Directive Also Acknowledges That “Occupation Segregation,” Not Pay Discrimination Alone, is a “driver of persistent pay disparities” 

Important: This Blog identifies four “Confusions” (and four Resolutions of those  Confusions) springing from OFCCP’s new Compensation Directive 2022-01, and also includes one “Happy Observation.”

Part I (containing discussion of the first three “Confusions”)

Confusion #1: OFCCP’s new Directive (DIR) 2022-01 “Subject: Pay Equity Audits” and its accompanying Press Release do not agree on who the audience is. A writer’s first rule is to know the audience to which s/he is writing.

The Press Release says the Directive is written for contractors (which is entirely possible since OFCCP Directives “may provide guidance …to federal contractors”) in these words: OFCCP

“…issued a new directive to promote greater contractor attention (emphases added) concerning the proactive and effective use of pay equity audits to identify barriers to equal pay in their pay-setting and employment practices.”

The Directive, however, is aimed at OFCCP and says:

“PURPOSE: To provide guidance on how OFCCP will evaluate federal contractor’s compliance with pay equity audit obligations and clarify OFCCP’s authority to access and review pay equity audits conducted pursuant to 41 CFR 60-2.17(b)(3).”

The Directive also sets out perfunctory generalized role instructions for various levels of OFCCP employees even while the Directive seems written for the contractor audience.

And, if this new Directive is not aimed at OFCCP, how will OFCCP Compliance Officers (“COs”) know to undertake the new audit procedural changes it calls for? This is important since OFCCP Directives are the OFCCP Director’s method of communication to instruct all her employees as to how to proceed on any particular issue. So, if this new Directive is not an instruction to OFCCP Compliance Officers, federal contractors do not know yet, in fact, what OFCCP is instructing COs to do, when and how.

Possible Resolution Of The Confusion: While I cannot be sure who OFCCP thought it was addressing in the new Directive, and OFCCP addresses most Directives to its employees (since Directives are the OFCCP Director’s primary communication tool to instruct her employees), the totality of the two documents taken together suggest OFCCP meant to write to contractors. That leaves the contractor community now to wonder exactly what instructions Compliance Officers have gotten, or will get, behind the scenes. Those instruction(s)/training materials to OFCCP COs become even more important as we now reach the second confusion.

Confusion #2: OFCCP’s new Directive introduces a new, seemingly important, “term of art,” but does not define it:

“Pay equity.” Here is the new Directive’s first of several references to “pay equity”:

“5. BACKGROUND: The *** (OFCCP) is committed to ensuring pay equity in the workplace.”

The meaning and intent of the above sentence may be tantamount to, or may be quite different from, OFCCP’s stated legal authority as framed in the first substantive sentence of Executive Order 11246:”

“The contractor will not discriminate against any employee or applicant for employment because of race, color, religion, sex, sexual orientation, gender identity, or national origin.”

But, given the ambiguous language of the new Directive, we do not know what OFCCP means by its use of the undefined term “pay equity.” And, significantly, this new Directive did NOT state that “OFCCP is committed to ensuring non-discrimination in compensation in the workplace” as all prior Administrations have stated. That language would have been just as easy to write and also be noticeably clear and consistent with prior OFCCP statements of its mission. Rather, for some odd or intentional reason OFCCP chose to write something new and build a Directive around this undefined term.

“Pay equity” is a term often heard in public discourse, of course, but with many different meanings to many different segments of society (including some who believe that all women and all men should be paid exactly the same to the penny regardless of job duties to achieve “pay equity,” and others who believe that all women and all men should be divided into and paid one of 150 payment amounts (like the federal civilian service) to achieve “pay equity,” and others who believe that “pay equity” means that only all “similarly situated” employees should be paid the same…with subgroups within that faction who define the term “similarly situated” quite differently).

And, even more confusing is that the new Directive quite rightly refers the reader to OFCCP Directive DIR 2019-08 for “an overview of how OFCCP assesses compensation during compliance reviews.” But prior OFCCP Directive DIR 2019-08 does not mention “pay equity” at all, let alone define it. Nor is the term “pay equity” found in OFCCP’s formal published Rules. There are, however, two fleeting and bald references to the phrase “pay equity” in OFCCP’s Federal Contract Compliance Manual-FCCM (which is the collection of instructions and Directives from the Director to her OFCCP employees). However, OFCCP’s FCCM does not have the binding force and effect of law and neither quick reference to the term “pay equity” in the FCCM defines the phrase. So, we are back to where we began not knowing what the new Directive’s use of the term “pay equity” means. However, the first reference in the FCCM (4I00 Overview of Total Compensation Packages), seems to equate this informal “street language” to be equivalent to “non-discrimination” in compensation pursuant to EO 11246:

“The Executive Order and the implementing regulations specifically require contractors to ensure pay equity.”

