United States: U.S. Department Of Labor Adopts Pay Transparency Final Rule For Employees Of Federal Contractors

On September 11, 2015, the U.S. Department of Labor's Office of Federal Contract Compliance Programs (OFCCP) published a Final Rule prohibiting federal contractors and their subcontractors from maintaining so-called pay secrecy policies and amending the equal opportunity clauses in 41 C.F.R. § 60.1-4 to provide protections to all workers and job applicants who discuss compensation. Among other things, the Final Rule prohibits the discharge of or discrimination against employees or job applicants who discuss, disclose or inquire about information related to compensation. Although the Final Rule's protections overlap with existing protections for private-sector employees under Section 7 of the National Labor Relations Act (NLRA), the Final Rule applies to a broader scope of employees of covered contractors and subcontractors and contains additional notice requirements. The Final Rule implements Executive Order 13665, signed by President Obama on April 8, 2014, and it becomes effective on January 11, 2016.

Protections for Contractor Employees Who Discuss Pay

The Final Rule applies to federal contractors with a federal contract or a federally assisted construction contract worth more than $10,000 and entered into or modified on or after January 11, 2016, as well as to subcontractors working under such covered federal contracts. It does not affect private employers who do not contract or subcontract with the federal government.

Significantly, the Final Rule provides even broader protections to employees who discuss pay than those already provided by Section 7 of the NLRA, which protects the right of only non-management and non-supervisory employees to engage in certain protected concerted activities, including making disclosures and having discussions about their compensation and other terms and conditions of employment. The OFCCP's Final Rule, on the other hand, applies to all employees—thus expanding protections to include managerial and supervisory-level personnel. The Final Rule also makes no distinction between a contractor's employees working on a federal contract and those working on purely private-sector projects.

Specifically, the Final Rule prohibits covered federal contractors and subcontractors from discharging or otherwise discriminating or retaliating against any employee or job applicant who inquires about, discusses or discloses his or her compensation information or the compensation information of another employee or applicant. Under the Final Rule, "compensation" refers to any payment made to an employee or applicant, including salary, wages, overtime pay, bonuses, commissions and vacation pay. "Compensation information" includes a variety of topics relating to pay that go far beyond salary and pay structures. For example, compensation information can be information related to the amount and type of compensation provided to employees or offered to applicants, the availability of employees with like skills in the marketplace, data about the worth of similar jobs in the marketplace, the desire of the contractor to attract and retain a particular employee for the value the employee is perceived to add to the contractor's business, employer decisions or policies related to compensation, and job descriptions and evaluations.

Covered contractors and subcontractors will be required to post notices regarding this anti-discrimination requirement "in conspicuous places" or distribute it electronically, and they will have to incorporate the non-discrimination requirement into their existing employee manuals or handbooks. Employers also will have to provide a copy of the notice to each labor union or representative or workers with which they have a collective bargaining agreement.

The non-discrimination requirement will need to be incorporated as a clause in every covered contract entered into by a contracting agency with a contractor. Additionally, federal contractors will have to incorporate the clause into their contracts and purchase orders with subcontractors, unless otherwise exempted by law. Contractors who do not comply with the non-discrimination requirement or who do not include the required clauses in their subcontracts risk having their contracts canceled, terminated or suspended, and the contractor may be declared ineligible for further government contracts.

The Final Rule provides employers with two limited defenses to alleged violations of the non-discrimination requirement. The first is a "general workplace rule defense," where a contractor may show that it disciplined an employee for violating a consistently and uniformly applied company policy that does not prohibit or tend to prohibit discussions about pay. As explained in the Department of Labor's earlier Notice of Proposed Rulemaking (issued on September 17, 2014), this defense would be applicable in a situation where the contractor has a rule prohibiting employees from being disruptive in the workplace, which an employee could violate by standing on her desk and shouting out her pay. The general workplace defense would also apply if an employee repeatedly was to ask other employees on working time unwelcome questions about their compensation after they request that she stop asking them.

The second defense available is an "essential job functions defense." A contractor may raise this defense when it takes an adverse action against an employee who, as part of his or her essential job functions, is entrusted with compensation information (such as human resources professionals, accountants or other high-level employees who have access to pay information as part of their core job duties) but discloses such information to other employees who do not have access to it. However, an exception exists where the disclosure is made in response to a formal charge, complaint, investigation or other legal proceeding, or is consistent with the contractor's legal duty to furnish the information.

What This Means for Employers

Covered contractors and subcontractors should review any policies they have regarding the possible discipline of employees who openly discuss pay, including, but not limited to confidentiality policies and social media policies, to ensure that they do not impose any disciplinary burden on an employee that would conflict with the new regulations. They should also consider training managers, supervisors, recruiters and human resources staff on pay secrecy issues to familiarize them with the changing legal landscape. By way of example, covered contractors previously could have disciplined supervisory and managerial employees not covered by the NLRA for disclosing or discussing compensation information, but the Final Rule now prohibits them from doing so.

Additionally, contractors may want to ensure that they are at least annually reviewing their compensation practices to identify and rectify any potential issues of pay discrimination or pay disparity before they are uncovered by the OFCCP in a compliance evaluation.

Finally, with respect to employees covered by Service Contract Act or Davis-Bacon Act wage determinations, the Final Rule should not have a significant impact because, presumably, the wages and benefits of employment are already known to all covered employees.

If you have any questions about this Alert, please contact any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group, any of the attorneys in the Government Contracts Group or the attorney in the firm with whom you are regularly in contact.

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.

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