One of the most significant changes under the new rule is the codification of the evidentiary standards the OFCCP must satisfy to meet its burden of proof and bring formal allegations of discrimination.

In a year that was tumultuous for all employers, federal contractors periodically received welcome news from the U.S. Department of Labor's Office of Federal Contract Compliance Programs (OFCCP), as OFCCP continued to build bridges to the contractor community and take steps to provide federal contractors with greater clarity regarding their affirmative action obligations and how OFCCP will enforce them. In perhaps the last of these actions before the Biden administration begins on January 20, 2021, OFCCP published a final rule codifying certain procedures OFCCP uses to resolve claims of potential employment discrimination and issued its so-called certainty directive that mostly reaffirms previously announced certainty initiatives.

Final Rule Codifies Procedures to Resolve Potential Employment Discrimination

On November 10, 2020, OFCCP published a final rule on the procedures for resolving claims of potential discrimination through the use of a predetermination notice (PDN) and notice of violation (NOV). As stated by OFCCP, the main purpose of the rule is to "provide contractors with greater certainty" about OFCCP's audit procedures. Notably, the procedures set forth in the rule focus only on those relatively few audits that have advanced to a stage where OFCCP's investigation has led it to believe that unlawful discrimination likely exists.

The main focus of the rule is to rein in the considerable discretion that OFCCP historically has exercised in audits when applying the requisite standards of proof and evidentiary standards applicable to employment discrimination claims brought under Title VII of the Civil Rights Act of 1964. This enhanced certainty regarding the procedures OFCCP will follow when preliminary and conclusive findings of discrimination have been made―which puts the contractor being audited on a path toward conciliation (settlement) and, if that fails, an enforcement action―provides contractors with more transparency in an otherwise murky process.

Predetermination Notice and Notice of Violation

The PDN is a tool used by OFCCP to inform federal contractors of the agency's preliminary findings. In 2018, OFCCP issued Directive 2018-01, requiring OFCCP to issue a PDN to a contractor at the conclusion of an audit, where OFCCP determined that the contractor had not adequately explained the agency's preliminary discrimination findings. The PDN provides the contractor with full notice of OFCCP's proposed discrimination findings, and pursuant to the directive, contractors were given 15 days to rebut the agency's proposed findings. Under the directive, the agency is required to issue a PDN before issuing an NOV, which constitutes OFCCP's final determination that discrimination has occurred.

The final rule codifies the requirement that OFCCP issue a PDN prior to issuing an NOV, and expands contractors' time to submit evidence to rebut the PDN from 15 to 30 days. Under the new rule, the OFCCP can only issue an NOV after it has given a contractor a reasonable time to respond to the preliminary findings outlined in a PDN. More, the new rule clarifies that the standards for issuing a PDN are the same for issuing an NOV, and requires that the NOV address the defenses or counterevidence presented by a contractor in response to the PDN.

Establishes Evidentiary Standards

One of the most significant changes under the new rule is the codification of the evidentiary standards the OFCCP must satisfy to meet its burden of proof and bring formal allegations of discrimination. The rule defines in detail the types of qualitative and quantitative evidence needed to meet these evidentiary standards.

Quantitative evidence is defined as:

hypothesis testing, controlling for the major, measurable parameters and variables used by the contractor (including, as appropriate, preferred qualifications, other demographic variables, test scores, geographic variables, performance evaluations, years of experience, quality of experience, years of service, quality and reputation of previous employers, years of education, years of training, quality and reputation of credentialing institutions, etc.), related to the probability of outcomes occurring by chance and/or analyses reflecting statements concluding that a disparity in employment selection rates or rates of compensation is statistically significant by reference to any one of these statements: (1) the disparity is two or more times larger than its standard error (i.e., a standard deviation of two or more); (2) the Z statistic has a value greater than two; or (3) the probability value is less than 0.05. It also includes numerical analysis of similarly situated individuals, small groups, or other characteristics, demographics or outcomes where hypothesis-testing techniques are not used.

Qualitative evidence is defined as:

testimony, interview statements, and documents about biased statements, remarks, attitudes, or acts based upon membership in a protected class, particularly when made by a decision maker involved in the action under investigation; testimony, interview statements, and documents about individuals denied or given misleading or contradictory information about employment or compensation practices, in circumstances suggesting discriminatory treatment based on a protected characteristic; testimony, interview statements, and documents about the extent of discretion or subjectivity involved in making employment decisions, in conjunction with evidence suggesting the discretion or subjectivity has been used to discriminate based on a protected characteristic; or other anecdotal evidence relevant to determining a contractor's discriminatory or non-discriminatory intent, the business necessity (or lack thereof) of a challenged policy or practice, or whether the contractor has otherwise complied with its non-discrimination obligations. Qualitative evidence may not be based solely on subjective inferences or the mere fact of supervisory discretion in employment decisions. OFCCP may also consider qualitative evidence in the form of a contractor's efforts to advance equal employment opportunity beyond mere compliance with legal obligations in determining whether intentional discrimination has occurred.

Simply put, OFCCP must have both mathematical/statistical (quantitative) evidence and other documentary or testimonial (qualitative) evidence to support a finding of disparate treatment discrimination.

The rule identifies three narrow exceptions for when both quantitative and qualitative evidence are not required to support a finding of discrimination: (1) the existence of overwhelming qualitative evidence; (2) extraordinary compelling quantitative evidence; or (3) the contractor's denial of access to data and records.