But to be understood by the regulated community, let alone to be enforceable, federal agencies need to communicate in regulatory terms and not in “street talk” and not in undefined and ambiguous language the contractor must guess at. 

Possible Resolution Of The Confusion: It appears what OFCCP was attempting to say, however unartfully, was that “OFCCP is committed to ensuring non-discrimination in compensation in the workplace.” And if that is the correct conclusion, then everybody is happy since that is OFCCP’s properly delegated authority from the Congress and thus this reference is nothing new, however unfortunate because undefined and unnecessary. And please note that my interpretation seems consistent with the Directive’s warranty that there is no new policy guidance offered in the Directive:

“8. INTERPRETATION: “This DIR does not create new legal rights or requirements or change current legal rights or requirements for contractors.”

By the way, before you go any further, one choice contractors have is to simply hold OFCCP to its word: that this new Directive changes nothing and keep on doing what you have been doing with success for the last 22 years since OFCCP Director Shirley Wilcher in the Clinton Administration first wrote this Rule at 41 CFR Section 60-2.17(b)(3) into law.

Confusion #3: OFCCP also coins a second new term called “Pay Equity Audit” and uses it to attempt to change OFCCP Rules while characterizing the change as a mere change of language, but not a new requirement. Here is the new Directive’s first of several references to “pay equity audit” (other than that this phrase is the formal subject name of the Directive: “Pay Equity Audits”):

“2. PURPOSE: “To provide guidance on how OFCCP will evaluate federal contractors’ compliance with pay equity audit obligations….”

Here is how the new Directive (on page 1 in section 5 BACKGROUND) defines what a “pay equity audit” is:

“As part of the affirmative action obligations, supply and service contractors are required to perform an in-depth analysis of their total employment practices to determine whether and where impediments to equal employment opportunity exist. (footnote 2 omitted) This includes conducting an in-depth analysis of their compensation systems to determine whether there are gender-, race-, or ethnicity-based disparities, as provided in 41 CFR 60-2.17(b)(3). (footnote 3 omitted). This analysis, hereafter referred to as a “pay equity audit” is an important component of the contractor’s affirmative action program.”

WHOA, WHOA, WHOA!

This description in the new Directive of what 41 CFR Section 60-2.17(b)(3) says is a far cry from what OFCCP’s 60-2.17(b)(3) Rule actually says. Equally important, this new language is also very different from what OFCCP has historically interpreted 60-2.17(b)(3) to mean and to require of contractors. And, of course, this new language is unenforceable for two different reasons because of this, as I will point out below. Let’s first look at the actual language of 41 CFR 60-2.17(b)(3) and then isolate the two subtle, but significant, sleight-of-hand changes the new Directive seeks to make to the OFCCP’s Rule and which depart radically from it as published in the Code of Federal Regulations.First, here is what 41 CFR Section 60-2.17(b)(3) actually says:

Ҥ 60-2.17 Additional required elements of affirmative action programs.
In addition to the elements required by § 60-2.10 through § 60-2.16, an acceptable affirmative action program must include the following:

                                    *          *          *          *          *          *

(b) Identification of problem areas. 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: [yellow highlighting added]

                                    *          *          *          *          *          *

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

First, the Two Twists the New Directive Attempts in an Effort to Change and Rewrite OFCCP’s Existing Rule Without Going Through Rulemaking and “Notice” and “Comment:”

OFCCP’s existing Rule does not require an “in-depth analysis” of compensation, and never has. While the Rule starts with that language, the latter part of the Rule then modifies and subtracts from the “in-depth analysis” language and states the requirement that a contractor must merely “evaluate” “compensation system(s).”

So, no “in-depth” requirement. And no “analysis” requirement. The verb contractors must obey is “evaluate.” That is the very most OFCCP can enforce.

Said another way, if a contractor does not have “in-depth” analyses, OFCCP cannot cite the contractor for a violation of 41 CFR Section 60-2.17(b)(3).

If a contractor does not have “analyses” (whatever those are (undefined)), again, OFCCP cannot cite a contractor for a violation of 41 CFR Section 60-2.17(b)(3).

Second Fatal Legal Problem for OFCCP’s Attempt to Change the Interpretation of 41 CFR Section 60-2.17(b)(3).

