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OFCCP regulations to prohibit “pay secrecy” scheduled to take effect in January 2016

October 6th, 2015  |  Cynthia L. Hackerott

Last month, the OFCCP published in the Federal Register (80 FR 54934-54977) its final rule on regulations to implement Executive Order (EO) 13665 signed by President Obama in April 2014 which prohibits federal contractors from retaliating against employees who choose to discuss their compensation. EO 13665 amends EO 11246, which already prohibits discrimination based on race, color, religion, sex, sexual orientation, gender identity, and national origin. The final rule, scheduled to take effect on January 11, 2016, amends the OFCCP’s regulations at 41 CFR Section 60-1 that implement EO 11246. It applies to all federal contractors with contracts entered into or modified on or after the effective date of the rule that exceed $10,000 in value.

Under the rule, federal contractors and subcontractors may not fire or discriminate against employees for discussing, disclosing, or inquiring about their own pay or that of their co-workers. The rule also protects pay discussions by job applicants. It allows job applicants and employees of federal contractors and subcontractors to file a discrimination complaint with OFCCP if they believe that their employer fired or otherwise discriminated against them for discussing, inquiring about, or disclosing their own compensation or that of others.

“Pay secrecy practices will no longer facilitate the pay discrimination that is too often perpetrated against women and people of color in the workplace,” said OFCCP Director Patricia Shiu in a statement announcing the rules. “Indeed, forward thinking companies that have embraced greater transparency find that it benefits them and their workforce by helping them attract and retain talented workers.  And research suggests these approaches have a substantially positive impact on society, workers, the workforce, and the economy as a whole.”

To view the final rule, frequently asked questions, fact sheets, and other resources, go to the OFCCP’s Pay Transparency Web page at www.dol.gov/ofccp/PayTransparency.

Background. On April 8, 2014, President Obama issued EO 13665 (79 FR 20749-20750, April 11, 2014) prohibiting discrimination by federal contractors and subcontractors against certain of their employees and job applicants for disclosing compensation information, Entitled “Non-Retaliation for Disclosure of Compensation Information,” EO 13665 amends Section 202 of  EO 11246 by adding the following provision:

“The contractor will not discharge or in any other manner discriminate against any employee or applicant for employment because such employee or applicant has inquired about, discussed, or disclosed the compensation of the employee or applicant or another employee or applicant. This provision shall not apply to instances in which an employee who has access to the compensation information of other employees or applicants as a part of such employee’s essential job functions discloses the compensation of such other employees or applicants to individuals who do not otherwise have access to such information, unless such disclosure is in response to a formal complaint or charge, in furtherance of an investigation, proceeding, hearing, or action, including an investigation conducted by the employer, or is consistent with the contractor’s legal duty to furnish information.”

The OFCCP announced a proposed rule on September 15, 2014, and a Notice of Proposed Rulemaking (NRPM) was published in the Federal Register on September 17, 2014 (79 FR 55712-55742). The comment period on the NPRM ended on December 16, 2014. The final rule was submitted for Office of Budget and Management (OMB) review on July 7, 2015, and the OMB approved it on September 9, 2015. The final rule was published in the Federal Register on September 11, 2015 (80 FR 54934-54977).

In response to the NPRM, the OFCCP received 6,524 comments, of which 6,443 were the result of organized efforts using form letters generally in support of the NPRM. The remaining group of 81 unique or non-form letter comments represented diverse perspectives including one contractor, three law firms, four contractor associations, 13 civil rights organizations, four employee associations and unions, and 56 individuals.

