In March 2022, we reported on a controversial directive issued by the Office of Federal Contract Compliance Programs (OFCCP) that appeared to assert, for the first time, that federal contractors and subcontractors are required to conduct statistical pay equity audits on an annual basis, and also took an aggressive position that documents relating to these audits are likely not protected by the attorney-client privilege or work product doctrine.  In response to widespread criticism from the contractor community, OFCCP, on August 18, 2022, issued a new, “revised” directive that yields ground on some of the prior directive’s more aggressive positions.  That said, the new directive makes clear that OFCCP is not relaxing its focus on pay equity, and contractors and subcontractors similarly should not relax their efforts in this area.

First, OFCCP clarified that the compensation analysis that its regulations require contractors to perform is not necessarily a statistical regression analysis of the type preferred by OFCCP.  The revised directive replaces the term “pay equity audit” with “compensation analysis” and clairifies that various methods may suffice.  However, contractors should not take this as a license to perform only cursory analyses.  When OFCCP reviews the information about the compensation analysis that is required to be provided (described below), it could conclude that an employer’s chosen method of analysis was insufficient.  In addition, conducting rigorous pay equity analyses has its own business case independent of OFCCP’s requirements, as ensuring pay equity aids significantly in an employer’s talent acquisition and retention efforts, helps maintain workplace morale and mitigates the risk of private-plaintiff pay discrimination litigation.

Most importantly, OFCCP’s revised directive abandons the agency’s prior position that it would seek “a complete copy” of a contractor’s pay equity audits and that such audits conducted for the purpose of complying with OFCCP regulations are, by definition, not privileged.  OFCCP’s revised directive provides contractors with three options to provide in lieu of the full analysis:

• A redacted version that removed privileged material.

• A separate, non-privileged analysis to be provided in full.

• A detailed affidavit describing the contractor’s efforts.

Regardless of which of these options the contractor elects, the information provided to OFCCP must describe: when the analysis was conducted, the number of employees included and number and categories of any employees excluded from the analysis, what forms of compensation the contractor analyzed and how different types of compensation were separated or combined for analysis, a confirmation that compensation was analyzed by gender, race, and ethnicity, and the method of analysis used by the contractor.

OFCCP also “recommends” that contractors provide additional information about their compensation analyses.  The revised directive states that OFCCP would also like to receive information about the employee pay groupings evaluated, how and why employees were grouped into these groupings, and what variables, factors, and controls the contractor used (such as time in the role, degrees, performance ratings, etc…), and the model statistics for any regression analyses conducted.  Unlike the prior directive, OFCCP recognizes that many contractors consider these types of information to be privileged.  That said, there can be value in providing these types of information to the agency – for instance, OFCCP may accept a contractor’s pay analysis groups if provided, rather than forming its own (typically overbroad) groups.  The decision on whether to provide this information will need to be made after careful analysis with counsel of the benefits and drawbacks of doing so.

Finally, OFCCP’s revised directive also requires contractors to disclose certain information about any corrective measures it takes in response to disparities found during the compensation analysis.  The contractor must provide information regarding the nature and extent of any disparities, whether the contractor investigated the root cause of the disparities, what types of “action-oriented programs” the contractor implemented to correct the disparities, and how the contractor intends to measure the impact of its programs.

Although OFCCP’s revision to its controversial directive is a welcome sign for contractors, it does not signal any reduction in OFCCP’s emphasis on combatting actual or perceived pay discrimination.  Nor does it imply that contractors should reduce their efforts to proactively monitor their compensation systems.  Pay equity is an area in which an ounce of prevention is worth a pound of cure, and it benefits employers to stay on top of their data to identify and redress the potential disparities that may inevitably develop over time.  However, even the more limited revised directive makes clear that federal contractors and subcontractors must carefully structure these analyses to satisfy OFCCP’s requirements and maintain the protection of attorney-client privilege.