Setting the Record Straight on Directive 2022-01

Written By: DCI President David Cohen

On March 15, 2022, OFCCP released its first directive under the Biden administration. Directive 2022-01 reinforces OFCCP’s commitment to pay equity. One of the main goals of the directive is to remind federal contractors and subcontractors that it has a regulatory obligation to evaluate and ensure non-discriminatory pay practices within its workforce. I fully commend OFCCP for its commitment to pay equity and believe every employer should take proactive steps to ensure that its workforce is free of discriminatory employment practices, including pay. It is important; however, to understand what new requirements exist under the Directive, if any. I will attempt to address the new Directive's three main components: pay equity audits, desk audit expectations, and attorney-client privilege.

Before turning to the specifics of the Directive, it is important to understand what a directive is and is not. A directive is sub-regulatory and cannot impose any new standards or requirements on federal contractors and subcontractors. Therefore, at most, Directive 2022-01 simply summarizes OFCCP’s position on internal pay equity audits and what OFCCP will do and expect during a compliance evaluation.

Section 1: Pay Equity Audits - Requirements under 60-2.17(b)(3)

The subject of Directive 2022-01 is Pay Equity Audits. It is noteworthy that this term is not found anywhere in the regulations, nor is it defined within the directive. Therefore, the only thing to conclude is that when OFCCP references “pay equity,” it is referring to non-discriminatory pay practices.

This section of the regulation was added in 2000 when the Clinton Administration made substantive changes to the Supply and Service regulations. Therefore, the new Directive simply refers to this 22-year-old regulatory requirement. If OFCCP wants to change the regulatory requirements and impose additional standards and/or requirements, it must go through the standard rulemaking process under the Administrative Procedures Act (APA) and/or the Paperwork Reduction Act (PRA). Hint: OFCCP may be looking to do just that later on in the year when it proposes substantive changes to the Supply and Service regulations. Until then, the requirements at 60-2.17(b)(3) have been in existence since 2000 and have not changed. The only thing that may have changed is OFCCP’s interpretation of what may be required under that 22-year-old requirement. Ultimately, the Directive is limited by the regulation, and the Directive cannot amend or change that regulation.

What are the regulatory requirements under 60-2.17(b)? There are approximately forty-one words in the regulation that only requires an analysis that includes an evaluation of compensation system(s) (not pay audits and/or statistical analysis). Here is what the regulation provides:

60-2.17(b) The contractor must perform in-depth analyses of its total employment process to determine whether and where impediments to equal employment opportunity exist. At a minimum the contractor must evaluate:

(3)Compensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities;

Unlike the other components of the affirmative action plan, the regulation does not detail what is required to comply. It is clear that something needs to be done to demonstrate compliance but what specifically remains unclear. For example:

1. Does the regulation require an evaluation or analysis?
2. Do you have to evaluate your system(s) or data?
3. Is base pay a “system”?
4. Can the evaluation be qualitative, or must it be quantitative?
5. How do you operationalize or define “disparity”? Is that a statistical evaluation, cohort analysis, or none of the above?

Let’s take a step back into history and review how OFCCP has addressed the obligations under the regulation, beginning with the preamble to the 2000 regulations that codified the 60-2.17(b)(3) requirement. The preamble provided some clarity on OFCCP’s stated intent when the regulation was published. Here is what OFCCP noted in the preamble of the regulation:

Section 202(1). Since the compensation analysis requirement is not new, it imposes no additional burden. The question of burden is also discussed in the Paperwork Reduction Act section below. In addition, contractors have the ability to choose a type of compensation analysis that will determine whether there are gender-, race-, or ethnicity-based disparities [emphasis added].

That certainly does not require or even envision the highly prescriptive approach that OFCCP now wants to impose through the new Directive.

When OFCCP revised and re-wrote the Sex Discrimination Guidelines in 2016 it reaffirmed that contractors have wide latitude in how compensation systems were to be evaluated. OFCCP stated in the preamble to the Sex Discrimination Guidelines:

In any event, contractors remain free to choose the assessment method that best fits with their workforces and compensation practices to accomplish the self-evaluation of compensation systems required by paragraph 60–2.17(b)(3) [emphasis added].

Again, OFCCP recognized that contractors had wide discretion in determining how to most effectively meet the evaluation of the compensation system required by the regulation.

So far, the two times that OFCCP revised the regulations addressing pay audits and evaluations, no substantive guidance was provided to the contractor community.

In 2020, OFCCP released the Supply and Service Technical Assistance Guide (TAG), and this document went into great detail on all of the analytics required under the affirmative action plan. So, what did OFCCP state in the TAG?

As noted above, contractors must also perform in-depth analyses of their compensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities. OFCCP does not dictate a particular method of analysis for meeting this regulatory requirement [emphasis added]. Page 49

That certainly does not provide any basis for OFCCP to dictate how contractors fulfill their regulatory obligation for analyzing their compensation system.

Bottom Line: As I have laid out, the regulations do not prescribe any specific manner or method in which a contractor needs to follow to comply with 60-2.17(b)(3). It is truly up to the contractor to interpret the ambiguous language in the regulations and conduct an evaluation or analysis that it sees fit. OFCCP cannot impose any specific method, nor can OFCCP cite a contractor as long as the contractor can demonstrate that it did something. Until OFCCP changes the regulations, the agency is stuck with the ambiguous standards and must accept any good faith attempt made by the contractor to comply.

