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Updates to OFCCP sex discrimination regulations present some compliance conundrums

August 17th, 2016  |  Cynthia L. Hackerott

The OFCCP’s definition of “similarly situated” for the purposes of evaluating compensation differences in its new sex discrimination regulations is so broad that it provides little guidance for federal contractors and goes beyond Title VII standards, two attorneys who handle OFCCP compliance matters recently told Employment Law Daily. The final rule, published in the Federal Register on June 15, 2016 (81 FR 39108-39169), replaces the guidelines at 41 CFR Part 60-20 with new sex discrimination regulations. The regulations, which implement the prohibition against sex discrimination contained in Executive Order (EO) 11246, took effect on August 15, 2016. Section 60–20.4(a) of the new regulations prohibits contractors from paying “different compensation to similarly situated employees on the basis of sex.” But the standard to which the OFCCP will hold contractors in assessing exactly which employees are “similarly situated” is far from clear, the attorneys stated.

“The final rule focuses on ‘similarly situated employees,’ but offers little in the way of concrete guidance except to say that the determination of similarity is ‘case specific,’” observed Gretchen W. Ewalt, a shareholder in the Raleigh, North Carolina, office of Ogletree Deakins and a member of the firm’s Affirmative Action/OFCCP Compliance Practice Group. “[It] lists factors such as skills, effort, and level of responsibility, among others, as relevant to the determination, but states that employees may be similarly situated where they are comparable on some of these factors, even if they are not similar on others. Although the OFCCP contends that it will follow Title VII case law when evaluating contractor’s compensation systems, this flexible standard appears to be broader than  numerous Title VII cases that define similarly situated as requiring the employees to be similar in all material respects.”

The rule “rewrites Title VII’s definition of ’similarly situated’ employees,” John C. Fox, a former OFCCP official and current president of Fox, Wang & Morgan P.C. in Los Gatos, California, said. “’Similarity situated’ does not mean ‘similarly’ situated,” rather, suddenly “[i]t means whatever the OFCCP wants it to mean.”

Ewalt and Fox provided their insights on the final rule in separate interviews with Employment Law Daily. Discussing topics including pregnancy accommodation, sex stereotyping, gender identity, and limitations periods, the attorneys identified several legal and compliance concerns presented by the new regulations.

Overview of changes. The OFCCP’s outdated sex discrimination guidelines had not been substantially updated since 1970, and the new regulations are intended to align with current law and address the realities of today’s workplaces. The OFCCP says that it enforces the nondiscrimination obligations under EO 11246 by following Title VII and the case law principles that have developed interpreting Title VII.

There are two important ways in which the final rule updates EO 11246’s discrimination law prohibitions, Fox explained. First, it catches EO 11246 up to the 1978 Pregnancy Discrimination Act (PDA) amendment to Title VII. Second, it incorporates into the EO 11246 program the amendment to Title VII made by the Lilly Ledbetter Fair Pay Act of 2009 (FPA) which revises the statute of limitations as to compensation claims. These two amendments to OFCCP regulations are important, Fox said, because EO 11246 itself has not been amended in parallel with the amendments to Title VII made by Congress.  For example: While President Obama amended EO 11246 to make “gender identity” discrimination unlawful, the President did not make a parallel change to EO 11246 to also make pregnancy discrimination unlawful. Rather, in the case of pregnancy discrimination, Fox said, the OFCCP amended only its regulations implementing EO 11246, but EO 11246 itself still does not make pregnancy discrimination unlawful. Accordingly, there may be a legal argument that the OFCCP has improperly amended its regulations without a necessary authorizing amendment to EO 11246 as to pregnancy discrimination prohibitions. As such, he said, the portions of this new rule that the agency may be able to enforce are a “checkerboard.”

Expanded definition of “sex.” The final rule contains a new and broad definition of the term “sex,” Fox points out. In Section 60-20.2(a), it states that “[t]he term sex includes, but is not limited to, pregnancy, childbirth, or related medical conditions; gender identity; transgender status; and sex stereotyping.”

