The OFCCP has gone all-in with their new compensation directive announcing that the agency intends to request, and expects to receive without pushback, contractors’ “pay equity audits” prepared in response to 41 C.F.R. § 60-2.17(b)(3) “[i]f the desk audit reveals disparities in pay or other concerns about the contractor’s compensation practices.”
Make no mistake, this is a direct shot across the bow aimed squarely at contractors that attempt to shield compensation analyses from discovery through either the attorney-client privilege or the work product doctrine. Both of these discovery principles are often misunderstood (even by attorneys) and often do not offer the level of protection that most people assume. However, the OFCCP’s interpretation of its own regulations and relevant federal case law here are, in a word, questionable.
What Will the OFCCP Ask For and When?
The standard desk audit submission does not change.
The new directive notes that with the desk audit submission the OFCCP is limited to the information and data described in the OFCCP’s current Scheduling Letter and Itemized Listing. As has been the case for several years now, supply and service contractors under audit must turn over employee-level compensation data and may also provide information regarding factors the contractor uses to determine compensation and/or policies related to compensation practices. Contractors are not currently required to provide actual compensation analyses or even any information about how such analyses are performed.
Historically, the OFCCP would ask for additional information regarding compensation practices after reviewing the desk audit submission if that review revealed significant potential issues. Once the agency thinks it has its teeth into something, the compliance officer might request any manner of follow-up information including additional compensation data, pay records, factors that determine pay (if not already provided), and interviews with compensation managers.
During this follow-up period that follows the desk audit submission review, the OFCCP often also requests copies of actual compensation analyses prepared by the contractor. Those requests are often met with a polite refusal citing confidentiality concerns, specifically the attorney-client privilege (which protects communications between attorneys and their clients regarding the rendering of legal advice) or the work product doctrine (which protects materials prepared in anticipation of litigation).
The OFCCP now officially takes the position that failure to provide the agency with copies of “pay equity audits” (analyses) upon request will be considered “an admission of noncompliance.”
Can They Do That?
The OFCCP does indeed have very broad authority to demand records and information relating to the agency’s regulations. Broadly speaking, the agency is entitled to just about anything that could shed light on the contractor’s compliance with the various technical requirements, including the preparation of required reports and analyses.
However, this is where the OFCCPs reasoning behind the new directive begin to fall apart.
When it comes to most of the required AAP reports and analyses, specifically the Workforce Analysis, Job Group Analysis, and the comparison of incumbency to availability and setting placement goals, the regulations define specific elements required for these reports to be compliant. The agency must review the reports themselves to determine whether or not the required elements are present and therefore whether or not the report complies with the regulations.
However, the regulations describe zero required elements for the required review of compensation systems for potential discrimination. The OFCCP’s new directive cites specifically to 41 C.F.R. § 60-2.17(B)(3) which states in whole, “At a minimum the contractor must evaluate…[c]ompensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities.” The actual form of such evaluations is left entirely up to the contractor.
So, while the OFCCP may need to see a copy of your Workforce Analysis to determine whether or not the contractor listed jobs in each department or unit by pay, reviewing a contractor’s “pay equity audit” does not shed any light on the extent to which the evaluation is “compliant” beyond the mere fact that it was actually prepared. And the agency does not need to see a copy of an actual compensation analysis to verify that one was performed.
Accordingly, the OFCCP’s rationale for demanding contractors’ “pay equity audits” is fundamentally flawed. It is simply not true that the OFCCP’s regulations, on their face, require contractors to turn over highly confidential compensation analyses and results. And this same flaw in reasoning undermines the agency’s interpretations of the two most common claims of protection—the attorney-client privilege and the work product doctrine.
What Is the Attorney-Client Privilege and the Work Product Doctrine?
The attorney-client privilege is a longstanding legal principle by which communications between attorneys and their clients are largely protected from discovery in litigation. The idea is that clients and lawyers need space within which they can share information with one another regarding a legal matter without restriction, particularly what can broadly be described as “legal strategy.” This protection is very strong (difficult for opposing parties to overcome and actually compel discovery) but also fairly limited. Under federal law, the protection only applies to communications regarding legal advice. The protection does not generally extend to documents and information used to form that legal advice. So if you provide an analysis of compensation practices to your attorney and ask for legal advice on how to proceed with the results of those analyses, the legal advice you receive is protected from discovery, but the compensation analysis is not.
The work product doctrine, which does not actually require the involvement of an attorney, is much broader in scope of coverage than the attorney-client privilege and protects any materials prepared in anticipation of litigation, either actual or presumed. “Litigation” can include administrative proceedings. However, this protection is relatively weak and can be overcome by an opposing party if they can demonstrate that the information is critical to their case and cannot be reasonably obtained any other way.
Most employers consider compensation data itself to be highly confidential, but such data is created and maintained for business purposes, not in anticipation of litigation, and is arguably necessary for the OFCCP to determine whether and to what extent there may be pay discrimination. So we lost the battle over whether or not this data must be produced before the battle ever began. But actual analyses of such data, particularly any conclusions drawn from such analyses, are usually only prepared under one of two circumstances. Either they are prepared because the employer is subject to OFCCP’s AAP regulations, or they are prepared to determine whether and to what extent the organization might be vulnerable to a claim of discrimination (potential litigation). If you are preparing compensation analyses just for fun, you should probably stop doing that.