Section 2: Desk Audit Review and Request for Additional Information

Item 19 of the OMB approved scheduling letter requires contractors to submit an employment snapshot with detailed compensation data. OFCCP field staff use an internal program to conduct a preliminary unadjusted wage gap analysis by either affirmative action job group and/or EEO-1 category. An unadjusted wage gap simply compares average salaries between protected groups using a t-test. Field staff are instructed to run this preliminary statistical analysis to determine if there are “indicators”.

The Directive addresses the standards that OFCCP will follow during the desk audit and what contractors can expect during a compliance evaluation. I think most bloggers and contractors have missed the significance of this section.

1. OFCCP clearly stated that it will collect additional data and documentation demonstrating compliance with 600-2.17(b) IF it identifies pay indicators or other concerns (these terms are not defined in the directive) during the initial desk audit review. I understand that this section of the Directive was directed at OFCCP compliance officers. If there are NOT pay indicators or other concerns the compliance officers should not ask for additional information/data and information pertaining to 60-2.17(b). Note: Additional data and evidence of 60-2.17(b) are not in the OMB approved scheduling letter, so OFCCP must have a legitimate basis for requesting additional data. The Directive supports this and I hope that OFCCP field staff follows the guidance issued in the Directive. Not requesting additional data and information when there are no indicators at the desk audit screen is a good thing for both OFCCP and contractors. If there is no “there there” close the review down!
2. I noticed how the directive does not mention pay analysis groups (PAG) and references Title VII requirements of similarly situated. This is a welcome change and I implore the agency to continue down the path of only comparing similarly situated employees.
3. The OFCCP made it clear that it will only ask for additional information when it finds an “indicator” (not defined) when comparing similarly situated employees. OFCCP should understand that an analysis of employees by EEO-1 or AAP job group would not satisfy this requirement in most situations.

Bottom line: OFCCP did not receive the massive budget increase that the Biden Administration requested. Therefore, OFCCP will have to figure out how it can do more with less. Sending out massive requests for information after the desk audit when there is no evidence of systemic discrimination is, and will continue to be, a complete waste of time for both OFCCP and contractors. Suppose OFCCP follows the cadence suggested in the Directive. In that case, this will be a smart move for OFCCP and allow it to conduct more reviews and focus its limited resources on audits that have bona fide indicators, and that may yield systemic discrimination findings. This approach would be a welcome change, and I hope OFCCP follows the new requirements laid out in the Directive.

Section 3: Attorney-Client Privilege

This Directive section was a welcome clarification on how OFCCP would handle pay equity studies conducted under the attorney-client work privilege and product doctrine. OFCCP is correct when it states that you cannot privilege any analyses undertaken to comply with the regulations. The fact that a contractor is undertaking a regulatory requirement and would be required to turn over documentation to OFCCP during a compliance evaluation, by definition, means that final reports required by the regulations are not privileged. Non-privileged documents and analyses would include things like the AAP narrative, workforce analysis, job group analysis, availability analysis, utilization analysis, etc. The non-privileged regulatory reports also include compliance with 60-2.17(b)(3). As explained above, contractors are free to conduct an evaluation/analysis of their choice that best fits the organization's needs but should be prepared to turn them over to OFCCP during an audit. Once again, as long as you made a good faith attempt to comply with the regulations, the OFCCP cannot cite you for non-compliance. OFCCP is free to make recommendations to contractors on other ways the contractor could comply but cannot cite them.

In addition, contractors are free to voluntarily conduct separate, privileged pay equity studies outside the four corners of the regulations, and those analyses can be privileged. The directive states:

The contractor may conduct a separate pay equity audit for the purpose of obtaining privileged legal advice, and not for demonstrating compliance with OFCCP regulations. Where the contractor has produced to OFCCP an acceptable pay equity audit sufficient to demonstrate compliance with 2.17(b)(3), OFCCP will not require the production of these separate pay equity audits, to the extent that the contractor can verify that they were conducted under privilege.

The directive clarifies that the OFCCP will honor privileged pay analyses and will not request them if they are not done to comply with 60-2.17(b)(3).

Bottom Line: Contractors need to do something to demonstrate compliance with 60-2.17(b)(3) and turn that over to OFCCP during a review, if requested. In addition, contractors are free to conduct privileged analyses of pay, and OFCCP will not require contractors to waive privilege on those pay equity self-audits. However, if during an audit you state to OFCCP that you conducted an analysis under 60-2.17(b) BUT it is privileged you now are on notice that OFCCP will argue that the analyses must be disclosed to OFCCP, and OFCCP is likely to prevail on those claims. There is room to disagree with its reading of how far it can seek privileged materials relating to the analyses, but the Agency is on strong ground seeking the analyses and reports, even if those were prepared on an attorney-privileged basis.

Therefore, my recommendation to contractors is:

1. Conduct an evaluation and/or analysis for each establishment to comply with 60-2.17(b). This could include:
   1. Qualitative assessment of the company’s compensation system
   2. Cohort Analyses
   3. Simple average or median analysis
   4. Statistical sign test (counts the number of positive and negative mean/median differences in pay) by similarly situated employee groups
   5. Percent difference analysis
   6. Other, you decide

Whatever you do, be prepared to turn it over to OFCCP and explain what you did.

2. Conduct a comprehensive Title VII analysis of base, bonus, merit, starting salary, etc., under attorney-client privilege. This analysis should follow Title VII standards, and if meaningful unexplained differences are identified, contractors should make appropriate pay adjustments and, if appropriate, change the system or practice that caused the inequities.

Good luck.

By DCI President David Cohen