On August 17, 2022, the U.S. Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) issued a revised Directive 2022-01, “Advancing Pay Equity Through Compensation Analysis,” in which the agency seeks to address concerns implicated by Directive 2022-01, issued only five months earlier, regarding the extent to which OFCCP would respect the attorney-client privilege when auditing contractors’ compliance with their obligation to annually perform compensation analysis. In the revised directive, OFCCP: (1) confirms that it will not require the production of attorney-client privileged communications or attorney work product; (2) identifies the documentation the agency may require a contractor to produce in an audit to confirm compliance with its compensation analysis obligations under 41 CFR 60-2.17(b)(3); and (3) identifies the necessary information that contractors must share with OFCCP when they identify evidence of pay disparities and institute corrective action programs. Like all other directives, this does not change any existing laws nor impose any new obligations on federal contractors, but rather serves to clarify existing requirements and OFCCP’s policies.
Clarification Regarding Treatment of the Attorney-Client Privilege
Under 41 CFR 60-2.17(b)(3), federal contractors are obligated to perform an in-depth analysis of their compensation systems at least annually as part of their affirmative action obligations. OFCCP, in turn, can request this analysis in an audit. Issues arise, however, where these compensation analyses are conducted at the direction of legal counsel, raising questions of attorney-client privilege and the work-product doctrine. While OFCCP has stated that it recognizes and respects the potential privileged nature of a contractor’s compensation analysis, it has consistently held that contractors cannot hide behind this privilege and withhold documentation altogether.
The revised directive states that, for the agency’s purposes, “the most useful form of documentation is a contractor’s full compensation analysis” and it “encourage(s)” contractors to make their full compensation analysis available to the agency in an audit. However, OFCCP recognizes that it cannot compel a contractor to produce attorney-client privileged information to demonstrate compliance with its obligations under 41 CFR 60-2.17(b)(3). Accordingly, the revised directive states that, where a contractor’s full compensation analysis contains privileged information, “the contractor may fulfill its regulatory obligations by making available to OFCCP other documentation that it has conducted the compensation analysis” required by the regulations. Specifically, the revised directive states that contractors may: (1) provide a redacted version of the compensation analysis; (2) conduct a separate, nonprivileged analysis during the relevant audit period; or (3) provide a detailed affidavit setting forth certain facts that demonstrate compliance.
Minimum Documentation Required to Demonstrate Compliance with 41 CFR 60-2.17(b)(3)
For contractors electing not to provide their full compensation analysis to the agency on privilege grounds, OFCCP will require the contractor to provide documentation that demonstrates, at a minimum:
- When the compensation analysis was completed;
- The number of employees included in, and excluded from, the compensation analysis;
- Which forms of compensation were analyzed and how different forms of compensation were separated or combined for analysis, if applicable (e.g., base pay, base pay combined with bonuses, etc.);
- Confirmation that compensation was analyzed by gender, race and ethnicity; and
- The method of statistical analysis used by the contractor in conducting its compensation analysis.
In addition to the above mandatory disclosures, OFCCP “recommends” that contractors also provide the following information regarding their compensation analysis, to the extent it is not privileged, to “assist OFCCP in conducting a more efficient compliance evaluation”:
- The pay groupings evaluated by the contractor;
- An explanation of how and why employees were grouped for the analysis;
- What variables or controls were considered (e.g., tenure, education, structural groupings, performance ratings, prior experience), if any, and how they were incorporated in the analysis; and
- The model statistics for any regressions or global analyses conducted (e.g., b-coefficients, significance tests, F-tests, etc.) for race, ethnicity and gender-based variables.
OFCCP Expectations for Contractor Actions to Address Compensation Issues
Furthermore, the revised directive articulates the documentation OFCCP will require contractors to produce regarding action-oriented programs developed and executed to address any problem areas identified in the contractor’s compensation analysis, as required by 41 CFR 60-2.17(c). This documentation must show, at a minimum:
- The nature and extent of any pay disparities found, including the categories of jobs for which disparities were found, the degree of the disparities and the group(s) adversely affected;
- Whether the contractor investigated the reasons behind the identified pay disparities;
- That the contractor has installed action-oriented programs to correct identified problems;
- The nature and scope of these programs, including the jobs to which they apply and any changes made as a result (e.g., pay increases, amendments to compensation policies and procedures); and
- How the contractor plans to measure the impact that these programs have on employment opportunities and identified barriers.
What This Means for Contractors
Revised Directive 2022-01 was a welcome clarification for contractors concerned that OFCCP would force them to choose between waiving the attorney-client privilege and demonstrating compliance with the compensation analysis obligation set forth in 41 CFR 60-2.17(b)(3). The revised directive also provides helpful guidance to contractors regarding how they can demonstrate compliance in an audit while steering clear of a privilege waiver, spelling out both what contractors must provide to demonstrate compliance and what they are encouraged to provide. Contractors should be especially deliberate in what additional information they choose to disclose beyond the mandatory documentation, which can inadvertently allow the agency to replicate the compensation analysis and defeat the purpose behind withholding for privilege altogether.
Importantly, although OFCCP repeatedly emphasizes its preference to receive a contractor’s full compensation analysis and the revised directive contains numerous references to statistical compensation analyses, neither is required by the regulations. Indeed, in OFCCP Director Jenny Yang’s blog post accompanying the publication of the revised directive, she specifically notes that while the initial Directive 2022-01 used the term “pay equity analysis” repeatedly, the revised directive instead uses the term “compensation analysis” in order to “avoid any confusion regarding the nature of a contractor’s obligations.”
Ultimately, the revised directive should not prompt a wholesale shift in federal contractors’ strategies to comply with their compensation analysis obligations. As we noted previously, contractors should consider performing a bifurcated analysis consisting of an initial, privileged audit followed by a nonprivileged version to be shared with OFCCP. By outlining what specific information contractors are expected to share with the agency, revised Directive 2022-01 offers a clearer road map for contractors to follow in this regard. Contractors are still encouraged to consult with legal counsel on their OFCCP compliance strategy.