OFCCP is on the written record, repeatedly over the decades, stating that its Rules do NOT ever require contractors to undertake regression analyses. Moreover, most federal contractors do not undertake regression analyses of the pay of their employees. Additionally, there are likely not more than a dozen or two dozen companies (and likely no institutions of higher learning) in the United States even capable of undertaking competent and professional “regression analyses” of the pay of their employees. This is because almost no company has digital data (necessary to computerized analyses) of all the “major factors” which affect pay, including (for starters) these possible factors which may affect pay and likely “major” if they do affect pay (anything which changes the analysis is a “major” factor”):

• lists of “similarly situated employees;”
• all the prior pay decisions in the relevant period of time for all “similarly situated” employees;
• prior related experience of each similarly situated employee;
• prior related education of each similarly situated employee;
• time-in-service in related jobs;
• prior related training;
• names of those assigning pay for each similarly situated employee;
• performance appraisals;
• comparators at time of the at-issue pay decisions; etc., etc., etc.

And the federal courts at all levels are clear and of one mind that the lack of even one major factor affecting pay renders the regression analysis worthless: not an A- or a B+…it is an F. Such regressions are not admissible evidence because they are entirely unreliable. Once incomplete, regression analyses can produce false positives and false negatives…which is why the law, unlike other sciences, refuses to work with incomplete data when legal sanctions are at risk: guessing only works in Charades and “getting close” only works in horseshoes, but neither work in a court of law or in regulatory enforcement matters.

Incomplete regression analysis should NEVER even be undertaken because they may mislead management to inappropriately feel concern (“false positive” result) or to feel safety (“false negative” result) when there is none. Junk with no usefulness to the company, as a matter of law…not to mention a colossal waste of money since they do not tell you anything.

Practice Tip: If a company wanted to eventually accomplish a legally compliant and professional “regression analysis” of pay, my suggestion has not changed over the decades: set an objective to annually catalogue and digitize (for an ever-expanding number of job classifications) the “major factors” which affect pay (you will typically find numerous subset pay systems (and often hundreds of different ones) depending on the industry and company). And do not use “proxy” data which attempt to estimate various factors which affect pay (like the age of employees as a proxy for prior related experience). The federal courts more likely than not will reject use of proxy data as not sufficiently accurate and will therefore throw out the entire regression analysis as flawed.

Also, be sober about the size of this data lift and the number of years it will take to complete the project. Think 5-10 years, at least. Most of my university clients think 10 to 20 years is the more likely “real world” answer for them since they are so decentralized, large in employee headcount and complex with sometimes hundreds of different pay systems.

The Third Stopper to this Attempted Newly Interjected Term “Pay Equity Audit” is that OFCCP’s Rule Does Not Require a “Pay Equity Audit”

Rather, OFCCP’s Rule requires that the contractor “evaluate” “compensation system(s).”

“[a]t a minimum the contractor must evaluate [AH, there is your verb…not “audit”]:

(3) compensation system(s) to determine whether there are gender-, race-, or ethnicity-based disparities.” (See 41 CFR Section 60-2.17(b)(3))

The word “evaluate” will become important as you will see below and is not just a semantical word play of interchangeable words. “Evaluate” means quite a different thing than an “analysis” means:

Analysis: a “detailed examination of the elements or structure of something.” The Oxford Dictionary.

Evaluate: “form an idea of the amount, number, or value of; assess.” The Oxford Dictionary.

Fourth, Another Stopper to this Attempted Rule Rewrite: Any Definition of “Evaluate” Will Do

OFCCP has well-defined this Rule in over 150,000 OFCCP audits. There is now a “longstanding” practice as to what the language of 41 CFR Section 60-2.17(b)(3) means. (That word “longstanding” is in quotes because we will find in a moment that it is a loaded legal “term of art” within the meaning of the Administrative Procedure Act (“APA”). The APA operates as a limit on OFCCP’s ability to now run off and define 41 CFR Section 60-2.17(b)(3) in some new way.

And remember, the new Directive as a matter of law and as a matter of its own self-proclaimed “Interpretation” (see para 8 of the new Directive quoted above), “…does not create new legal rights or requirements or change current legal rights or requirements for contractors.”

41 CFR Section 60-2.17(b)(3) simply means that the contractor must have some evaluation, any evaluation, any kind of an evaluation whatsoever (since OFCCP’s Rule does not specify what the contractor must do other than to “evaluate” “compensation system(s).” What this has meant in the “real world” of OFCCP audits for two decades is that any of the following “evaluations,” and more, will pass and have passed OFCCP muster over 150,000 times in the last 22 years pursuant to 41 CFR Section 60-2.17(b)(3):

“Our company responds to all concerns or complaints of employees and Applicants regarding compensation to evaluate their merit.”