Section 60-20.2(b) of the new regulations lists 14 examples of prohibited disparate treatment sex discrimination that the OFCCP believes its existing rules already outlaw, and Section 60-20.2(c) list four examples of disparate impact discrimination already made unlawful, Fox notes. However, he reports that the majority of concerns contained in these lists have never been prosecuted by the OFCCP in the agency’s history, including during the current administration.

Pregnancy accommodation is a gray area. Section 60–20.5(c) of the final rule requires that federal contractors provide workplace accommodations, such as extra bathroom breaks and light-duty assignments, to an employee who needs such accommodations because of pregnancy, childbirth, or related medical conditions, in certain circumstances where those contractors provide comparable accommodations to other workers, such as those with disabilities or occupational injuries. The OFCCP rejected comments to require accommodation of pregnant employees as an “Affirmative Action” requirement, Fox notes. Therefore, the final rule doesn’t require pregnancy accommodation, he explained; rather, in order to avoid unlawful discrimination, contractors are required to accommodate pregnant workers in certain circumstances where the employer has made accommodations to non-pregnant workers with impairments.

The final rule’s provisions regarding pregnancy accommodation are “a reasonable restatement” of the U.S. Supreme Court’s March 2015 holding in Young v. United Parcel Serv, Ewalt said.

In Young, the Court held that an individual pregnant worker who seeks to show disparate treatment under Title VII through indirect evidence may do so through application of the McDonnell Douglas framework, but such plaintiffs are not required to show that the employer’s policy rationale was intentionally biased; rather, the employee can satisfy her burden of showing pretext by demonstrating that the policy put a “significant burden” on pregnant employees and that the employer’s reasoning was not sufficient to justify that burden.

“There is much litigation to come under the Young standard,” Fox predicts, adding that “there is lots of potential liability out there” because the circumstances requiring accommodation are a gray area. There are not “wooden rule” yes or no answers regarding when an accommodation may be necessary. Accordingly, employers will need to get an employment discrimination lawyer to advise them as to each accommodation request, he recommended.

Disparate impact defense. Under Title VII, as amended by the Civil Rights Act of 1991, an employer may defend a disparate impact claim by proving that a challenged specific and neutral practice or policy (not intended to discriminate) is “job related and consistent with business necessity” (the “business necessity” defense). The business necessity defense is incorporated into the OFCCP’s new regulations. However, Fox explained that EO 11246 has not been amended in parallel with the Title VII amendments made in the Civil Rights Act of 1991 to encompass that entirely new definition of what constitutes a business necessity defense. Therefore, federal contractors faced with disparate impact claims under EO 11246 may choose to avail themselves of the defense contained in the Supreme Court’s 1989 decision in Wards Cove Packing Co. v. Atonio. Specifically, contractors need only show that a challenged practice “serves, in a significant way, the legitimate employment goals of the employer.” While the contractor’s justification must be substantial, there is no requirement that the challenged practice be “essential” or “indispensable” to the employer’s business for it to pass muster, as is now the case under Title VII as amended.

Sex stereotyping, gender identity, and transgender status. The final rule reflects the OFCCP’s view that adverse treatment of employees based on failure to conform to particular gender norms and expectations about their appearance, attire, or behavior is unlawful sex discrimination. Moreover, sexual orientation and gender identity were expressly added to the categories protected from discrimination under EO 11246 on July 21, 2014, when President Obama signed EO 13672 which applies to covered contracts entered into or modified on or after April 8, 2015 (the effective date of the OFCCP’s regulations promulgated under EO 13672).

“This is certainly the trend seen in a lot of Title VII cases as courts seem more receptive to the argument that discrimination due to sex stereotyping is prohibited by Price Waterhouse v. Hopkins, and discrimination against people because they do not conform to traditional expectations on gender in terms of dress or behavior is actionable under Title VII,” Ewalt noted.  “Most arguments being asserted now on discrimination against transgender individuals are couched as sex-stereotyping because the individual does not conform to traditional notions of how a man or a woman would dress or act,” she continued.  “Of course, many contractors are already covered by EO 13672, which explicitly prohibits discrimination based upon gender identity.”