Where an employer prepares a compensation analysis in anticipation of potential litigation, there is no question that the analysis falls squarely within the work product doctrine and will generally be protected from discovery in either litigation or an OFCCP audit. And although the doctrine is relatively easy to overcome, the rationale for dismissing the doctrine does not exist here. Contractors already provide the agency with the compensation data necessary to perform analyses, and the agency can request information about the parameters and methodology used by the contractor to analyze their pay data and replicate those analyses on their own. The OFCCP can see the same results without making the contractor turn over the actual analyses. And information about how such analyses are prepared demonstrates that they are, in fact, prepared, so the analyses themselves are not required to verify compliance.
Where an employer prepares a compensation analysis solely for the purpose of complying with the OFCCP’s regulations, the contractor is still arguably preparing such analyses in anticipation of potential litigation because the sole purpose of the requirement is to identify areas of potential legal exposure. The OFCCP’s argument here is that a required compensation analysis is prepared to be turned over to the federal government and is therefore not “confidential” to begin with (as to those two parties, anyway). The federal case cited by the agency involves an instance in which a party was required to make a disclosure to the other party about information in its possession. The party communicated the information necessary to make the required disclosure to their attorney for the purpose of making that required disclosure, but then refused to turn over that communication citing attorney-client privilege. Other cases cited for the OFCCP’s various rationales are similarly flawed as either inapplicable or ignoring important context.
As already noted, though, attorney-client privilege does not really apply to contractors’ compensation analyses (just to legal advice obtained based on those analyses). But the agency is incorrect when it asserts that a compensation analysis prepared in response to 41 C.F.R. § 60-2.17(b)(3) is necessarily done so that it can be turned over to the federal government. The OFCCP’s regulations contain no prescribed elements that must be verified by reviewing an actual report, and the agency has other ways to verify that the requirement to review compensation systems for potential discrimination is being met. There is not necessarily an expectation that the analyses will have to be turned over to the federal government because a contractor may never be audited, yet they are required to analyze compensation anyway.
So the short answer to the question, “Can they do that,” is probably no. The agency either misunderstands or deliberately misconstrues the law here at every turn. Unfortunately, it will take someone either suing the agency or being sued by the agency to get the issue in front of a judge. In the meantime, expect the OFCCP to request copies of compensation analyses in most audits.
What Do We Do Now?
The OFCCP’s new directive states, “Provided that the contractor produces to OFCCP a pay equity audit and compliance records sufficient to comply with 41 CFR 60-2.17(b)(3) in the course of its evaluation, OFCCP generally will not seek additional privileged analyses where the contractor demonstrates that it also conducted a properly privileged pay equity process with an attorney.” So the OFCCP is effectively forcing contractors to prepare a “compliant” compensation analysis as a pure “paperwork exercise.”
Meeting the OFCCP’s requirement to evaluate compensation system(s) for potential discrimination is fairly easy to do since the regulations do not define what such analyses must contain. A simple comparison of average pay between men and women, and the various race/ethnicities would suffice. If you want to get “fancy,” you might perform such comparisons based on “pay analysis groups,” though even that is not strictly necessary. Such an analysis would not necessarily tell you much about potential discrimination lurking in the organization’s pay practices, but it would be sufficient to meet the technical requirements of the regulations. It would also be fairly low-stakes to turn over to the OFCCP in an audit.
Then contractors can perform any additional, more refined analyses they like based on those initial results to determine the extent of the organization’s potential legal exposure. Those analyses would fall squarely into the work product doctrine and, according to the new directive, the agency will “generally” not pursue them. Note, however, that the agency did leave that door wide open for when they are dissatisfied with the “compliant” analysis you provide.
Preparing such a “straw man” analysis would not protect you from the discovery of actual discrimination based on more refined analyses and/or other information, of course, but it would give you something to give to the OFCCP in an audit if you are not willing to take the matter to court. The OFCCP used to understand this, which is why contractors were not previously required to turn over these analyses.
The agency will likely push hard for any more refined compensation analyses that might exist. If the contractor claims attorney-client privilege, that is just unlikely to apply. But if the contractor claims the work product doctrine, the agency will push back but we have already discussed how their most likely arguments will fail.
One argument not yet discussed is that the agency might claim they need to determine whether or not your compensation analyses are sufficient. But this would be conflating compensation analyses with “good faith efforts” implemented in response to the setting of placement goals. There is no basis in the OFCCP’s regulations for a violation because a compensation analysis was deemed to be “insufficient.”
Looking Ahead
The lawsuits are surely coming on this one and it is quite possible that a federal judge will soon stay the implementation of Directive 2022-01. In the meantime, however, contractors need to figure out how to respond to the OFCCP’s demands for compensation analyses in audits.
As discussed, the path of least resistance is likely to slap together a simple spreadsheet comparing average pay among various groups specifically for disclosure to the federal government (if asked). This is what many contractors do already. Whether you will be able to successfully claim that there are no compensation disparities to investigate based on such a simplistic analysis is highly unlikely. But to the extent that such an analysis reveals areas of concern, subsequent analyses meant to investigate those disparities are, by the agency’s own directive, still protected.
Whatever you do, you will likely want to consult with legal counsel to find your path forward. Keep in mind, however, that compensation analyses are generally not protected by attorney-client privilege, and you do not have to have an attorney involved to successfully invoke the work product doctrine. So any outside attorney who tells you that your organization must run compensation analyses through their law firm is not being completely above-board.
If you have questions about this or any other OFCCP-related matter, feel free to contact us at BCGi@Biddle.com.