On Feb. 28, the U.S. Department of Labor, Office of Federal Contract Compliance Programs issued regulations rescinding a rule issued in the final days of the Trump administration that had expanded federal contractors' ability to make employment decisions on the basis of religious faith.

The new rule, which restored the OFCCP's interpretation of a religious exemption in Executive Order No. 11246, to its pre-Trump administration interpretation, became effective on March 31.

While the Trump-era rule purported to clarify the scope of the religious exemption under Executive Order No. 11246, it was met with controversy. Opponents of the rule believed that it created confusion, was inconsistent with established case law and potentially created additional flexibility for contractors to discriminate against applicants and employees on the basis of sexual orientation and gender identity.

Background: Executive Order No. 11246's Religious Exemption

Executive Order No. 11246 prohibits federal government contractors and subcontractors from discriminating on the basis of race, color, religion, sex, sexual orientation, gender identity or national origin, and requires contractors to take affirmative action in employment.

The order contains a religious exemption, which states that Executive Order No. 11246:

shall not apply to a Government contractor or subcontractor that is a religious corporation, association, educational institution, or society, with respect to the employment of individuals of a particular religion to perform work connected with the carrying on by such corporation, association, educational institution, or society of its activities.

This exemption permits qualifying entities to make employment decisions based on acceptance of and adherence to religious tenets embraced by the company, even where such decisions may not otherwise be consistent with the order's prohibition on religious discrimination.

The exemption was added to Executive Order No. 11246 in 2002, and was based on the religious exemption in Title VII of the Civil Rights Act.

Since its adoption in 2002, the religious exemption in this executive order generally has been interpreted in a manner consistent with courts' interpretation of Title VII's religious exemption, which has two key components: (1) the religious organizations that may qualify for the exemption, and (2) the substantive scope of the exemption.

OFCCP's 2020 Rule Change and Impact

In 2020, in the waning days of the Trump administration, the OFCCP finalized the controversial rule expanding the scope of the order's religious exemption. As articulated by the agency when the rule was promulgated, the change was "intended to correct any misperception that religious organizations are disfavored in government contracting."[1]

The OFCCP defended its position by pointing to feedback it had previously received from religious organizations disclosing their reluctance to participate in federal contracts due to collective uncertainty surrounding the scope of Executive Order No.11246's religious exemption.

The agency additionally declared an interest in aligning the religious exemption with a string of recent U.S. Supreme Court decisions that, it believed, rendered the existing iteration of the rule inconsistent with the court's views on religious liberty.

These Supreme Court decisions — for example, the 2014 landmark case Burwell v. Hobby Lobby Stores Inc., which recognized a for-profit corporation's claims of religious belief — represented a shift toward granting companies greater religious liberty when making employment-related decisions.

To make clear what it believed was the exemption's proper scope and application, the OFCCP defined specific terms in the exemption, such as defining the term "particular religion" to mean, in part, "acceptance of or adherence to sincere religious tenets as understood by the employer as a condition of employment."

While aiming for clarity, however, the 2020 rule undoubtedly expanded the availability of the exemption. With respect to the first key component of the exemption, the 2020 rule expanded the availability of the exemption beyond organizations whose purpose and character are primarily religious, which traditionally had been limited to churches, religious schools and other nonsecular employers.

In other words, where the exemption traditionally was available only to organizations with an explicitly religious mission, it was now potentially available to any employer with sincere religious tenets that the employer understood as a condition of employment.

With respect to the second key component of the exemption, the 2020 rule directed the exemption to be construed in favor of the broadest protections available under the law, which could be read to exempt qualifying religious organizations from adhering to the executive order's other nondiscrimination prohibitions — e.g., race, sex, sexual orientation.

Finally, the 2020 rule directed the OFCCP to apply the Religious Freedom Restoration Act in the broadest possible manner.

Critics immediately condemned the new rule for weakening anti-bias protections for workers, and characterized the agency's rationale for its implementation as "a regulation in search of a problem." While the OFCCP asserted that the vast majority of federal contractors would be unaffected by the rule, it was promptly challenged in two federal lawsuits shortly after it took effect on Jan 8, 2021.

In Oregon Tradeswomen Inc. v. U.S. Department of Labor, in the U.S. District Court for the District of Oregon, a group of nonprofit organizations challenged the 2020 rule for clearing the way for federal contractors and subcontractors to make discriminatory employment decisions.