Major provisions. The final rule protects employees’ inquiries, discussions, and disclosures of their own pay and benefits, and similar employee activities related to the pay and benefits of others, if they obtained that information through ordinary means such as conversations with co-workers. Neither the EO, nor the final rule, protects the disclosure of others’ pay information that an employee obtained as part of the employee’s essential job functions. For instance, if the employee making the disclosure to others had access to the information as a part of carrying out the essential job functions of the position of payroll administrator or benefits administrator, the contractor may be justified in taking adverse action based on that disclosure. The rationale behind this provision is that the employee, as payroll or benefits administrator, had access to the information as an essential part of the job and shared that information with others who do not otherwise have access to such information, which could undermine a contractor’s ability to maintain necessary confidentiality concerning compensation. The nondiscrimination provision of the final rule may not protect this employee. The final rule specifically allows a contractor to take adverse action when an employee, with access to compensation information as part of an essential job function, discloses that information to others and the disclosure does not fall into one of the exemptions. The exemptions are disclosures made in response to a formal complaint or charge, in furtherance of an investigation, proceeding, hearing or action, including an investigation by the contractor, or disclosures consistent with the contractor’s legal duty to furnish the information.

Nothing in the final rule prohibits contractors from proactively promoting what they view as good about their pay policies and practices, according to the OFCCP. As a best practice, the agency encourages contractors to remove barriers to employees knowing that the contractor’s pay and benefit practices are competitive with other companies within the same industry, and to promote their company’s practices regarding advancement opportunities, merit increases in pay, and other factors that affect their employees’ pay. The more a contractor’s employees know about where they stand in terms of their pay within the company, the more the employees should feel that they have a stake in the company and its financial success, the OFCCP reasons.

Changes to equal opportunity clauses. The current regulations at § 60-1.4 enumerate the basic equal employment obligations of federal contractors in a clause required to be included in all federal contracts. The final rule amends this clause to include the requirement that federal supply and service contractors (§ 60-1.4(a)(3)) and federal construction contractors (§ 60-1.4(b)(3)) refrain from discharging or otherwise discriminating against employees or applicants who inquire about, discuss, or disclose their compensation or the compensation of other employees or applicants, except where the disclosure was carried out by an employee who obtained the information in the course of performing his or her essential job functions.

The rule provides that contracting agencies may either incorporate the equal opportunity clauses by reference or expressly include it in government contracts and modifications thereof if not included in the original contract.

Definitions. In addition to amending the existing equal opportunity clauses in § 60-1.4 to include the nondiscrimination provision in EO 13665, the final rule also defines key terms used in EO 13665 that are incorporated into the rule. Specifically, the rule changes the list of relevant definitions at § 60-1.3 by adding the following three definitions:

(1) The definition of the term “compensation” is defined in a manner consistent with the definition used by OFCCP in other existing guidance. Therefore, compensation is defined for these purposes as 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, shift differentials, bonuses, commissions, vacation and holiday pay, allowances, insurance and other benefits, stock options and awards, profit sharing, and retirement.

In the preamble to the final rule, the OFCCP noted public comment regarding the differing definitions in Directive 2013-03 (“Procedures for Reviewing Contractor Compensation Systems and Practices”) and the NPRM, and advocating for making them consistent. However, the agency maintains that its guidance and regulations have historically included salary, wages, overtime pay, shift differentials, bonuses, commissions, vacation and holiday pay, allowances, insurance and other benefits, stock options, profit sharing and retirement. Though the definition of compensation in Directive 2013-03 and the final rule are not identical, Directive 2013-03 should be interpreted in a manner consistent with the final rule.

(2) The final rule defines “compensation information” as the amount and type of compensation provided to employees or offered to applicants, including but not limited to the desire of the contractor to attract and retain a particular employee for the value they are perceived to add to the contractor’s profit or productivity; the availability of employees with like skills in the marketplace; market research about the worth of similar jobs in the relevant marketplace; job analysis, descriptions, and evaluations; salary and pay structures; salary surveys; labor union agreements; and contractor decisions, statements, and policies related to setting or altering employee compensation. In the preamble, the OFCCP states this definition is consistent with Directive 2013-03.

