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Court rejects NASA contractor’s challenge to OFCCP’s request for compensation data beyond that required in audit scheduling letter

November 18th, 2011  |  Cynthia L. Hackerott

In a rare court decision regarding OFCCP audit and investigative procedures, the federal district court for the District of Columbia ruled against United Space Alliance, LLC in the contractor’s attempt to seek relief from an April 11, 2011, order of the DOL’s Administrative Review Board (ARB) adopting an earlier ALJ order requiring the contractor to submit to the OFCCP additional data for analyses beyond that which the contractor had submitted in response to the OFCCP’s standard scheduling letter. (United Space Alliance, LLC v Solis, No 11-746 (RCL), November 14, 2011). Rejecting the contractor’s assertions that the OFCCP’s actions violated the Fourth Amendment, the Administrative Procedure Act (APA), the Paperwork Reduction Act (PDA) and other laws, the court wrote, “[s]ubmission to such lawful investigations is the price of working as a federal contractor.”

This decision addresses several issues that have long been simmering within the area of OFCCP compliance, and its holdings will surely hearten, to say the least, the OFCCP in its aggressive enforcement agenda. Conversely, United Space has been no less aggressive in asserting its positions. No doubt, United Space will appeal to the DC Circuit. So, whether the holdings of the district court will stand remains to be seen.

Factual background.  United Space, a joint venture between the Boeing Co. and Lockheed Martin Corp., works with NASA to operate human space operations, including the Space Shuttle and the International Space Station. According to the OFCCP, United Space’s contracts with NASA are worth at least $8 billion dollars.

In August 2009, the OFCCP informed the contractor, via the agency’s standard scheduling letter, that it had been selected for a compliance review at its Cape Canaveral, Florida facility under Executive Order (E.O.) 11246, Sec. 503 of the Rehabilitation Act and the Vietnam Era Veterans’ Readjustment Assistance Act. Via the itemized listing that accompanies every scheduling letter, the OFCCP requested the contractor to provide the agency with its affirmative action programs (AAPs) and specified supporting documents and records, and the contractor did so. The scheduling letter, corresponding itemized listing, and the contractor’s response to these documents are known collectively as the “desk audit” phase of a compliance review. Under certain circumstances specified by OFCCP policy and regulations, compliance reviews can be completed at the desk audit stage without an on-site visit by the agency.

An OFCCP compliance officer took the compensation data submitted in response to the scheduling letter (at Item 11 of the standard “itemized listing” that accompanies every scheduling letter) and did an initial desk audit analysis. The initial test performed was a threshold indicator test. The results turned up no indicators of possible pattern of pay disparity between men and women. In other words, the data passed the threshold indicator test. Nevertheless, the compliance officer performed two additional tests (neither of which employed thresholds) which showed indicators of possible pay disparities between men and women, in favor of men. Based upon these results, the OFCCP requested additional data from the contractor, eventually seeking 18 items of information regarding all employees in contractor’s work force.

The contractor did not submit the data, and the Assistant District Director for the OFCCP’s Orlando District Office then requested an on-site compliance review, for the purpose of continuing the compliance evaluation to resolve the unresolved issues involving possible compensation discrimination against women. After the contractor refused to continue with the desk audit and refused to allow the OFCCP to continue the compliance evaluation on-site, the agency filed its administrative complaint with the DOL.

Administrative proceedings. After the ALJ granted, over the contractor’s objection, the OFCCP’s request for expedited hearing procedures and following a hearing on the merits, the ALJ issued his “Recommended Decision and Order” on February 28, 2011 (ALJ Case No 2011-OFC-2). The ALJ concluded that, as part of the desk audit portion of an OFCCP compliance review, the agency was entitled to seek additional data for analyses beyond that which the contractor had submitted in response to the OFCCP’s standard scheduling letter.

