Don’t Get Snowed in by New DOL Pay Transparency Regulations

Like the roads in our region affected by 2016’s Winter Storm Jonas, the avenue of compliance for federal contractors has just become a little more treacherous. The Department of Labor’s Final Rule affecting federal government contractors’ policies on pay transparency went into effect on January 11, 2016. [1] The Rule, which implements Executive Order 13665, which was signed by President Barack Obama back in April 2014, is the DOL’s effort to promote pay transparency by barring policies of certain federal contractors which previously prevented workers from discussing their wages. Now, covered federal contractors are prohibited from firing or otherwise disciplining employees or job applicants for discussing their pay or the pay of their co-workers.  This new Rule, unlike the National Labor Relations Act, applies to all employees and applicants, including supervisors and managers.[2]

What the Rule prohibits

Employees and applicants of federal contractors now have a protected right to inquire about, discuss or disclose their own compensation or the compensation of other employees. If contractors discipline, harass, demote, terminate, deny employment or otherwise discriminate against employees or applicants for these discussions, then they open themselves up to investigations by the Office of Federal Contract Compliance Programs (“OFCCP”) and penalties. However, the Rule does not impose any requirement on covered contractors  to disclose information to applicants or employees regarding the compensation paid to other employees, even if employees request such information.

It is important to note that the term “compensation” is very broadly defined.  For purposes of this Rule, “compensation” includes any payments made to an employee or offered to an applicant, including but not limited to salary, wages, overtime pay, shift differentials, bonuses, commissions, vacation and holiday pay, allowances, insurance and other benefits, stock options and awards, profit sharing and retirement.

If contractors violate this Rule and dismiss the employee/applicant, then they may be required to reinstate or hire the employee or applicant, and to compensate the individual for back pay, front pay, a pay raise, or some combination of these remedies.  Compensatory and punitive damages are not available in enforcement actions under the Rule.

How to Stay Compliant

1. Update Handbooks & Policies

The Rule requires that affected contractors incorporate the non-discrimination provision into their employee handbooks and disseminate the non-discrimination provision to employees and job applicants.  We recommend that handbooks be revised and updated, and that the non-discrimination provision be posted on the company’s website if individuals can submit an employment application online.

2. Update Subcontracts and Purchase Orders

Covered contractors are responsible to ensure their subcontractors comply.  If your subcontracts and purchase orders include the full language of the EEO clause, instead of incorporating it by reference, contractors will need to update the language in their documents to reflect the new pay transparency rules.

3. Posting the New DOL Notices in the Workplace

Contractors must post the new pay transparency non-discrimination notice in the workplace. Contractors are now governed by three posting requirements under OFCCP regulations. These include posting:

• An “EEOC is the law” poster
• An “EEO is the law” poster supplement
• The new nondiscrimination notice on pay transparency

Each of these posters is available online on the OFCCP website.

Employer Defenses

When facing an audit or investigation, in addition to demonstrating that the decision to discipline the employee was for an unrelated, legitimate reason, the OFCCP recognizes two specific, but limited defenses when defending against claims for violations of the new pay transparency rule. The two defenses are: (a) the “essential job functions” defense which applies in the HR/Finance/Audit/IT personnel and (b)  the “workplace rule” defense, which applies when the employer can show a different reason for the adverse action.

a. The Essential Job Functions Defense

Under the “essential job functions” defense, a contractor can defend against a claim of discrimination by showing that it took adverse action against an employee because the employee (a) had access to the compensation information of other employees or applicants as part of his or her essential job duties and (b) disclosed such information to individuals who did not otherwise have access to it. The term “essential job functions” means the fundamental job duties of the employment position an individual holds. A job function may be considered essential if (i) the access to compensation information is necessary in order to perform that function or another routinely assigned business task; or (ii) the function or duties of the position include protecting and maintaining the privacy of employee personnel records, including compensation information. The DOL has provided an example of how the defense works:

Sam is an information technology professional at a federal contractor and one of his weekly tasks is to ensure that personnel data, including individualized pay data, has not been compromised. While performing a routine security check, Sam notices that his coworker Sally makes $10,000 less a year than Ted, a colleague who does the same job as Sally. The next day, Sam informs Sally of Ted’s pay. In this example, the contractor could defend an adverse action against Sam because he revealed pay information that he discovered performing one of his essential job functions. Access to employees’ compensation data is necessary to perform one of Sam’s routinely assigned tasks. Additionally, Sam’s task involved protecting the privacy of personnel information.

b. The “Workplace Rule” Defense

The “workplace rule” defense allows for a contractor to defend against a discrimination claim by showing that it took adverse action against an employee for violating a consistently and uniformly applied workplace rule that does not prohibit employees or applicants from discussing or disclosing their compensation. That is to say, employers are not liable if they take adverse action against employees or applicants who are discussing pay while they are simultaneously violating another workplace rule. The DOL provided an example of when this defense might apply:

ABC Corporation, Inc. allows employees to take a 20-minute break for every three hours worked. Jennifer and Sally take a 30-minute break during which they discuss their pay. Their manager refuses to pay both Jennifer and Sally for the extra 10 minutes taken during their break, which is the usual penalty for exceeding the allotted 20-minute break time. In this example, the contractor can defend an allegation that it unlawfully penalized Jennifer and Sally for discussing pay by explaining that Jennifer and Sally were penalized for violating the consistently and uniformly applied workplace rule that employees lose pay if they take a break longer than 20 minutes.

Recommendations and Conclusion

Covered federal contractors and subcontractors are strongly encouraged to update their handbooks, policies, practices and guidelines to be sure that they comply with this new Rule.   Policies must not expressly prohibit discussion of compensation, nor  contain language that will be construed as “tending to prohibit” or discourage applicants or employees from discussing compensation.

Additionally, though the Rule does not impose any explicit training requirements, federal contractors and subcontractors should train managers and supervisors on these new rules to ensure they do not take potentially discriminatory actions against applicants or employees who discuss compensation information. In this regard, separate and apart of this new OFCCP Rule, Section 7 of the National Labor Relations Act (“NLRA”)  already protects nonsupervisory employees who engage in concerted activity by discussing compensation issues with co-workers. This NLRA provision applies even in the non-union setting.  Accordingly,  employers who violate this new OFCCP Rule should also expect unfair labor practice charges to be filed if employees are disciplined.

Last, employers must appropriately document the reasons for disciplinary action, especially termination decisions.  Whenever an employee has engaged in some form of “protected activity,” which now includes discussing compensation, in close proximity in time to the decision to discipline, the employee is going to claim retaliation. This puts a premium on making sure the reasons for disciplinary action are understood and documented at the time.

If you have questions about these issues, contact a member of Gentry Locke’s Employment & Labor team.

Footnotes  [1] and [2]:

[1] The final rule is entitled “Government Contractors, Prohibitions Against Pay Secrecy Policies and Actions” and can be found here.

[2]  Compared to Section 7 of the National Labor Relations Act (“NLRA”), which protects the rights of only non-supervisory employees to engage in certain protected concerted activity, this Rule provides broad protections to all employees who discuss their pay, including for both non-supervisory and supervisory-level personnel.