Today (September 10, 2015), the Department of Labor issued its final rule, implementing Executive Order 13665  (the “Order”), which prohibits federal contractors from firing or otherwise disciplining employees or job applicants for discussing their pay or the pay of their co-workers.  The final rule goes into effect on January 11, 2016.

The final rule comes after the Department of Labor received 6,524 comments from stakeholders.  Among other things, the final rule amends the equal opportunity clauses in Executive Order (“EO”) 11246 to afford protections to workers who discuss pay; codifies certain defenses for contractors; and adds employee notice provisions.  The new regulation’s key points are discussed below.

Applicability

The final rule applies to both federal contracts and subcontracts “entered into or modified on or after [January 11, 2016] that exceed $10,000 in value.”  Modification of a contract includes changes to any term or condition of the contract, as well as extensions and renewals of existing contracts.

Amendments to Executive Order 11246 (“EO 11246”)

EO 11246 protects employees of federal contractors from various forms of discrimination by their employers.  The final rule amends EO 11246 to prohibit federal contractors from discriminating against an employee or job applicant “because the employee or applicant inquired about, discussed, or discloses the compensation of the employee or applicant or another employee or applicant.”

Defenses for Contractors

The Order and the final rule provide contractors with two defenses:  (1) a general defense; and (2) an essential job function defense.  The general defense protects a contractor’s ability to discipline an “employee for violation of a consistently and uniformly applied rule, policy, practice, agreement, or other instrument that does not prohibit, or tend to prohibit, employees or applicants from discussing or disclosing their compensation or the compensation of other employees or applicants.”  In other words, if the contractor disciplines an employee for violating a policy that does not on its face violate the Order, the mere fact that the employee may have been speaking about his or her compensation in connection with the policy violation does not necessarily constitute a violation of the Order, so long as the contractor uniformly and consistently applies the policy in a non-discriminatory fashion.  However, the final rule is clear that the defense is not a “complete defense,” and is instead merely a factor in the analytical framework used to assess liability.  The contractor still needs to establish that the pay disclosure at issue was not a motivating factor in the decision to discipline the employee.

The second defense – the essential job functions defense – is a complete defense.  This defense allows a contractor to take adverse action against an employee for disclosing the compensation of other employees or applicants where the disclosing employee has access to the compensation information as part of his or her job or where that employee is charged with guarding the privacy of that information.  This defense recognizes the contractor’s need to entrust an employee or group of employees with sensitive personnel information without being powerless to act if that information is unjustifiably released.  It is worth noting that this defense does not apply in situations where the employee is responding to legitimate inquiries for the information such as an “investigation, proceeding, hearing or action.”

Defining Key Terms

The final rule, after considering comments by stakeholders, defines three key terms implicated by the Order:  (1) Compensation; (2) Compensation Information; and (3) Essential Job Function.

For purposes of the rule, “compensation” is defined as “any payments made to, or on behalf of, an employee or offered to an applicant as remuneration for employment, including but not limited to salary, wages, overtime pay, shift differentials, bonuses, commissions, vacation and holiday pay, allowances, insurance and other benefits, stock options and awards, profit sharing, and retirement.”  Notably, and as a direct result of stakeholder comments, the definition of “compensation” does not include “paid leave” or “sick time.”

The final rule defines “compensation information” as “the amount and type of compensation provided to employees or offered to applicants, including, but not limited to, the desire of the contractor to attract and retain a particular employee for the value the employee is perceived to add to the contractor’s profit or productivity; the availability of employees with like skills in the marketplace; market research about the worth of similar jobs in the relevant marketplace; job analysis, descriptions, and evaluations; salary and pay structures; salary surveys; labor union agreements; and contractor decisions, statements and policies related to setting or altering employee compensation.”  This is, by design, a very broad definition.  The Department of Labor wanted the definition to be “broad enough to encompass any information directly related to employee compensation, as well as the process or steps that led to a decision to award a particular type or amount of compensation.”

Finally, the final rule defines “essential job functions,” a critical term that dictates the scope of one of the two defenses provided to contractors under the Order.  Under the final rule, the term is defined as “the fundamental job duties of the employment position an individual holds.”  Specifically, a “job function may be considered essential if: (i) The access to compensation information is necessary in order to perform that function or another routinely assigned business task; or (ii) The function or duties of the position include protecting and maintaining the privacy of employee personnel records, including compensation information.”

Notice to Employees

The final rule requires contractors to provide notice to their employees of these new protections in two forms.  First, contractors must add the new non-discrimination provisions to their existing handbooks or manuals.  Second, contractors must either electronically disseminate a notice of the new protections (to be provided by the OFCCP) to each employee and applicant, or post a notice of the new protections conspicuously in the workplace where it can be accessed by both employees and applicants.

Analytical Framework

During the notice and comment period many stakeholders questioned which analytical framework would apply to alleged violations of the Order.  Much of the confusion came from the protections being referred to as non-discrimination provisions, while appearing to really address retaliation concerns.  Thus, one recurring question was what standard would be used by the OFCCP to determine whether a violation had occurred.

The Department of Labor adopted the “motivating factor” burden of proof of traditional Title-VII discrimination cases.  Accordingly, when assessing whether a contractor has violated the Order and implementing regulations, the OFCCP will assess whether the employee’s disclosure of pay information was a motivating factor for any adverse treatment.  Additionally, the OFCCP will follow the commonly used burden shifting analysis announced in McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973) in determining whether violations have occurred.

Key Points and Takeaways

The issuance of the final rule should serve as a reminder to contractors to analyze their existing policies to ensure that they are in compliance with the new protections.  Contractors should be prepared to add new non-discrimination language to their manuals and handbooks.  In addition, contractors should watch for the OFCCP’s published notice and be prepared to disseminate and post it as required by the new rules.