On March 15, 2022, the Office of Federal Contract Compliance Programs (OFCCP) issued its first directive of the Biden Administration to address the requirement that federal government contractors and subcontractors perform pay equity audits. Consistent with predictions that the Biden OFCCP would focus on pay equity enforcement, the new Directive 2022-01 highlights the requirement that federal contractors and subcontractors perform regular pay equity audits as part of their affirmative action program (AAP) obligations, and indicates that OFCCP will closely scrutinize the results of these audits during its compliance evaluations.

OFCCP’s AAP regulations have long required that a federal contractor “perform in-depth analyses of its total employment process to determine whether and where impediments to equal employment opportunity exist,” including evaluation of “compensation system[s] to determine whether there are gender-, race-, or ethnicity-based disparities.” However, OFCCP has not previously provided specific guidance about the scope of this requirement.  In the new directive, OFCCP appears to take the position that the AAP regulations require that contractors perform a regular, in-depth pay equity audit of their workforce to identify potential disparities.

More importantly, OFCCP’s directive also makes clear that the agency intends to request and scrutinize contractor pay equity audits in its compliance evaluations.  Under the directive, if a compliance evaluation “reveals disparities in pay or other concerns about the contractor’s compensation practices,” then OFCCP intends to request documentation of the contractor’s pay equity audits.  Some circumstances that OFCCP identifies as triggering a request for this follow-up information include:

1.     Pay disparities or evidence of pay discrimination among similarly-situated employees.

2.     Employee complaints of pay discrimination or other anecdotal evidence of discrimination.

3.     Inconsistencies in how the contractor is applying its pay policies.

4.     Statistical analyses or other evidence that a group of workers is disproportionately concentrated in lower paying positions or pay levels based on a protected characteristic.

If one of these circumstances occurs, OFCCP will seek “a complete copy” of the pay equity audit showing all pay groupings that were evaluated, any variables used, and the results of the analyses. OFCCP will also seek information about model statistics if a statistical analysis is employed and the frequency of audits, communication to management, and how the results were used.

The directive also takes an aggressive position regarding the privileged status of contractor pay equity audits.  Contractors commonly perform pay equity audits with the assistance of legal counsel in order to ensure the audit is protected from disclosure by the attorney-client privilege.  In the directive, however, OFCCP takes the position that because its regulations require that contractors maintain and provide OFCCP with evidence of their compliance with the AAP obligations, “contractors cannot withhold these documents by invoking attorney-client privilege or the attorney work-product doctrine.”  The directive does recognize, however, that a contractor may conduct a “separate” pay equity audit for the purpose of obtaining legal advice, not for compliance with OFCCP obligations, which remains privileged.  The directive asserts that the failure to provide pay equity audits in response to an OFCCP request will be considered “as an admission of noncompliance with these regulatory requirements.”

The new directive ups the ante for federal contractors and subcontractors to perform regular pay equity audits as part of their AAP compliance efforts.  Such audits have always been advisable as a best practice to identify and rectify potential compensation disparities before they ripen into litigation, but are now a required exercise for those doing business with the federal government.  In light of OFCCP’s aggressive positions about the application of the attorney-client privilege to pay equity audits, contractors and their counsel will also need to carefully structure their audits in order to ensure that at least a portion of the audit remains protected from disclosure.