Notwithstanding the fact that Office of Federal Contract Compliance Programs Director Jenny Yang was one of the first U.S. Department of Labor officials appointed by President Joe Biden, there was little public indication of the shifts in policy and enforcement priorities that typically accompany a change in the party controlling the White House until recently.

Although the OFCCP went live with its new contractor portal during the Biden administration, the portal was years in the making, and formal approval from the Office of Management and Budget had been requested during the Trump administration in September 2020.

Two agency directives issued in March 2022, however, sent a clear signal that a new sheriff is, in fact, in town and that federal contractors need not only to be in compliance, but on their toes.

Directive 2022-01 on pay equity audits, issued March 15, addresses the obligations of federal contractors subject to OFCCP jurisdiction to conduct in-depth analyses of their compensation systems under Title 41 of the Code of Federal Regulations, Section 60-2.17(b)(3).

The directive also addresses the OFCCP's right to access and review pay equity audits conducted by contractors in whole or in part for compliance purposes, even where the audit is conducted at the direction of legal counsel.

Directive 2022-02 on effective compliance evaluations and enforcement, issued just over two weeks later on March 31, implements significant changes to the OFCCP's audit and enforcement processes, and signals that more changes are coming down the pike.

Directive 2022-01 on Pay Equity Audits

Pay Equity Audits as Part of Contractors' Annual Compensation Systems Analysis

OFCCP regulations require contractors, as part of their annual affirmative action plans, to perform in-depth analyses of compensation systems "to determine whether there are gender-, race-, or ethnicity-based disparities."[1]

Although the regulations do not specify precisely what analysis contractors must perform to meet this obligation, Directive 2022-01 strongly suggests that the OFCCP views the regulations as requiring contractors to perform quantitative, or statistical, pay equity audits of employee compensation.

The directive makes clear that such pay equity audits are an important component of a contractor's affirmative action program, which the OFCCP expects contractors to conduct proactively.

OFCCP's Broad Access to Contractor Pay Equity Audits

Directive 2022-01 further provides that the OFCCP has the right to extensive documentation of a contractor's pay equity audit to understand the methodology used and verify compliance with the requirements set forth in Title 41 of the Code of Federal Regulations, Section 60-2.17(b)(3).

Specifically, the directive states that the OFCCP has a right to require that a contractor submit:

• A complete copy of the pay equity audit conducted pursuant to the regulation, showing all the pay grouping evaluated, any variables used and the results, including any disparities found;
• The model statistics — such as b-coefficients, significance tests, R-squared, adjusted R-squared, F-tests, etc. — for all variables or comparisons in the model, used for compensation regression or statistical analysis results; and
• Information "relating to the frequency of pay equity audits, the communication to management, and how the results were used to rectify disparities based on gender, race and/or ethnicity."

While contractors that have been audited in recent years are familiar with OFCCP requests for some of this information, this is the first time the OFCCP has asserted such a broad right to documentation of contractor pay equity audits in a public agency document.

Limits on Attorney-Client Privilege and Work Product Doctrine

Directive 2022-01 also articulates the OFCCP's view of the limits of attorney-client privilege.

In short, the OFCCP takes the position that if a contractor engages legal counsel to assist in conducting a pay equity analysis pursuant to OFCCP regulations, the contractor cannot assert the attorney-client privilege or attorney work product doctrine to withhold pay equity audit document.

OFCCP recognizes that federal contractors often retain counsel to assist with the preparation of the pay equity audit and compliance records required by OFCCP's regulations. OFCCP notes, however, that federal contractors must maintain and make available to OFCCP documentation of their compliance with OFCCP regulations. Contractors cannot withhold these documents by invoking attorney-client privilege or the attorney work-product doctrine. OFCCP has the authority under its regulations to request the analyses the contractor has conducted to comply with OFCCP regulations.

The directive goes even further by taking the position that the OFCCP has a right in appropriate circumstances to discovery of documents and information protected by attorney-client privilege or work product doctrine where "a contractor conducts a dual-purpose pay equity audit or analysis of employment processes — i.e., one that implicates both legal concerns and OFCCP compliance."

The OFCCP only concedes that it does not have a right to access documents and information pertaining to such attorney-client privileged audits where a contractor conducts "a separate pay equity audit for the purpose of obtaining privileged legal advice, and not for demonstrating compliance with OFCCP regulations."

Further, this only applies where the contractor produces a nonprivileged pay audit to the OFCCP "sufficient to demonstrate compliance with 2.17(b)(3) [and] to the extent that the contractor can verify that they were conducted under privilege."

Effectively, the directive articulates the OFCCP's enforcement position that a contractor may only engage counsel to provide legal advice in connection with a pay equity audit conducted, in whole or in part, for OFCCP compliance purposes if the contractor is willing to waive the privilege in an OFCCP audit.

The OFCCP will consider the contractor's refusal to waive the privilege as an admission of noncompliance with the regulatory requirements set forth in Title 41 of the Code of Federal Regulations, Section 60-2.17(b)(3).

