There is a new proposed rule coming down the pike with a lot of momentum that will bring state- and local-level pay transparency efforts to federal contractors.
The Federal Acquisition Regulatory Council (which consists of the Department of Defense, the General Services Administration, NASA, and Office of Federal Procurement Policy) is proposing a nationwide approach to pay equity and pay transparency by prohibiting federal contractor employers from inquiring about or using a candidate’s pay history when making selection or compensation decisions, and requiring contractors to disclose the expected pay for open positions. There is also a separate notice provision and “flow-down” obligations.
Fifteen years ago, President Obama signed his first piece of legislation into law as President—the Lilly Ledbetter Fair Pay Act. Amending Title VII of the Civil Rights Act, the legislation resets the normal 180-day statute of limitations for bringing a pay discrimination claim every time the employee receives a paycheck, ushering in a new era of focus on pay equity issues.
About ten years later, we saw state and local jurisdictions begin to advance the pay equity ball by enacting pay transparency laws and regulations. These new pay transparency provisions generally focus on preventing employers from considering a candidate’s past/current compensation when setting pay for the new position. Employers are encouraged to advertise the expected pay or pay range, focusing on what the job should pay, rather than on how cheaply they can get qualified people to do the job.
Fast-forward to today and the White House, in recognizing the Lilly Ledbetter Act anniversary, announced new, proposed pay transparency rules for federal contractor employers, elevating the state and local efforts to the national level.
When it comes to applying the proposed rule, there is bad news and there is good news.
The bad news is the proposed rule is very broad. First, the new rules would apply to all federal contractor employers that are subject to the Equal Opportunity clause for Executive Order 11246. If you need to refresh your recollection, that means contractor employers of any size with either a single contract valued at $10,000 or more, or multiple contracts in a 12-month period with a total value that exceeds that threshold. In other words, the new rules would apply to the vast majority of federal contractors and is not limited to just those that are required to prepare AAPs.
Note also that the new rules would attach to federal contracts and subcontracts for commercial products or services, including commercially available off-the-shelf items. So, there is no “COTS exception” here.
The new rules will also only apply to positions expected to do work on or in connection with a qualifying federal contract or subcontract, though that may not be quite the limitation it seems. For many contractors, determining which positions or workers might touch a federal contract will be an extremely heavy lift. In fact, the feds are banking on it being such a high administrative burden that they will opt to apply the new rules across the board instead. Undoubtedly, the proposed rule actually encourages (but stops short of requiring) contractors to apply the new rules to positions the employer reasonably thinks might perform work in relation to a qualifying contract, clearly signaling that broader application than perhaps necessary is likely the easiest path to compliance.
The good news? This makes applying the new rules much simpler for employers, unlike the maddeningly complicated federal contractor minimum wage provisions, for example.
Use of Pay History Prohibited
The proposed rules focus on prohibiting employers from considering a candidate’s current or past pay when setting compensation for the new position. The prevailing theory is that this common practice runs too great a risk of an employer perpetuating the effects of past employers’ discriminatory pay decisions and benefiting from that by “getting a deal” on a qualified candidate. The Lilly Ledbetter Fair Pay Act makes it harder for past discriminatory decisions to perpetuate at the employer responsible for the original discriminatory decision, but is not a very useful tool for stopping the perpetuation beyond that initial employer.
To that end, the proposed rule would clamp down pretty hard on the gathering and use of pay history information. Contractor employers would be prohibited from:
- Seeking applicants’ pay histories, either orally or in writing, directly or indirectly from any person (not just the applicant);
- Requiring disclosure of pay history as a condition for consideration;
- Retaliating against an applicant for refusing to respond to pay history inquiries; and
- Relying on an applicant’s pay history when making selection decisions or setting pay.
Note that some state and local jurisdictions with similar prohibitions on the use of pay histories contain exceptions for if/when an employer nonetheless learns of a candidate’s pay history, such as through unprompted self-disclosure. The proposed rule for federal contractors contains no such exception; if employers learn of pay history information, they have to ignore it.