OR

“Our company evaluates the pay we are offering every new hire employee and at the time of every promotion or transfer of an employee.”

OR

“Our company evaluates pay periodically for selected job classifications through benchmarking surveys of compensation paid in our community for the kinds of jobs we staff.”

OR

“Our company undertakes periodic spot checks of the pay of selected employees to evaluate their pay against other similarly situated employees in their work unit and against market competitors.”

OR

“Our company annually undertakes “cohort analyses” to evaluate the pay of employees in selected job titles as part of our annual Affirmative Action Program for Minorities and Women.”

And, OFCCP has NEVER required evaluations of every pay system or every pay decision. That would be simply overwhelming for almost every contractor and far outside the paltry number of “burden hours” OFCCP has estimated over the decades for contractors to develop AAPs for Minorities and Women and as formally reported to the Office of Management and Budget. Rather, OFCCP’s “longstanding” practice and interpretation of 41 CFR Section 60-2.17(b)(3) has been that contractors could undertake spot checks, although some of the above commonly used “evaluations” are in point of fact universal evaluations of the entire pay system of interest.

Now here is the bad news for OFCCP: Most courts will enforce a “longstanding” federal agency practice interpreting an agency Rule if it is a reasonable interpretation even without publishing the practice for Notice and Comment. This is because the purpose of the APA is to make sure there is a common understanding of the compliance burden to allow the regulated community to comply and to produce a “level playing field” on which competitor companies may fairly compete. At some point, however, the federal agency follows the practice lacking a formal Notice and Comment Rulemaking uniformly enough and long enough that it stands in as a replacement for formal Notice and Comment.

See Barnhart v. Walton, 535 U.S. 212, 219-20 (2002) (the Agency’s regulations reflect the Agency’s own longstanding interpretation . . .  [T]his Court will normally accord particular deference to an agency interpretation of “longstanding’ duration”); Alaska Dept. of Environmental Conservation v. EPA, 540 U.S. 461, 487 (2004) (recognizing that “longstanding agency interpretations” are entitled to particular deference, and thus upholding agency construction, in part, because it was reflected in interpretive guides the Agency had published several times); Kasten v. Saint-Gobain Performance Plastics, 563 U.S. 1, 15 (2011) (agency Rule upheld since courts must accord deference to agencies’ view in part because of “[t]he length of time the agencies have held them”); Smith v. City of Jackson, 544 U.S. 228 (2005) (“longstanding interpretation” of nearly 25 years by the U.S. Department of Labor and the EEOC as to the Age Discrimination in Employment Act supported authorization of relief on a disparate-impact theory of discrimination).

And, of course one of the interesting foibles of each of the last three OFCCP Administrations has been that they each started their work at the agency as though there had been no prior history before they arrived. History began for the first time with them. (This problem is also badly exasperated at OFCCP by the paucity of long-term senior career managers who have been there and done that. Retirements and transfers have taken a heavy toll on OFCCP’s senior managerial workforce for the last 20 years. It is difficult to even remember the succession of OFCCP District Directors (“DDs”) as the revolving door in District Offices began in the mid-2000s to spin rapidly as DDs came and went, some even before they could attend their first local Industry Liaison Group meeting. But, of course, there is a lot of prior history and OFCCP is now handcuffed by it and cannot now willy-nilly paint a different portrait of required compliance that suits them today.

So, what is a new Director to do when she arrives at OFCCP and discovers prior policy the new administration does not like. Newly arriving OFCCP Directors must BREAK the prior longstanding practice they do not like by publishing a formal Rule for Notice and Comment embodying the new compliance requirements. When a federal agency wants to sponsor a fundamental modification or change a longstanding interpretation of a Rule, the Agency must go through the Notice and Comment process the Administrative Procedure Act prescribes.

See Torch Operating Co. v. Babbitt, 172 F. Supp.2d 113, 128 (D.D.C. 2001) (the Department of Interior’s change in interpretation of the phrase “approved by FERC” was a fundamental modification to the Department’s prior long-standing interpretation, and thus required compliance with the Notice and Comment procedures required for rule amendments); Ferguson v. Ashcroft, 248 F. Supp.2d 547, 564 (M.D. La. 2003) (although agency “interpretations” are not typically subject to Notice and Comment procedures, when an interpretation departs from a longstanding agency practice it too must be promulgated pursuant to the general Administrative Procedure Act Notice and Comment procedures).