One commenter expressed concern that the definition of “compensation information” in the NPRM would interfere with the operation of the attorney-client privilege. Disagreeing, the OFCCP explained in the preamble that the attorney-client privilege only protects disclosure of communication; it does not protect the disclosure of the factual bases underlying the communication between a client and his or her attorney. Therefore, the privilege generally would not cover “compensation information” data. However, after reviewing the proposed definition, the OFCCP decided to modify the definition in the final rule slightly so that it would mean the amount and type of compensation provided to employees or offered to applicants, including, but not limited to, factual information about the desire of the contractor to attract and retain a particular employee for the value they are perceived to add to the contractor’s profit or productivity; the availability of employees with like skills in the marketplace; market research about the worth of similar jobs in the relevant marketplace; job analysis, descriptions, and evaluations; salary and pay structures; salary surveys; labor union agreements; and contractor decisions, statements and policies related to setting or altering employee compensation. This modification in the final rule, by way of including several examples, provides contractors with additional guidance.

(3) The definition of “essential job functions” is designed to provide clarity about the positions covered by minimizing the degree of subjectivity involved in the determination. A job function may be considered essential if: (a) the access to compensation information is necessary in order to perform that function or other routinely assigned business task; or (b) the function or duties of the position include protecting and maintaining the privacy of employee personnel records, including compensation information.

In the NPRM, the OFCCP proposed using the ADA, as amended, definition of essential job functions. Under that definition, a job function may be considered essential for any of several reasons, including: (1) the function may be essential because the reason the position exists is to perform that function; (2) the function may be essential because of the limited number of employees available among whom the performance of that job function can be distributed; and/or (3) the function may be highly specialized so that the incumbent in the position is hired for his or her expertise or ability to perform the particular function.

Some public comments on this proposed definition asserted that the ADA definition was too narrow, and others indicating that it was too broad or needed further specificity. In response to these comments, the final rule modifies the proposal in the NPRM by eliminating the use of the ADA definition of essential job functions in favor of identifying two categories or types of essential job functions, as detailed above.

Defenses. The final rule creates a new provision at § 60-1.35 entitled, “Contractor Obligations and Defenses to Violation of the Nondiscrimination Requirement for Compensation Disclosures.” This new provision provides employers with two defenses to alleged violations of the nondiscrimination obligation for employees who inquired about, disclosed, or discussed compensation: one based on enforcing rules against disruptive behavior; and the other based on the essential functions of the person’s job. Specifically, proposed § 60-1.35(a) and (b), respectively, establish a general defenses provision and an essential job functions defense provision.

These provisions allow contractors to pursue a defense as long as that defense is not based on a rule, policy, practice, agreement or other instrument that prohibits employees or applicants from discussing or disclosing their compensation or that of other employees consistent with the provisions in the equal opportunity clauses in § 60-1.4. Yet, the nature of the defenses differs.  The essential job functions defense, per the text of EO 13665, is a complete defense, such that if an employee discloses compensation information accessed or received through performance of an essential job function, unless the disclosure falls into one or more exemptions, the protections of the EO shall not apply and a contractor is allowed to take adverse action on those grounds. Contractors may also pursue a general defense if the discipline it imposes is for violation of a consistently and uniformly applied rule, policy, practice, agreement, or other instrument that does not prohibit, or tend to prohibit, employees or applicants from discussing or disclosing their compensation or the compensation of other employees or applicants. Given the difference in structure and function of this defense, the final rule clarifies that it is not a complete defense, but rather is to be employed within the analytical framework of the rule.

Dissemination. Section 60-1.35(c) of the final rule requires contractors to disseminate the nondiscrimination provision by incorporating it into existing employee manuals or handbooks, and disseminating it to employees and to job applicants. The language of the provision, prescribed by the OFCCP Director, is based on the language in Section 2(b) of EO 13665 and is available on the agency’s Pay Transparency Web page cited above.  This dissemination can be executed electronically or by posting a copy of the provision in conspicuous places available to employees and applicants for employment. In person or face-to-face communication of the provision is not required or recommended, however, contractors may use this method if they typically communicate information to all employees or applicants in this manner. In order to reduce the burden to contractors associated with disseminating the provision, the final rule requires contractors to adopt the nondiscrimination language provided by the OFCCP into contractors’ existing employee manuals or handbooks and otherwise make it available to employees and applicants.

