On April 8, 2014, President Obama undertook two actions in an effort to make the compensation of employees of federal contractors and subcontractors more transparent, first issuing an executive order giving license to employees to share and discuss compensation information and then releasing a memorandum directing the proposal of a rule that would require federal contractors and subcontractors to report compensation data to the federal government.

The executive order prohibits federal contractors and subcontractors from discriminating or retaliating against employees or applicants for asking about, discussing, or disclosing their own compensation or the compensation of other employees or applicants. The order instructs the Secretary of Labor to propose regulations within 160 days to implement the order’s requirements. The order will go into effect once those regulations have been finalized and will apply only to federal contracts entered into after the effective date and to subcontracts under those contracts. Issued by the President the same day, the executive memorandum directs the Department of Labor (DOL) to propose a rule requiring federal contractors and subcontractors to submit to the DOL summary data on their employees’ compensation, including data compiled by sex and race.

According to the President, allowing federal contractors to bar employees from inquiring about or discussing their compensation with other employees causes two problems: (1) it hinders enforcement of civil rights laws by making compensation discrimination “much more difficult to discover and remediate”; and (2) it diminishes market efficiency by restricting the free flow of information in the federal contracting labor pool, “decreas[ing] the likelihood that the most qualified and productive workers are hired at the market efficient price.”

The executive order does provide an exception to its prohibition against adverse action for employees sharing and discussing compensation information. It states that the provision against discrimination shall not apply to instances in which the sharer of the compensation information has access to the information as part of his or her essential job functions (presumably referring to human resources and payroll personnel, for example).

The executive order amends Executive Order 11246, administered by the Office of Federal Contract Compliance Programs (OFCCP), which prohibits federal (and federally assisted) contractors and subcontractors that have contracts exceeding $10,000 from discriminating in employment decisions on the basis of race, color, religion, sex, or national origin. Executive Order 11246 also requires such contractors and subcontractors to undertake affirmative action to eliminate barriers to employment for women and minorities.

The executive memorandum directs the DOL to propose, within 120 days, a rule requiring federal contractors and subcontractors to provide summary compensation data. The memorandum was issued in partial response to an Advanced Notice of Proposed Rulemaking published on August 10, 2011, in which the DOL solicited input on the design and operation of a potential compensation data collection tool.

Practical Implications

Press coverage of the signing of the new executive order has focused on an effort by the President to combat gender-based pay inequality. The practical effects of the executive order may be more far-reaching, however. Many employers understandably regard compensation as a sensitive topic in the workplace and prohibit employees from sharing compensation information. Although such prohibitions have been held to be unlawful under the National Labor Relations Act insofar as they apply to the nonmanagement employees covered by that Act, the new executive order gives covered contractors and subcontractors an added incentive to eliminate rules against compensation discussions among both management and nonmanagement employees. Federal contractors and subcontractors would therefore be wise to revise personnel policies that prohibit the sharing of compensation information among personnel except in the limited circumstances in which the executive order permits such a prohibition. Likewise, federal contractors and subcontractors should train supervisors about the types of conduct protected by the executive order.

While the President’s aim is to make unlawful pay discrimination more visible, the order may lead to an uptick in lawsuits filed by individuals seeking higher pay, regardless of whether they were actually treated unfairly. To combat such concerns, federal contractors and subcontractors should reassess compensation plans to ensure that differences in pay are clearly justified by legitimate, nondiscriminatory, job-related factors such as education, prior experience, job performance, and length of time in the position and/or at the company. Furthermore, federal contractors and subcontractors should ensure that they document and retain evidence of these drivers of pay for each employee in case of an audit by the OFCCP or an Equal Employment Opportunity Commission (EEOC) charge or lawsuit claiming pay discrimination.