Accordingly, the ALJ recommend that the ARB order the contractor to comply with the desk audit within thirty days of the ARB’s final decision. In addition, the ALJ recommended that, if the contractor failed to comply with the desk audit and/or on-site compliance review, the ARB cancel all of the contractor’s current federal contracts and debar all future federal contracts until such time as contractor is in compliance with the ARB’s order.

Exceptions by the parties to the order were due within 14 days after it was issued. United Space Alliance filed it’s exceptions on March 10, 2011. Because the ARB did not issue a “Final Decision and Order” within 30 days after the time for filing exceptions, on April 11, the ARB issued a “Notice of Case Closing” and, by operation of the expedited hearing procedures, the ALJ’s February 28 order became the ARB’s the “Final Administrative Order.”

United Space’s aggressive stance escalates to court action. On April 19, United Space petitioned the federal district court in D.C. for relief from the ARB’s order. In its complaint, the contractor sought a preliminary injunction and stay of enforcement of the ARB order pending final review. It also asked the court to enjoin the OFCCP “from sending letters to government agencies or contractors requesting that United Space be effectively debarred from future contracts or subcontracts or requesting effective suspension of United Space’s existing contracts.”

United Space assembled an impressive legal team for the case that includes former Solicitor of Labor and former Deputy Secretary of Labor Howard M. Radzely and former OFCCP Deputy Director William E. Doyle; both Radzely and Doyle served during the George W. Bush administration. Radzely also served as Acting Secretary of Labor under President Obama from January 20 through February 2, 2009.

Both parties moved for summary judgment.

Administrative Procedure Act. The contractor argued that the ARB’s order violated the APA because the regulations governing OFCCP investigations only permit the agency to require the production of additional documents for off-site review in conjunction with an on-site inspection. In contrast, the OFCCP asserted that its regulations give it broad authority to request supporting documentation during the desk audit stage. Because the OFCCP’s interpretation of its own regulations was not plainly erroneous, the court concluded that the OFCCP had the authority (under 41 C.F.R. Sec. 60-1.20(a)(1)) to make the challenged data request.

The contractor then argued that even if the regulations permitted the data request, agency policy — evidenced by a notice published in the Federal Register (“Interpreting Nondiscrimination Requirements of Executive Order 11246 With Respect to Systemic Compensation Discrimination”; 71 FR 35124-35141) in June 2006, an FAQ published on the OFCCP’s website, and a 2007 internal agency directive — barred the OFCCP from requesting additional compensation data under the circumstances presented.

Under the 2007 directive, after the OFCCP received a contractor’s response to Item 11 of the itemized listing, it used an algorithm for an initial assessment of the data to see if indicators of potential discrimination were present — the algorithm did not lead to a finding of unlawful discrimination, but rather was a means to trip the OFCCP’s alert system for further investigation. The algorithm has evolved over time, and the OFCCP has never officially announced or otherwise explicitly communicated to the public the precise algorithm. United Space argued that the agency documents to which it cited bound the OFCCP to the use of the threshold analysis described in the 2007 directive and only that analysis as the basis for its decisions to request additional compensation information.

The court, however, agreed with the OFCCP’s assertion that the statements contained in the documents at issue preserved the agency’s discretion to use other modes of analysis. The mandatory language on which United Space relied could not overcome the agency’s clear reservations of authority in its internal documents, the court found. Except in unusual circumstances, the internal procedures manual of an executive agency, such as the directive at issue here, does not create due process rights in the public, the court explained. Moreover, the court noted that threshold analysis was never issued in any formal, public pronouncement that evidenced an intent to bind the agency.

Even if the agency intended to be bound to the 2007 directive, the language contained therein only required that OFCCP perform the threshold analysis. Nowhere did it forbid the agency from also performing other analyses, the court found. Thus, the OFCCP’s reliance on analyses other than the threshold test did not violate the APA.