A potential legal impediment to enforcement of the OFCCP’s inclusion of sexual orientation and gender identity in the final rule is the fact that Congress has not explicitly delegated legal authority to the President to protect employees from discrimination based on sexual orientation or gender identity, Fox said. Still, in regard to gender identity, Fox—similar to Ewalt—points out that the U.S. Supreme Court’s 1989 decision in Price Waterhouse interpreted Title VII’s sex discrimination prohibition to include a hidden prohibition on “gender” discrimination and specifically outlawed, under Title VII, sex stereotyping. As a result, federal courts have regularly been allowing gender identity claims to proceed under Title VII since Price Waterhouse.

In contrast, courts have not generally recognized claims based on sexual orientation as cognizable under Title VII. The OFCCP notes the weakness of federal court support of Title VII protection against sexual orientation discrimination in the preamble to the final rule, Fox observed.

[ELD Note: Recently, the Seventh Circuit, in Hively v. Ivy Tech Community College (July 28, 2016), reaffirmed its earlier rulings that sexual orientation is not a protected category under Title VII. On top of the fact that Seventh Circuit precedent has been unequivocal in holding that Title VII does not redress sexual orientation discrimination, this precedent is in line with all other circuit courts to have addressed the matter, the Seventh Circuit noted, citing decisions from the First, Second, Third, Fourth, Fifth, Sixth, Eighth, Ninth, and Tenth Circuits, as well as the D.C. Circuit. These holdings reflect the fact that despite multiple efforts, Congress has repeatedly rejected legislation that would have extended Title VII to cover sexual orientation, even in the face of “an abundance of judicial opinions recognizing an emerging consensus that sexual orientation [discrimination] in the workplace can no longer be tolerated,” the Seventh Circuit wrote. Two of the three judges on the Hively panel further wrote to call out the illogical result, in other court decisions, of denying sexual orientation discrimination claims under Title VII but allowing nearly indistinguishable gender non-conformity claims (based on Price Waterhouse and its progeny).]

Do contractors have to pay for sex reassignment surgery? The rule requires contractors to allow workers to use bathrooms, changing rooms, showers, and similar facilities consistent with the gender with which the workers identify. Additionally, the preamble to the rule states that an explicit, categorical exclusion of coverage for all care related to gender dysphoria or gender transition is facially discriminatory because such exclusion singles out services and treatments for individuals on the basis of their gender identity or transgender status.

Under the final rule, contractors may have to pay for sex reassignment surgery, Fox said. The rule uses the term “transition-related medical services” to encompass sex reassignment surgery and/or non-surgical treatment, such as hormone therapy and other medical services. Pursuant to the Young standard, contractors that pay for every other major medical procedure in their company health plans may have to pay for transition-related medical services, unless they can provide a “legitimate nondiscriminatory reason” for excluding such coverage.

Limitations periods. The applicable limitations periods depends on whether the enforcement action is a compliance evaluation or a complaint investigation. In the preamble to the final rule, the OFCCP notes that both federal and administrative courts have held that the regulations at 41 CFR Part 60–1.26, which govern OFCCP compliance evaluations, contain no statute of limitations. Thus, the agency claims that, in compliance evaluations, it may go back in time to investigate and prosecute any unlawful acts back to the beginning of a contractor’s first federal contract, Fox noted. As to enforcement actions arising from individual complaint investigations, the OFCCP states in the preamble that those are governed by 41 CFR Part 60–1.21, which contains a 180-day statute of limitations.

For compensation claims, the new regulations adopt the limitations period provided for in the FPA. The final rule states that a contractor violates EO 11246 and these regulations “any time it pays wages, benefits, or other compensation that is the result in whole or in part of the application of any discriminatory compensation decision or other practice” (Section 60-20.4(e)).

“The Ledbetter Amendment has now arrived at the OFCCP,” Fox said, referring to the FPA. This means that the OFCCP’s two-year statute of limitations on liability is no longer applicable in compensation investigations. For example, an unlawfully discriminatory initial wage pay decision made 10 years ago is not untimely and is still actionable today in 2016, he explained. Yet, Fox again notes that the portion of the final rule adopting the FPA may not be enforceable because, although the FPA amended Title VII, it did not amend EO 11246, and President Obama has not (yet) similarly amended EO 11246 to allow for and apply the Ledbetter amendment.