Meanwhile, in New York v. U.S. Department of Labor, the state of New York brought suit against the DOL for what it described as a seismic shift from federal civil rights jurisprudence, and opening the floodgates for rampant mistreatment of LGBTQ and other minority workers.

Both cases were eventually stayed following affirmation from the DOL of its intent to rescind the 2020 rule in November 2021.

The OFCCP's Rationale for Rescinding the 2020 Rule

In her Feb. 28 blog post, former OFCCP Director Jenny Yang explained that the Trump-era rule improperly deviated from the approach to Title VII's religious exemption taken by courts, the Equal Employment Opportunity Commission, the Department of Justice, and OFCCP.[2]

In its FAQs published contemporaneously with the announcement of regulations rescinding the 2020 rule, the DOL described how the 2020 rule improperly broadened the test for exemption beyond religious grounds, and espoused "an inappropriately categorical approach" to how the OFCCP would handle potential religious freedom claims, "including an incorrect assertion that, in assessing such claims, the OFCCP's interests in prohibiting discrimination in government contracting are compelling only with respect to race discrimination."[3]

Rescission of the 2020 rule, the OFCCP believes, is a return to the original framework and long-standing practice of Title VII case law and Executive Order No. 11246, including the prohibition against discrimination on the basis of protected characteristics, even where such discrimination is religiously motivated. Yang clarified, however, that the rescission did "not change religious entities' ability to pursue federal contracts."

Further, the agency's FAQs set forth nine factors it would weigh moving forward to evaluate the first key component of the executive order's religious exemption — i.e. which religious organizations may qualify for the exemption:

• Whether the entity operates for a profit;
• Whether the entity produces a secular product;
• Whether the entity's articles of incorporation or other pertinent documents state a religious purpose;
• Whether the entity is affiliated with, owned or financially supported by a formally religious entity such as a church or synagogue;
• Whether a formally religious entity participates in the management of the entity, e.g., by having representatives on the board of trustees;
• Whether the entity holds itself out to the public as secular or sectarian;
• Whether the entity regularly includes prayer or other forms of worship in its activities;
• Whether the entity includes religious instruction in its curriculum, to the extent it is an educational institution; and
• Whether the entity's membership is made up by coreligionists.

With respect to the second key component, the substantive scope of the exemption, the agency affirmed that while qualifying religious organizations generally may make employment decisions based on applicant and employee acceptance of and adherence to religious tenets, such organizations:

may not insist on compliance with such tenets to the extent it would result in violation of the other nondiscrimination provisions, e.g., the prohibitions on discrimination on the basis of race, sex, and sexual orientation, and the prohibition on retaliating against employees because they have asserted their legal rights.

What This Means for Federal Contractors

Return to the pre-2020 rule approach to Executive Order No. 11246's religious exemption does not affect most businesses that contract with the federal government. The exemption will still be available for qualifying religious employers to claim protection for certain employment decisions taken regarding whether to employ individuals based on acceptance of and adherence to religious tenets.

However, employers wishing to avail themselves of the exemption should carefully examine whether they may qualify by applying the nine factors set forth above. Furthermore, assuming an employer qualifies, it must ensure that reliance on its religious tenets does not violate the executive order's other nondiscrimination provisions.

In particular, it will be important for federal contractors who changed their hiring or other employment practices in reliance on the expanded scope of the religious exemption set in 2020, in light of the OFCCP's return to its prior standards

Lastly, it is important to remember that even religious organizations properly asserting the religious exemption generally are required to comply with the order's other requirements, including their affirmative action obligations.

References

[1] 85 Fed. Reg. 79,324 (Dec. 9, 2020), https://www.govinfo.gov/content/pkg/FR-2020-12-09/pdf/2020-26418.pdf.

[2] U.S. Department of Labor, "Protecting Workers and Safeguarding Religious Freedom", https://blog.dol.gov/2023/02/28/protecting-workers-and-safeguarding-religious-freedom.

[3] U.S. Department of Labor's Office of Federal Contract Compliance Programs, "Religious Exemption Final Rule Frequently Asked Questions", https://www.dol.gov/agencies/ofccp/faqs/Religious-Exemption-Final-Rule.

Reprinted with permission of Law360.