Oh DRAT! The Administrative Procedure Act: the bane of every federal agency head’s existence. They all wonder: why can’t we just adopt the Nike slogan: “Just Do it!” and do whatever we want to do (we won the election, right!)? APA formal Notice and Comment is particularly difficult in every OFCCP administration. Unfortunately, the agency typically gets little “airtime” with the Labor Department’s regulatory lawyers as the (“Rock-of-Gibraltar”) Wage and Hour Division is always the Secretary of Labor’s favorite child, followed by OSHA (in Democrat Administrations). So, do not expect much here.

Fifth, OFCCP Also has Another Insurmountable Legal Problem Trying to Enforce Any Definition CFR Section 60-2.17(b)(3) Different from Whatever the Contractor Has Done to Comply

Whatever the contractor has done to comply with 60-2.17(b)(3) is compliant…WHATEVER THAT IS, SO LONG AS THE CONTRACTOR’S “EVALUATION” of a compensation system or systems IS NOT NOTHING. The contractor’s action must be something, but it may be anything.

This is because of the Firestone Synthetic Rubber & Latex Company (this is the tire company) case decision. That case involved Firestone’s challenge to OFCCP’s changed interpretation of several sections of OFCCP’s Affirmative Action Rules in a case David A. Copus and I successfully tried on behalf of Firestone in 1980 against OFCCP. While the Firestone case was a simple Administrative Procedure Act case at its core, it came as a shock to OFCCP that it could not just willy-nilly lean out the window and announce new interpretations of old and tired OFCCP Rules or have hollow Rules which were so vacuous as to be unenforceable because void for vagueness.

It is a “gimme” putt [WHOOPS; dreaded sports analogy…or maybe because it is basketball season, I should write “Slam Dunk”] from the Firestone holding to the facts of 41 CFR Section 60-2.17(b). Under the APA (the “you gotta’ write it down” law), it is more likely than not that OFCCP simply cannot enforce this hopelessly vague Rule at Section 60-2.17(b)(3) (even apart from OFCCP’s “longstanding” history of accepting anything and everything from contractors to find them in compliance with the Rule.) So, OFCCP has no choice but to either amend 41 CFR Section 60-2.17(b)(3) to update its longstanding practice of accepting anything a contractor “evaluates” pertaining to compensation and to put “meat on the bones” as to what kind, EXACTLY, of an “evaluation” OFCCP does want if not the offerings contractors have previously offered up and OFCCP has accepted without contest in over 150,000 OFCCP audits. The update and reform of 60-2.17(b)(3) is L-O-N-G overdue: good news for contractors…not so much for OFCCP.

Possible Resolution Of The Confusion: Whatever this newly introduced phrase “Pay Equity Audit” means, it does not change anything (since OFCCP agrees this new Directive does not change any law or compliance obligation, nor can it as a matter of law). But this is also true because the APA will stop cold any attempted new re-interpretation of OFCCP’s longstanding interpretation of 41 CFR Section 60-2.17(b)(3) and requires OFCCP to accept any “evaluation” of compensation a contractor undertakes. So, contractors may continue with what they are doing, assuming your company is doing some kind (any kind) of an “evaluation” of “compensation system(s).”

So, if the reason OFCCP wrote this Directive was to attempt to convert 41 CFR Section 60-2.17(b)(3) from its existing interpretation into a requirement that contractors undertake an in-depth and detailed “audit” of all their pay systems, that effort will fail utterly.

The utility of this Directive focusing on 41 CFR Section 60-2.17(b)(3) and offering “clarification” is further undermined, however, by the additional observation that it seems to be a solution in search of a problem. There are no widespread contractor violations of 41 CFR Section 60-2.17(b)(3). There never have been…in any OFCCP Administration going back to inception of the Rule. For example, in the almost 14 months the Biden Administration has been in office, OFCCP has cited a contractor for a violation of 41 CFR Section 60-2.17(b)(3) on only three (3) occasions out of over 1,500 closed OFCCP audits. This is less than .2 (point two) of 1%  violation rate. There are dozens of other Affirmative Action violations far more numerous than the 60-2.17(b)(3) violation. Section 60-2.17(b)(3) violations are “small potatoes” for a Directive which has already spawned over a dozen Blogs which have hit my e-mail in-box since last Tuesday (although I have not read any of them, yet. I wanted to write my Blog free of the knowledge of whatever everyone else was saying.)