Still, both attorneys point out the Title VII’s two-year limit on back pay (i.e. damages) is still in place for OFCCP enforcement actions.

“OFCCP states in the preamble to the final rule that it will follow the FPA in enforcement actions arising from individual [compensation] complaints under 60-1.21,” Ewalt notes. “The vast majority of OFCCP enforcement actions, however, arise out of compliance evaluations and are not governed by a specific statute of limitations, although the OFCCP’s own regulations currently limit the back pay recovery period to two years from the date of the scheduling letter,” she said.

Importantly, the OFCCP’s focus on current pay does not comport with the Supreme Court’s 2007 ruling in Ledbetter v. Goodyear Tire & Rubber Co., both attorneys asserted. While the FPA extended the Title VII charge filing period indefinitely when an employee challenges compensation, it did not change the requirement in Ledbetter that Title VII claimants must identify and challenge discrete pay decisions. Accordingly, the OFCCP cannot claim pay discrimination under the relevant legal standard unless it identifies a specific pay decision (meaning an event that impact pay such hiring, promotions, pay freezes, bonuses, and demotions) and proves that decision is discriminatory, Fox said.

“Although the FPA reversed the timeliness portion of the Ledbetter decision, it did not change the crucial portion of the majority decision, namely that Title VII focuses solely on discrete decisions, not current pay. To the extent OFCCP focuses on current pay disparities instead of identifying specific discriminatory pay decisions, OFCCP’s approach may be at odds with controlling Title VII law,” Ewalt stated.

The OFCCP’s focus on current pay, rather than pay decisions, will lead to the OFCCP missing some compensation discrimination incidents, Fox explains. For instance, the OFCCP won’t recognize a situation where a one-time payment was unlawfully denied in 2006, but did not carry forward into 2016.

Recommendations. Fox provided the following recommendations of actions contractors should take now:

(1) Conduct a “quality control check” of your company’s pregnancy leave /accommodation policy against the new Young legal standard that the OFCCP has now adopted. Start by cataloguing ALL of your leave allowances and policies allowing employees to be away from work or to transfer to different duties (i.e. “light duty”). If there is perceived or confirmed variance from Young’s accommodation requirements, consult with an employment lawyer to discuss before meeting with policy/decision-makers to determine next steps.

(2) Review your practices/policies/medical benefits plan/restroom use practice/policy to identify where, if anywhere, company policy/practice is inconsistent with the OFCCP’s final rule regarding transgender workers. If there is variance, meet with policy/legal team to determine whether the company wants to comply or fight.

(3) Change all your company’s written references (EEO policies/employee handbooks; Affirmative Action Programs (AAPs) for minorities and women, EEO training materials; etc) to capture the OFCCP’s ever broadening definition of “sex” discrimination to include—if you have not already done so—sexual orientation and gender identity (unless you are going to resist either or both expansions of the OFCCP’s claimed legal authority). You may also chose (but are not required) to make clear to employees that the OFCCP’s newly expanded definition of “sex” includes pregnancy, childbirth or related medical conditions, transgender status, and sex stereotyping.

(4) Consider advising supervisors/managers what to do if employees confront them with pregnancy accommodation requests or the issue of transgender access to the bathroom of choice. Do you want to train them as to specific contingencies? Should they consult HR in every situation? Should you beef up/expand harassment training to include pregnancy/sex-stereotyping/child rearing/sexual orientation and/or transgender modules?

(5) In light of the Ledbetter amendment, have a policy meeting to decide going forward: (a) what you wish to do as to compensation data recordkeeping, and (b) how you are going to analyze compensation if you are doing a compensation equity study.

(6) Review the names of your job titles, if you have not done so lately, to see how many you may make gender-neutral. Then devise a conversion plan and timeline which will not confuse the compensation group. Consider whether to discuss with the union(s). Identify what document sets need to be changed within the company to capture the new titles (Collective Bargaining Agreements; AAPs for minorities/women (Workforce Analysis/Job Group Analysis); compensation group documents; insurance documents; training materials; recruiting documents; job listing documents, etc)

(7) Review all leave policies and practices to insure they are sex-neutral. Are you affording leave to men on a basis equal to the leave you afford women for birth/child rearing/family leave?

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