Disparate Treatment and Disparate Impact

The new rule discusses the two theories of discrimination—disparate treatment and disparate impact—that OFCCP can pursue. Disparate treatment is based on a theory of intentional  discrimination, whereas disparate impact challenges policies and practices that are nondiscriminatory on their face but result in discriminatory outcomes in practice.

Disparate treatment generally must be supported by both qualitative and quantitative evidence. As a result, statistics alone generally will be insufficient to support an OFCCP finding of disparate treatment. However, the new rule provides an exception to that general rule for when there is an "extraordinarily compelling [statistical] disparity." The new rule does not define how large a statistical disparity has to be in order to be considered "extraordinarily compelling."

In order to pursue a finding of disparate impact discrimination, OFCCP is required to first identify the alleged facially neutral policy or practice that has caused the alleged disparate impact. Once a policy is identified, OFCCP must then present quantitative evidence demonstrating that the policy or practice produces an adverse impact. After OFCCP has established those two prerequisites, employers have an opportunity to rebut the evidence presented.

While these principles are well established in Title VII case law, this new rule, importantly, puts additional guardrails on OFCCP to make clear the evidence needed to support each theory of discrimination.

Practical Significance

Another important takeaway is that in addition to qualitative and quantitative evidence, OFCCP generally has to demonstrate practical significance to support a finding of discrimination. As used in the new rule, practical significance signifies OFCCP's opinion that disparities may be statistically significant yet nevertheless immaterial from an enforcement perspective. To an extent, this acknowledges that statistical significance depends on the number of employees included in the analysis. By way of example, large employers with numerous employees in a pay group may exhibit a statistically significant disparity when, in fact, the difference in pay is only around 1 percent. As a result, OFCCP has recognized that pursuing discrimination cases based on statistically significant disparities that have little practical significance is not the best use of the agency's resources. However, practical significance is not a hard and fast rule but rather an opportunity for OFCCP to use discretion in using its limited resources in pursuing alleged pay disparities.

In a December 10, 2020, webinar on the new rule, OFCCP Director Craig Leen confirmed that the new rule applies to ongoing audits going forward, but noted that OFCCP generally has been applying the principles outlined in the new rule.

In addition, Director Leen emphasized some key principles about how OFCCP will approach evaluations, including:

  • OFCCP will consider all factors that a contractor uses to set pay or conduct hiring. When regression analyses are done under this rule, OFCCP generally will control for all material factors in setting pay or minimum/preferred qualifications in making hiring decisions. The only exceptions to this rule are when a contractor fails to keep records of the factors or where it is clear that the factor is a tainted variable, though OFCCP will not assume a variable is tainted.
  • OFCCP will prioritize holistic cases that have both quantitative and qualitative evidence of discrimination. The OFCCP will not solely rely on inferences of discrimination that can arise from statistical evidence.
  • OFCCP will base compensation review programs on the PDN rule.
  • OFCCP will provide fair notice and due process.

OFCCP Directive 2021-02, Certainty in OFCCP Policies and Practices

In 2018, OFCCP adopted four principles: Certainty, Efficiency, Recognition, and Transparency, which are referred to as the "CERT Principles." OFCCP issued directives related to three of the principles in 2018 and 2020: Directive 2018-08, Transparency in OFCCP Compliance Activities; Directive 2018-06, Contractor Recognition Program; and Directive 2020-02, Efficiency in Compliance Evaluations. On December 11, 2020, the OFCCP issued the final directive on the CERT principles: Directive 2021-02, Certainty in OFCCP Policies and Practices.

This final directive's stated purpose is "[t]o reaffirm OFCCP's commitment to a number of certainty initiatives and principles, and establish a process to facilitate the continued provision of clarity and certainty in OFCCP practices."

The final directive attaches and incorporates previously issued guidance titled "What Federal Contractors Can Expect," which is referred to as the Contractors' Bill of Rights. In that guidance, OFCCP set forth the following commitments to contractors subject to its jurisdiction:

  1. Access to accurate compliance assistance;
  2. Timely responses to compliance assistance questions;
  3. Opportunities to provide meaningful feedback and collaborate;
  4. Professional conduct by OFCCP's compliance staff;
  5. Neutral scheduling of compliance evaluations;
  6. Reasonable opportunity to discuss compliance evaluation concerns;
  7. Timely and efficient progress of compliance evaluations; and
  8. Confidentiality

This directive also includes an important commitment by the OFCCP to:

conduct ongoing review of its policies and practices to ensure they are clear and certain to the stakeholder community, and to provide for a process by which a member of the stakeholder community can seek clarification or disclosure of a policy or practice to ensure greater certainty.

What This Means for Employers

In sum, the new rule should provide contractors with more clarity throughout the OFCCP audit process and a better understanding of the evidence required for OFCCP to move forward with a finding of discrimination. Contractors, in consultation with employment counsel experienced in this area, also can proactively use the rule as a guide to evaluating their own compliance efforts―before OFCCP knocks on their door. Moreover, contractors should be able to rely on both the new directive and the other directives relating to the CERT Principles to help gain greater clarity in ongoing audits and other OFCCP actions and programs.

Finally, as is customary with a new administration, federal contractors are likely to see a shift in enforcement and engagement philosophy and strategies with the incoming Biden administration. However, unlike much of the guidance issued by executive branch agencies, regulations such as the final rule codifying procedures to resolve potential employment discrimination have staying power even when the party in the White House changes, and contractors should become familiar with the procedures and standards set forth in the final rule.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.