue, temple, or other house of worship; or be supported by, be affiliated with, identify with, or be composed of individuals sharing, any single religion, sect, denomination, or other religious tradition.”

Identifying Potentially Impacted Contractors Through Real-World Examples

The final rule demonstrates which contractors may qualify for religious exemption by providing four illustrative factual scenarios within the definition of “religious corporation, association, educational institution, or society.” For instance, one example illustrates how a manufacturer likely will not qualify as a religious organization where “the manufacturer provides goods predominantly for religious communities, [but] the manufacturer’s fundamental purpose is secular and pecuniary, not religious . . . .” On the other hand, a contractor likely will qualify as a religious organization in a circumstance where the contractor’s organizing documents expressly state that its mission is primarily religious in nature and the contractor exercises religion through its business, hiring and training practices. The example also indicates it is helpful when the contractor holds itself out as a religious organization to its employees, applicants and clients in its emails and other communications.

Impact of Final Rule

The religious exemption permits religious organizations to make employment-related decisions — such as which employees to hire — on the basis of religion. However, contractors should be reminded that even if they are entitled to the religious exemption, they are not exempt from all of Executive Order 11246’s nondiscrimination requirements. Specifically, religious organizations are not permitted to make employment decisions on bases that are otherwise protected by law, such as race, color, sex, sexual orientation, gender identity, national origin, disability, or status as a protected veteran. Even so, contractors may seek relief under the Religious Freedom Restoration Act where Executive Order 11246’s requirements substantially burden a religious organization’s exercise of religion.

The final rule is expected to help federal contractors and subcontractors better understand their obligations under Executive Order 11246 and the religious exemption. Not only will contractors have additional guidance when the Equal Employment Opportunity Commission (EEOC) updates its Compliance Manual on Religious Discrimination, but the OFCCP has published 15 FAQs, which provide information on the final rule.

This controversial final rule is likely to be challenged in the Biden administration. Affected contractors should watch closely for further developments.