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Pay Audits Get Closer Look From Federal Contractor Watchdog (2)

March 15, 2022, 9:01 AMUpdated: March 15, 2022, 7:13 PM

The U.S. Department of Labor’s federal contractor watchdog issued a new directive that would more closely scrutinize the pay equity audits of companies that work with the federal government.

The directive from the Labor Department’s Office of Federal Contract Compliance Programs took effect Tuesday and clarifies federal contractors’ mandate to ensure fair compensation practices. The agency enforces federal anti-bias laws and affirmative action obligations among contractors.

The new instructions state that federal contractors are expected to hand over all information about their internal pay analyses when being audited by the office, including documents that contain legal advice.

“Contractors cannot withhold these documents by invoking attorney-client privilege or the attorney work-product doctrine,” the directive said. “OFCCP has the authority under its regulations to request the analyses the contractor has conducted to comply with OFCCP regulations.”

Contractors typically conduct internal audits to correct potential violations before the government gets involved, attorneys said.

“As a general rule, employers do not want a government agency to see what goes on behind the scenes. They would rather keep that internal,” said Matthew Camardella, co-lead of Jackson Lewis P.C.'s affirmative action, OFCCP, and government contract compliance practice. “So that to the extent that there’s any risk or issues identified, that doesn’t become a hotspot for OFCCP to investigate.”

The directive also states that companies doing business with the federal government are required to conduct an in-depth analysis of their pay practices for potential gender, race, or ethnicity-based disparities, something new for OFCCP, said Leigh Nason, an Ogletree Deakins attorney and co-chair of the firm’s OFCCP Compliance Practice Group.

“I think they are assuming that the regulations require a quantitative annual, ‘pay equity audit,’ and that’s a real stretch,” Nason said in an interview. “What they’re saying is, look, you’ve got to do a pay equity audit every year quantitatively for compliance purposes, so that’s never going to be privileged.”

Privileged Advice

Companies typically hire firms to help prepare their records and provide legal advice on their compliance with the requirements enforced by the office.

The directive clarifies that the agency has the authority to review the pay equity reviews conducted by contractors “to understand the methodology used and verify compliance with this requirement.”

The agency said that having its hands on the pay reviews that firms conduct enables OFCCP to accomplish its audits “more efficiently by understanding the contractor’s analysis of its pay.”

Such audits aren’t considered “privileged legal advice” that a company can withhold from the agency, the directive said.

Otherwise, “contractors could frustrate OFCCP’s enforcement efforts by delegating the preparation of all pay equity audit and compliance records to their attorneys,” an outcome that OFCCP said “is contrary” to the executive orders and regulations it enforces.

Instead, the agency stated that contractors may “conduct a separate pay equity audit for the purpose of obtaining privileged legal advice,” and not for demonstrating compliance with OFCCP regulations.

Attorneys say they expect contractors to increasingly seek separate pay audits for risk and compliance with OFCCP regulations as a result of the change, instead of a dual audit for both risk and compliance.

“For efficiency purposes, employers have really wanted to do dual-purpose analysis, as opposed to doing two different sets of analyses,” explained Camardella. “This is going to make employers rethink that strategy. And in all likelihood, result in two different types of analyses that are run either annually or on some other cadence, one for regulatory compliance purposes, and one for risk mitigation purposes.”

The agency is trying to ensure that when contractors are complying with the regulatory requirement to evaluate compensation, the OFCCP has a lens into what the contractor has done, said Alissa Horvitz, an attorney with Roffman Horvitz PLC who specializes in federal contractor compliance.

“And while I understand that OFCCP has a regulatory right to evaluate pay as part of a compliance review, I don’t think that when an organization retains counsel for the purposes of providing legal advice on its Equal Employment Opportunity obligations and compliance posture, that the OFCCP should have a right to gain access to privileged attorney client communications,” Horvitz said.

(Added additional quotes in 8th and last paragraphs.)

To contact the reporters on this story: Rebecca Rainey at rrainey@bloombergindustry.com; Paige Smith in Washington at psmith@bloomberglaw.com

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; Andrew Harris at aharris@bloomberglaw.com