What’s good for the goose? Employers have long argued, and courts have almost universally agreed, that an employer’s policy and procedures manual does not create a binding contract between an employer and its employee, particularly if the manual contains a disclaimer stating that it does not constitute a contract. By contrast, when it comes to whether a federal enforcement agency should be bound by its own policy manual, the employer here, as other employers presumably would, argued that the agency should be bound to the procedures contained in its Federal Contract Compliance Manual (FCCM). Although the court in this case sided with the OFCCP, the issue brings to mind an interesting query. To discourage future legal challenges, should the FCCM include a disclaimer stating that its contents do not create Due Process rights under the U.S. Constitution?

Fourth Amendment. The contractor charged that the OFCCP’s request for additional data violated the Fourth Amendment prohibition against unreasonable searches and seizures. Different standards apply to administrative warrants and subpoenas under the Fourth Amendment, the court explained. For an administrative warrant to issue, the government must have either specific evidence of an existing violation or the ability to show that reasonable legislative or administrative standards such as a general administrative plan derived from neutral sources justify the warrant (i.e. a showing of “probable cause”). A lower standard applies to administrative subpoenas; to be enforceable, the Fourth Amendment requires that the subpoena be sufficiently limited in scope, relevant in purpose, and specific in directive so that compliance will not be unreasonably burdensome.

After examining the applicable case law, the court determined the ARB’s order should be evaluated under the Fourth Amendment standard for administrative subpoenas because the order did not authorize entry onto private areas of United Space’s property. Applying this standard, the court held that the ARB’s order that United Space produce 18 items of individualized compensation data for a single facility was sufficiently limited in scope, relevant in purpose, and specific in directive so that compliance would not be unreasonably burdensome.

Paperwork Reduction Act. The PRA requires that requests for information using identical questions posed to, or reporting or recordkeeping requirements imposed on, ten or more members of the public be approved by the Office of Management and Budget (OMB). United Space argued that because the Orlando OFCCP office regularly requested additional data when conducting desk audits, and often requested the same additional information, its request for additional compensation data beyond those items included in the OMB-approved scheduling letter violated the PRA because it was a general investigation undertaken with reference to a category of entities, rather than a specific investigation against specific individuals or entities.

The court disagreed. The OFCCP’s request for additional data was triggered by its analysis of the contractor’s initial submission, and thus, it was not part of a request made to an entire category of entities. To say that the relevant category of entities was federal contractors with pay disparities in their initial data submissions would render the PRA’s exception for investigations against individuals nearly meaningless, because all individual investigations are triggered by some standard that can be expressed in general terms, the court reasoned. To hold otherwise would seriously curtail the OFCCP’s investigative efforts in a way that Congress never intended in passing the PRA.

Recent proposed changes to the scheduling letter/itemized listing. Even if, on the presumptive appeal, the D.C. Circuit rules against the OFCCP on the PRA issue, the OFCCP is working another angle that would allow it, within the requirements of the PRA, to get more compensation data at the desk audit stage of future compliance reviews. Currently pending with the OMB is the OFCCP’s request to revise its scheduling letter and accompanying itemized listing to allow it to seek more, and more detailed, information from federal contractors during the desk audit phase of compliance evaluations, including more precise data for compensation analysis. Should the OMB approve this request (which appears likely), then deeper probes into federal contractors compensation data could occur at the desk audit stage without running afoul of the PRA. 

Due process. In rejecting United Space’s argument that it was that it was denied due process by a number of the ALJ’s discovery and evidentiary rulings, which were made pursuant to the expedited hearing procedures, the court cited a decision issued in 2000 by another DC district judge in Beverly Enterprises v Herman (79 EPD ¶40,258). In Beverly, the contractor argued that the OFCCP’s use of expedited hearing procedures violated its Fifth Amendment Due Process rights by violating its privacy interest in protecting its property from an administrative document search and inspection of its facilities. The judge in Beverly found, however, that the contractor had a diminished expectation of privacy because: (1) the expectation of privacy in commercial property is lower than that in residential property; and (2) it made a voluntarily choice to do business with the federal government. The Beverly court concluded that, and the court in this case agreed, that because the expedited procedures provide contractors with the rights to counsel, to a neutral arbitrator, to present evidence and witnesses, and to rebut and cross-examine the evidence and witnesses put forward by the government, the expedited procedures satisfy the requirements of due process. Further, the court here found that none of United Space’s objections to the discovery rulings of the administrative law judge overcome the deference that the court had to accord to those rulings due to its finding that the overall administrative proceeding was constitutional.