Analytical framework. In the NPRM, the OFCCP stated that it viewed Executive Order 13665 “as establishing a new prohibition against discrimination against any employee or applicant” and announced its intent to use the burdens and standards of proof applicable to Title VII discrimination claims – including the use of a motivating factor framework for analyzing causation. OFCCP provided three broad reasons for adopting this approach in the NPRM: (1) the equal opportunity clause paragraph set out in Section 2(b) of Executive Order 13665 is framed in terms of discrimination; (2) the prohibitions set forth in Executive Order 13665 diverged from the traditional Title VII retaliation framework, to which the different “but-for” standard of review applies; and (3) the application of the motivating factor framework would maintain consistency with the review of similar claims under the National Labor Relations Act, which also utilizes the motivating factor approach.

The OFCCP received seven comments on the proposed analytical framework. Five of these comments, largely from organizations representing employers, opposed the proposal, and urged instead that OFCCP adopt a “but-for” causation standard, citing the U.S. Supreme Court’s recent decision in University of Tex SW Med Ctr v Nassar (97 EPD ¶44,851). These commenters were concerned that the NPRM proposed prohibiting “discrimination” for conduct that is more appropriately considered “retaliation.” The commenters noted that the proposed prohibition was not based on the employees’ or applicants’ membership in one of the protected categories under Title VII. Similarly, several commenters wrote that it is unclear whether a violation would be analyzed under the “motivating factor” standard or “but for” standard under Title VII – the “but for” standard being applicable to retaliation claims while “motivating factor” applies to discrimination claims.

Two commenters, both civil rights advocacy organizations, viewed the NPRM’s prohibition as a nondiscrimination provision, and thus, strongly supported the proposed motivating factor framework and urged its inclusion in the final rule.

After reviewing these comments, the OFCCP adopted the framework as proposed in the NPRM with some further clarification. While OFCCP recognizes the lack of specific “motivating factor” language in Executive Order 13665 and the other textual arguments raised by commenters, the policy language embedded in the EO, the differences between the EO’s protections and current case law interpretations of the Title VII retaliation provision, and related affirmative action and nondiscrimination obligations under the existing regulations provide important text and context for determining the appropriate analytical framework to employ, the agency explains in the preamble to the final rule. Accordingly, OFCCP does not believe that Nassar dictates that a “but-for” analytical framework must be used to analyze pay secrecy claims under Executive Order 13665.

The final rule clarifies that adverse action taken by a contractor against an employee or applicant that violates the provisions of EO 13665 and these regulations is appropriately viewed as discrimination and analyzed as such under that legal framework. While the OFCCP has concluded that the motivating factor framework is a permissible approach for claims brought under EO 13665, the agency states that it may use other approaches, based on the evidence available in a particular case, to demonstrate that unlawful discrimination occurred. For example, numerous circuit courts examining Title VII discrimination claims since the Civil Rights Act of 1991, which codified the motivating factor framework, have held that, despite the availability of the motivating factor analysis, plaintiffs may also proceed under the more traditional burden shifting framework first set forth in McDonnell Douglas Corp v Green (3 EPD ¶8607).

Manager training proposal not adopted. In the proposed rule, the OFCCP sought public comments on the feasibility of requiring contractors with manager training programs or meetings to include a regular review of the nondiscrimination provision. However, after considering the public feedback received on the proposal, the OFCCP decided against requiring contractors to modify their existing trainings or meetings to include a review of the prohibition on discriminating based on an employee or applicant inquiring about, discussing, or disclosing compensation information. In making this determination, the agency considered the added burden to contractors resulting from them modifying their training materials, as well as the potential for contractors to become confused about which of them would be covered by the training requirement. Although this final rule does not require training, the OFCCP encourages all contractors to incorporate personnel training on this new nondiscrimination provision as a best practice.

Other updates. In addition, the final rule deletes the outdated reference to the “Deputy Assistant Secretary” in §60-1.4(d) and replaces it with the “Director of OFCCP.” It also changes the title of §60-1.4(d) to “Inclusion of the equal opportunity clause by reference” and making a conforming change in the text.