While the OFCCP's position is one with which contractors audited in recent years and their counsel may be familiar, it nonetheless is unsettling for the agency to take a position so hostile to the attorney-client privilege in a publicly available guidance document.

Directive 2022-02 on Effective Compliance Evaluations and Enforcement

Four Pillars Directives Rescinded

Directive 2022-02 rescinds four prior directives issued under former OFCCP Director Craig Leen:

• The Contractor Recognition Program — Directive 2018-06;
• Transparency in OFCCP Compliance Activities — Directive 2018-08;
• Efficiency in Compliance Evaluations — Directive 2020-02; and
• Certainty of OFCCP Policies and Practices — Directive 2021-02.

These directives memorialized Leen's so-called four pillars — Certainty, Efficiency, Recognition and Transparency — advanced to improve agency governance and processes, and to ensure federal contractors understood the OFCCP's expectations.

Not surprisingly, these directives were welcomed by the contractor community, evincing a shift from the prior administration's approach to compliance, which many viewed as inconsistent, lacking transparency and lacking regard for contractor resources or efforts to comply with affirmative action obligations.

In short, Directive 2022-02 signals a shift back to an era of fewer self-imposed constraints on the OFCCP's enforcement activities.

Less Advance Notice of, and Less Time to Respond to, Audits

Directive 2022-02 rescinds the OFCCP's practice of authorizing an automatic 30-day extension for submitting affirmative action data — if the contractor submits narrative affirmative action plans within the initial 30-day period — such as key compensation, employment activity and other supporting data.

Contractors will be granted an extension to submit supporting data responsive to the itemized listing that accompanies OFCCP scheduling letters only in specific, extraordinary circumstances. These include:

• Extended medical absences of key personnel;
• A death in the immediate family of key personnel;
• A localized or company-specific disaster affecting records retrieval such as a flood, fire or computer virus;
• Unexpected military service absence of key personnel; and
• Unexpected turnover or departure of key affirmative action official.

Directive 2022-02 also eliminates the automatic 45-day scheduling delay after the issuance of a corporate scheduling announcement list, or CSAL, that identifies the contractor establishments that will be audited in the coming fiscal year.

The directive does state that the "OFCCP will continue to provide information about its scheduling methodology [and] will continue to post a CSAL to notify contractors that they are included in OFCCP's scheduling list," which were both welcome developments for contractors in recent years.

By doing away with the 30-day automatic extension and 45-day post-CSAL scheduling delay, Directive 2022-02 leverages contractors' obligation to certify compliance in the OFCCP contractor portal on an annual basis.

According to the DOL:

The directive makes clear that when covered contractors use the Contractor Portal to certify compliance with their affirmative action program obligations annually, they are certifying that they have developed and maintained complete programs in compliance with OFCCP requirements.

Indeed, the directive touts that the OFCCP is promoting "a proactive approach to compliance where federal contractors actively self-audit employment systems to identify and resolve problems in their employment practices."

Better Audit Coordination Across Contractors' District and Regional Offices

Currently, contractors with multiple establishments under audit deal individually with the regional and district offices handling the audits, with little coordination between the audits at the OFCCP.

The directive states that going forward, the agency will implement a coordinated, cross-regional approach to multi-establishment compliance reviews, coordinating "evaluations of common policies and patterns across establishments." Anecdotal reports from contractors under audit suggest this already is happening.

Changes Coming to OFCCP's Scheduling Methodology

According to Directive 2022-02:

OFCCP is enhancing its neutral scheduling procedures for selecting federal contractors for compliance evaluations to reach a broader universe of contractors and subcontractors and to identify those with greater risk factors for noncompliance with nondiscrimination and affirmative action requirements.

While contractors don't yet know what these changes will be, the directive says the OFCCP will continue to provide information about its scheduling methodology and how it neutrally selects contractors for a compliance evaluations.

Potentially Broader Scope of Requests for Supplemental Data in Audits

While contractors are accustomed to supplemental requests for documents and information in an OFCCP audit going back two years, Directive 2022-02 articulates the agency's asserted right to request records created after the date of the scheduling letter, including employment activity data such as hiring and compensation data, to evaluate whether practices in question have ended or are continuing.

Although the OFCCP has prevailed in administrative proceedings over its right to have access to such data in audits, the right has not been conclusively established — through regulation or otherwise — and may be a point of contention in audits moving forward.

The OFCCP also claims that it will reasonably tailor such requests to areas of concern, include the basis for the request and allow contractors a reasonable time to respond, although the extent to which the agency follows this commitment in practice remains to be seen.

A Final Word About Directives

As a final note, it is important to point out that, as the OFCCP readily acknowledges in the preamble to its directives, a directive is intended to provide OFCCP staff and federal contractors with guidance on enforcement and compliance policy or procedures, and does not change the laws or regulations governing the OFCCP's programs. 

Directives do not establish legally enforceable rights or obligations. They do not have the force and effect of law and are "not meant to bind the public in any way."

Nonetheless, directives are key to understanding the OFCCP's audit enforcement position, and can be an important tool to maximize compliance, minimize audit risk and navigate increasingly contentious audits in a difficult enforcement environment.

Reprinted with permission of Law360.