Note that part of the OFCCP’s current enforcement strategy is to utilize expedited procedures in DOL administrative hearings, so the court’s backing of the use of these procedures bolsters yet another weapon in the agency’s enforcement arsenal.

United Space also argued that the OFCCP denied it due process of law by failing to provide notice of the “pattern analysis” that the agency performed upon the data that the contractor submitted in response to Item 11. In other words, the contractor asserted that the OFCCP violated due process by failing to give it notice of a newly proscribed activity. But the proscribed activity, employment discrimination by federal contractors, has remained unchanged for many years, the court pointed out. “Only the methods by which OFCCP investigates possible instances of such discrimination are at issue here,” the court wrote, adding that “[t]here is no constitutional requirement that United Space be given notice of the ways in which OFCCP will investigate potential instances of discrimination.”

Equal protection. According to United Space, the pay disparities observed by OFCCP are a characteristic of the entire American workforce, and basing information requests on small pay disparities rather than the larger disparities incorporated into the threshold test would cause federal contractors to pay women more than they otherwise would, so as to avoid the burden of OFCCP investigations. Thus, United Space asserted, the standard employed here violated the equal protection guarantee of the Fifth Amendment because it had a discriminatory effect. However, the Constitution only prohibits governmental actions undertaken with a discriminatory purpose, the court stated, and no such forbidden favoritism was explicit in the analysis employed here. Rather, the analytic method used by the OFCCP was neutral on its face. “United Space’s argument against it would suggest that some threshold disparity was constitutionally required,” the court concluded, rejecting what it called an “implausible result and the argument that stands behind it.”

Stay request. At oral argument, United Space requested that the court stay any adverse judgment pending appeal. The court noted that United Space is unlikely to prevail on the merits and the contractor failed to show that it would be irreparably injured by producing the data that OFCCP has requested. It added that “the public interest lies in the efficient enforcement of Executive Order 11246.” Nevertheless, the court granted a temporary stay of its judgment to allow the court of appeals to determine whether a permanent stay is warranted. Accordingly, the district court’s judgment will become enforceable on November 28, 2011.

Concluding statement.  The court concluded with a statement that must have been music to the ears of the OFCCP:

“Despite the vigor with which United Space has litigated it, there is surprisingly little at stake in this case. The Department of Labor has not accused United Space of employment discrimination. It has not ordered United Space to permit agency investigators onto company premises. The Department has merely required United Space to submit data about its employee compensation. The Court understands that United Space and the entire community of federal contractors are keenly interested in how OFCCP decides whether to request additional data on a contractor’s compensation practices, but that interest does not allow those companies or this Court to interfere with the agency’s investigatory practices. Submission to such lawful investigations is the price of working as a federal contractor.”

Agency press release.  Taking a victory lap, the OFCCP issued a press release on the court’s ruling, quoting some of the language in the decision’s concluding statement. In addition, OFCCP Director Patricia A. Shiu offered the following comment:

“At OFCCP, we are charged with identifying which federal contractors discriminate in their hiring and pay practices, and which are abiding by the law. We cannot serve our mission to protect workers if companies refuse to give us access to the records they promised to keep and share with us when they signed their contracts.”

If the D.C. Circuit, like the ALJ and the district court, rules in favor of the OFCCP, will United Space’s aggressive stance continue to the point of seeking Supreme Court review?