On March 15, 2022, the U.S. Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) issued Directive 2022-01, addressing the obligations of federal government contractors and subcontractors subject to OFCCP jurisdiction to conduct in-depth analyses of their compensation system(s) under 41 CFR 60-2.17(b)(3) and OFCCP’s right to access and review contractors’ pay equity audits conducted in whole or in part for compliance purposes, even where the audit is conducted at the direction of legal counsel. The Directive, which is the first since Jenny Yang became director more than a year ago, reinforces that pay equity will continue to be a primary focus for OFCCP and puts contractors on notice regarding their compliance obligations and OFCCP’s right during audits to demand contractors’ documentation of pay equity analyses.

OFCCP Expects Pay Equity Audits as Part of Contractors’ Annual Analysis of Compensation Systems

OFCCP regulations require contractors, as part of their annual affirmative action plans, to “perform in-depth analyses of… [c]ompensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities.” 41 CFR 60-2.17(b)(3). Although OFCCP regulations do not specify precisely what analysis contractors must perform in order to meet this obligation, the Directive strongly suggests that OFCCP views the regulations as requiring contractors to perform quantitative, or statistical, “pay equity audits” of employee compensation. The Directive makes clear that such a pay equity audit “is an important component of the contractor’s affirmative action program” that OFCCP expects contractors to conduct “proactively.”

OFCCP Access to Contractor Pay Equity Audits

The Directive further provides that, as part of an audit, OFCCP has the right to extensive documentation regarding contractor pay equity audits “to understand the methodology used and verify compliance with” the requirement set forth in 41 CFR 60-2.17(b)(3). Specifically, the Directive states that OFCCP has a right to require that a contractor submit to the agency:

  • “[A] complete copy of the pay equity audit(s) conducted pursuant to 2.17(b)(3) that shows all pay groupings that were evaluated, any variables used, and the results of the analyses, including any disparities found”;
  • “For compensation regression or statistical analysis results… 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”; and
  • “[I]nformation 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 who have been audited in recent years are familiar with OFCCP requests for some of this information, before this Directive, OFCCP has not previously asserted in any public agency document such a broad right to documentation of contractor pay equity audits.

Limits on Attorney-Client Privilege and Work Product Doctrine in Pay Equity Audits

After articulating OFCCP’s broad right to access records relating to pay equity audits, the remainder of the Directive is devoted to expressing OFCCP’s view of the limits of the attorney-client privilege. In short, 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 attorney-client privilege or attorney work product doctrine to withhold pay equity audit documents from OFCCP:

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. (Emphasis added.)

Going even further, the Directive takes the position that OFCCP has a right “in appropriate circumstances” to discovery of documents and information protected by attorney-client privilege and/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 Directive only concedes that OFCCP does not have a right to access documents and information pertaining to attorney-client privileged pay equity 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,” and only then where the contractor produces a nonprivileged pay audit to 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 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, and that a contractor’s refusal to waive the privilege “will be considered by OFCCP as an admission of noncompliance with the… regulatory requirements” set forth in 41 CFR 60-2.17(b)(3). While OFCCP’s position is one with which contractors audited in recent years may be familiar, it nonetheless is surprising for the agency to take a position so hostile to the attorney-client privilege in a publicly available guidance document.

What This Means for Contractors

As an initial matter, it is important to note that, as OFCCP acknowledges, the Directive “does not change the laws and/or regulations governing OFCCP’s programs and does not establish any legally enforceable rights or obligations” and its contents “do not have the force and effect of law and are not meant to bind the public in any way.” Nonetheless, the Directive is key to understanding OFCCP’s audit enforcement position with respect to pay equity analysis, in particular that (1) OFCCP expects contractors to conduct quantitative pay equity audits annually to satisfy their affirmative action compliance obligations, and (2) OFCCP has the right to obtain a broad range of documents and information relating to any such pay equity audits, regardless of legal counsel involvement in the audit.

In light of the Directive, contractors should consult with legal counsel regarding how best to meet their affirmative action compliance obligations with respect to compensation analyses. When conducting quantitative pay equity analyses for OFCCP compliance, contractors should strongly consider bifurcating the pay equity analysis process into an initial, privileged audit to diagnose and address any potential problem areas (not limited to OFCCP compliance), and a subsequent nonprivileged audit to fulfill their OFCCP compliance obligations. The process of conducting a bifurcated pay equity audit has numerous procedural and logistical considerations that are beyond the scope of this Alert, and contractors should consult with counsel regarding those considerations.