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Subcontractors Gear Up for More Bias Audits as U.S. Plans Rule

Dec. 23, 2021, 10:30 AM

Federal subcontractors are bracing for Biden administration plans that would allow the U.S. Labor Department to more easily target them for audits aimed at exposing workplace discrimination and affirmative action violations.

The DOL’s Office of Federal Contract Compliance Programs regulates employers that have “prime” contracts to provide supplies and services to the government. However, the agency has typically been less active when it comes to auditing companies that receive subcontracts to help perform that work.

The Biden administration’s fall regulatory agenda included plans for a proposed rule that would require prime contractors to notify the OFCCP when they award subcontracts, which would allow the agency to identify and schedule more subcontractors for compliance audits.

These reviews can lead to high-dollar discrimination settlements and, in some cases, lengthy litigation.

The proposal prompted concerns from some management attorneys who say the rule could prove burdensome to contractors and subcontractors and spark resistance from businesses that say they shouldn’t fall within the OFCCP’s reach. The scope of the agency’s power over certain subcontractors was heavily litigated during the Obama administration and eventually resolved through regulation.

“We are going to see a lot of subcontractor pushback, and I think OFCCP’s going to try to hold onto” the subcontractors said Alissa Horvitz, an attorney with Roffman Horvitz PLC who specializes in federal contractor compliance. “They would try to use as many legal tools in their toolbox to try to assert jurisdiction.”

But former agency officials expressed optimism about the proposal, which comes as the office also seeks to broadly revamp goal-setting for contractor affirmative action requirements.

“It is a terrific idea for OFCCP to identify subcontractors,” said Patricia Shiu, a labor and employment consultant who previously served as the agency’s Obama-era director. “Subcontractors often perform some of the most critical work that is being done for the federal government, and I think it’s important to hold every contractor accountable.”

Craig Leen, who led the agency during the Trump administration, said the proposal may be similar to current requirements for federal construction contractors, which must notify the OFCCP if they award a subcontract over a certain size.

While he was director, Leen said he attempted to set up a policy where every time a contractor was scheduled for an audit, it would need to tell the agency its top three subcontractors in terms of size, but the proposal was withdrawn.

The Labor Department declined to comment. However, current OFCCP Director Jenny Yang said in a Nov. 9 speech that the agency is considering how to “streamline our processes and reduce unnecessary burdens on contractors, while ensuring OFCCP can comprehensively address indicators in discrimination.”

Potential Burdens

To pass muster from the White House’s Office of Management and Budget, which reviews agencies’ rulemaking, the OFCCP will need to show that the benefits of the proposal, which would presumably allow them to audit more effectively, would outweigh the burden it would impose on contractors, Leen said.

For some prime contractors, like a large university system, it’s difficult to determine if every vendor they contract with is susceptible to government contracting requirements, Horvitz said. The OFCCP has set specific definitions for when a subcontractor is under its enforcement jurisdiction.

Shiu, however, said she wouldn’t expect the proposal to add much burden.

“Contractors know with whom they are doing work, just as they know who their employees are,” she said.

One way to balance possible contractor burdens and the need for agency oversight is to set a threshold for subcontract amounts that would trigger when the OFCCP must be notified.

Subcontractors, so far, “have not had to invest in compliance obligations. And so to avoid a supply chain catastrophe, I don’t think that you could impose these OFCCP requirements on smaller subcontractor vendors,” Horvitz said.

“If we’re going to identify subcontractor organizations, the threshold should be at a minimum $500,000 or higher,” she said. “If our government wanted to encourage more competition by small business, it would set the threshold higher and it would give them a longer opportunity to come into compliance.”

Shiu said the agency’s funding and staffing should also be considered if thresholds are set. Lowering the bar could mean it won’t have the resources to audit more subcontractors, she said.

Concerns about subcontractor costs for compliance are fair, but federal contracts make up a “significant part of America’s budget” and companies that have them should be scrutinized, she said. “I think there should be some accountability and there should be discussion and training.”

Affirmative Action Updates

The agency also listed a proposal in its regulatory plan that would modify affirmative action goals for the hiring and recruitment of women and minorities. Instead of establishing goals that combine all minorities together, employers could set “disaggregated” goals based on specific races or ethnicities.

“This change would allow companies to better identify areas of underrepresentation in their organizations,” Yang said Nov. 9.

Modernizing affirmative action program requirements would be a “massive lift” since they haven’t been overhauled in over two decades, said David Cohen, co-chair of the Institute for Workplace Equality, a federal contractor group specializing in compliance. The agency could “blend DEI analytics and metrics” with affirmative action programs, which would be more useful to employers, he said.

Updating affirmative action program, or AAP, obligations “absolutely has to be done. And actually, contractors have been doing some of that already” by providing disaggregated data, Shiu said. “The question is, how disaggregate is disaggregated?”

Other stakeholders view possible changes with caution.

“Any time they’re proposing to revise the affirmative action obligations under the executive order for women and minorities, we’re all sort of holding our breath,” Horvitz said. “I’m always concerned that OFCCP is going to head down a path of requiring race by race analyses in situations where I just don’t think it’s appropriate.”

She said she worried that managers could get the wrong impression from those type of analyses and “make decisions based on race and they will eliminate otherwise qualified individuals from applicant pools because they’re the wrong race.”

The regulatory agenda also says the agency will consider modifying contractors requirements based on President Joe Biden’s executive order aimed at combating discrimination based on sexual orientation or gender identity.

Yang previously announced the OFCCP is considering options that would allow contractors’ employees to self-identify as non-binary.

“To the extent that this is seeking to have contractors and subcontractors have record keeping or AAP obligations as they relate to gender identity and sexual orientation, this would be a sea change,” said Christopher Wilkinson, a former Labor Department attorney who now counsels employers at Perkins Coie LLP in Washington.

“Having workers provide that information in an open way, that would then allow contractors and subcontractors to perhaps set some level of goals for those groups,” he said.

To contact the reporter on this story: Shira Stein in Washington at sstein@bloomberglaw.com

To contact the editors responsible for this story: Jay-Anne B. Casuga at jcasuga@bloomberglaw.com; Andrew Harris at aharris@bloomberglaw.com