On August 18, 2022, the Office of Federal Contract Compliance Programs (OFCCP) issued a revised version of its Directive 2022-01 - Advancing Pay Equity Through Compensation Analysis, which was originally issued on March 15, 2022. Although the stated purpose of the original Directive was to “provide guidance on how OFCCP will evaluate federal contractors’ compliance with compensation analysis obligations and clarify OFCCP’s authority to access and review documentation of compensation analyses conducted pursuant to 41 CFR 60-2.17(b)(3),” the Directive was controversial as OFCCP appeared to be claiming a right to compel contractors to disclose their pay equity analyses even when properly protected by the attorney-client privilege.

As noted, Directive 2022-01 is focused primarily on contractor compliance with 41 CFR §60-2.17(b), which states:

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.

The Revised Directive opines that OFCCP’s authority to review a contractor’s compliance with the obligation created by 60-2.17(b)(3) implies a right to request documentation of the contractor’s compensation analysis as documentation of that compliance. 

While OFCCP “encourages” contractors to make their full compensation analysis available in response to such a request, the Revised Directive acknowledges that a contractor’s compensation analysis may contain privileged attorney-client communications or attorney work product and, therefore, be withheld from production to the agency.  OFCCP then offers several suggestions as to how a contractor may establish compliance with its obligation to self-audit without having to produce such privileged or protected information.  In particular, OFCCP notes that contractors may establish compliance by:

1. Conducting a separate analysis during the relevant Affirmative Action Plan (AAP) period that does not implicate privilege concerns and then providing that analysis to OFCCP in full;
2. Making available a redacted version of a privileged analysis; or
3. Producing a detailed affidavit that does not contain privileged material.

Regardless of the selected approach, the Revised Directive states that the contractor will be expected to provide the following information:

1. When the compensation analysis was completed;
2. The number of employees the compensation analysis included and the number and categories of employees the compensation analysis excluded;
3. Which forms of compensation were analyzed and, where applicable, how the different forms of compensation were separated or combined for analysis (e.g., base pay alone, base pay combined with bonuses, etc.);
4. That compensation was analyzed by gender, race, and ethnicity; and
5. The method of analysis employed by the contractor (e.g., multiple regression analysis, decomposition regression analysis, meta-analytic tests of z-scores, compa-ratio regression analysis, rank-sums tests, career-stall analysis, average pay ratio, cohort analysis, etc.).

The Revised Directive further provides that if the contractor’s own analysis has identified any problem areas based on gender, race, or ethnicity, the OFCCP will require that the contractor show proof to the agency that action-oriented programs were established.  At a minimum the OFCCP will require documentation that demonstrates:

1. 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 groups adversely affected;
2. Whether the contractor investigated the reasons for any pay disparities found;
3. That the contractor has instituted action-oriented programs designed to correct any problem areas identified;
4. The nature and scope of these programs, including the job(s) for which the programs apply and any changes (e.g., pay increases, amendments to compensation policies and procedures) the contractor made to the compensation system; and
5. How the contractor intends to measure the impact of these programs on employment opportunities and identified barriers.

It should be noted that OFCCP’s expectations in this regard are arguably broader than what can be supported by the agency’s rules, which merely require contractors to “evaluate . . . [c]ompensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities.”  Furthermore, this type of additional documentation is even more likely to be subject to attorney-client privilege or protected as work product than the analysis itself. 

The Revised Directive is a step forward in that OFCCP is now explicitly recognizing that this type of additional information, if it does exist, may well be subject to attorney-client privilege.  However, it remains to be seen whether, in practice, the Revised Directive will resolve the tension between OFCCP’s desire for information and the applicability of the attorney-client privilege. 

The Revised Directive also includes a further “recommendation” that contractors provide the following additional information to assist OFCCP in understanding how contractors evaluate their compensation systems in practice:

1. All employee pay groupings evaluated;
2. An explanation of how and why employees were grouped for the analysis;
3. Which, if any, variables, factors, measures, or controls (e.g., tenure, education, structural groupings, performance ratings, prior experience) were considered and how they were incorporated in the analysis; and
4. 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.

Contractors will be misled by this recommendation if they interpret it to imply that OFCCP’s rules require contractors to create pay groupings for pay analysis purposes or to utilize formal statistical tests; they do not.  All that is required by the rules is an “evaluation” of compensation.  Under the current rules, this evaluation may not even have to be quantitative. 

In conclusion, the Revised Directive represents a positive step forward in that it offers a much more realistic recognition by OFCCP of the applicability of attorney-client privilege and appears to represent a good-faith effort by the agency to identify ways in which OFCCP’s obligation to evaluate contractor’s compliance can be satisfied while respecting the protection of attorney-client privilege and work product under the law.   

From a contractor’s perspective, often the best option will be to evaluate compensation for compliance purposes using a simple methodology so that the results can be shared, if necessary, with OFCCP without having to worry about revealing privileged information or work product.  Such simple methodologies are not only effective at identifying potential problem areas but also cost effective.  Whether more complex analyses should also be conducted and whether such analyses will be protected by attorney-client privilege are questions that should then be addressed in a considered and context-specific way.

It is important to remember that an analysis is not necessarily going to be privileged just because the analysis has been requested by a lawyer.  As OFCCP notes in footnote 14 to the Revised Directive, the attorney-client privilege is generally limited to situations in which communications are related to the provision of legal services.  Directive 2022-01 is putting contractors on notice that they need to be intentional and careful in the implementation and documentation of affirmative action program-related self-auditing.  Contractors cannot rely on OFCCP simply accepting a bald assertion of attorney-client privilege as a basis for declining to respond to an information request.