We use “applicant” and “candidate” interchangeably here because the proposed rule treats them as the same, so this would not be limited to external candidates. Contractor employers would have to ignore the pay information they already have on their current employees as well when considering them for an open position. The rule is not clear on whether or not the rule would apply to promotions (though it is relatively safe to assume that is the intent).
“Pay Transparency” Disclosure
Very much in line with the OFCCP’s pay transparency requirements allowing applicants and employees to inquire about and talk about their pay and the pay of others, the new rule would also require contractor employers to advertise the expected pay for affected positions when advertising the job.
“Compensation” is defined broadly to include “any payments made to, or on behalf of, an employee or offered to an applicant as remuneration for employment, including but not limited to salary, wages, overtime pay, sift differentials, bonuses, commissions, vacation and holiday pay, allowances, insurance and other benefits, stock options and awards, profit sharing, and retirement.”
The little bit of good news buried here for employers is that they will be allowed to determine the salary or wage range for an affected position one of several ways:
- Using the contractor employer’s own self-set pay scale;
- Calculating the range of compensation for those currently working the same or similar jobs; or
- Relying on the amount budgeted for the position.
Moreover, if an affected position is compensated 50% or more through commissions, bonuses, and/or overtime pay, the job advertisement has to note that with specificity.
Additional Applicant Notice and OFCCP Involvement
Not to be outdone by the state and local laws the feds drew from, the new rule would go farther by requiring written notice to applicants for an affected position about the rule, along with instructions on how to file a complaint regarding the new rule.
Curiously, the notice would also have to include instructions on how to file a discrimination complaint with the OFCCP. The proposed rule contemplates complaints regarding the use of pay history and/or advertising expected pay for the job being handled by the contracting agency.
The proposal notes that any discrimination complaints received by the contracting agency will be promptly forwarded to the OFCCP for processing. Yet it is silent on what the OFCCP should do if they receive a complaint that should have gone to the contracting agency.
So the OFCCP’s role in enforcement seems to be a little unclear here, but the proposed rule appears to indicate that the OFCCP will not actually have a role in enforcement. That stands out to this author as surprisingly inefficient. The agency will likely have authority to confirm that required contract clauses are included in qualifying subcontracts (see the “flow-down” requirement below), but to have any role in enforcement beyond that, the OFCCP may need to issue their own rule.
Additional “Flow-Down” Requirement
The proposed rule would require contracting agencies to insert these provisions into new federal contracts, and for contractors to include them in qualifying subcontracts, just as they do now for the EO Clauses related to E.O. 11246, Section 503 of the Rehabilitation Act, and Section 4212 of VEVRAA.
However, beyond the prime contract, the OFCCP requires contractors to include references to the OFCCP’s regulations, not citations to the Federal Acquisition Regulation (which, in turn, points back to the OFCCP’s regulations).
Here, the OFCCP has no regulations for contractors to reference in their subcontracts and purchase orders. Accordingly, the flow-down provision will look a little different than most Compliance professionals are used to.
The proposal is at the “notice and comment” stage of the rule-making process, which is to say things are just getting started. Notice has been published in the Federal Register, and the agencies are accepting public comment on the proposal through April 1, 2024 (and yes, we have been assured this is not a joke). Comments can be submitted here.
After the comment period closes, the agencies will review the comments received and make any revisions to the proposal that they deem appropriate. At that point it will be submitted to the Office of Information and Regulatory Affairs for final approval. Depending on how many comments the agency receives, the degree to which they decide to revise the proposal, etc., it may still be quite a while before we see the final proposed rule. Implementation could occur this year, but the process could easily stretch into 2025.
However, federal contractor employers would be smart to start thinking now about how this rule, or one very similar to it, will impact their current practices. Employers in jurisdictions like New York or Colorado will have a leg up here because they already had to figure out how to comply with very similar provisions.
If you have questions about this or any other federal contract compliance matter, please feel free to reach out to us at BCGi@Biddle.com.