For years, many federal contractors have criticized the Office of Federal Contract Compliance Programs (OFCCP) for misusing statistical methods to support allegations of discrimination against federal contractors and for general inconsistency in conducting compliance reviews.
On November 10, 2020, OFCCP published in the Federal Register a final rule on procedures to resolve potential employment discrimination.1 This rule purports to address some of these criticisms by adopting standards that are intended to “increase clarity and transparency for federal contractors, establish clear parameters for OFCCP resolution procedures, and enhance the efficient enforcement of equal employment opportunity laws.”2
As discussed below, there are some aspects of the new rule that contractors will welcome. However, these changes are primarily relevant only in those relatively rare situations in which OFCCP is considering findings of discrimination. The criticisms that civil rights groups, federal contractors, and Congress have fairly leveled at OFCCP over the years almost all arise from the agency’s failure to properly train and supervise compliance officers and their first-level supervisors. Adding additional complexity and rigidity to OFCCP’s existing rules does not fix this fundamental problem.3
Moreover, in basing this new rule on what OFCCP describes “as an exercise of its enforcement discretion” and taking positions that OFCCP acknowledges are “neither compelled nor prohibited by Title VII and OFCCP case law,”4 the agency appears to be unnecessarily relinquishing its ability to timely adapt to future changes in the workplace and in the law—changes that are going to require different approaches to enforcement and the use of more sophisticated statistical methods.
The agency’s ambitions have often exceeded what its funding and headcount can bear. As a result, training and support of the compliance officers who are responsible for auditing contractors and enforcing the law has often been insufficient. Furthermore, the agency’s organization into small district offices that report to regional directors results in significant differences in approach from one state or part of the country to another. As a result, in auditing contractors, OFCCP often makes broad, burdensome and unreasonable demands for documents and information that cannot be justified under applicable law and are inconsistent with the agency’s own rules. Similarly, the agency too often purports to find violations or discrimination under circumstances where neither the law nor the facts can reasonably support such a finding.5 OFCCP’s performance issues are discussed at length in the U.S. Government Accountability Office’s (GAO) 2016 and 2019 reports on OFCCP’s performance6 and, in its discussion of this new rule, OFCCP explicitly acknowledges being criticized for lacking “sufficient transparency, clarity, certainty, and timeliness in its dealings with contractors, and criticisms stating that the agency has brought cases without an adequate evidentiary foundation.”7
Under these circumstances, OFCCP’s efforts over the past few years to improve transparency have generally been met with broad approval from contractors.
The New Rule and its Implications
In reviewing contractor employment practices and enforcing the laws that prohibit discrimination by federal contractors, OFCCP generally follows Title VII principles regarding burdens and standards of proof. These principles have been well established through legislation and judicial interpretation and it is not within OFCCP’s authority to alter these principles. When OFCCP chooses to bring an enforcement action against a contractor, these principles, as established by Congress and interpreted by the federal courts, are what will determine the outcome.
Like any prosecutor, however, OFCCP has considerable discretion to decide what standards it will use to determine when to investigate, when to seek enforcement, and when and how it will settle disputes. The new rule relates entirely to OFCCP’s exercise of this discretion.
OFCCP published its Notice of Proposed Rulemaking (NPRM) on this subject in the Federal Register on December 30, 2019. Although the proposed rule and the subjects that it seeks to address are complicated and highly technical, OFCCP allowed only 30 days for public comment on its 11,000-word proposal, rejecting requests for additional time.8
As a result, the final rule is based on a much smaller number of comments than would normally have been expected with regard to proposals of such importance.
A Predetermination Notice (PDN) is a letter that OFCCP uses to inform federal contractors of the agency’s preliminary findings of employment discrimination toward the conclusion of a compliance review and before issuing a Notice of Violation (NOV).
A PDN provides the contractor with a clear understanding of OFCCP’s concerns and gives the contractor an opportunity to address directly those specific concerns by providing additional information. The use of a PDN makes for a more fair and efficient process. By giving contractors notice of its specific concerns, OFCCP is able to ensure that it has a full and complete understanding of the relevant facts before proceeding to conciliation or expensive enforcement proceedings. And by having an opportunity to review OFCCP’s preliminary findings, contractors are able to make an informed assessment of OFCCP’s concerns and either address those concerns or begin the process of correcting any deficiencies.
Although PDNs clearly facilitate the fair and efficient resolution of audit issues, OFCCP had largely abandoned their use during the Obama administration, apparently preferring a strategy of surprise, which often left contractors feeling undue pressure to settle vague allegations of discrimination unsupported by specific facts. In February 2018, OFCCP issued Directive 2018-01 requiring the use of a PDN at the conclusion of every compliance evaluation in which OFCCP believes that the contractor “has not provided adequate explanations to proposed discrimination findings.” The PDN, in the form of a letter from OFCCP to the contractor, provided the contractor an additional 15 calendar days to rebut OFCCP’s proposed findings that sufficient evidence of discrimination exists.9
The new rule codifies the use of PDNs, expands the contractor’s time to respond to 30 calendar days, and makes it clear that the 30-day deadline may be extended for good cause.
These changes will be welcome by federal contractors and should contribute to a more fair and efficient process for resolving concerns of discrimination when they arise.
Notice of Violation
If an employer’s response to the PDN does not persuade OFCCP that its concerns regarding possible discrimination are unfounded, OFCCP may then issue a Notice of Violation. Once a NOV has issued, OFCCP will then seek to conciliate and, if that fails, may pursue enforcement.
The new rule makes it clear that the standards for issuing an NOV are the same as for issuing a PDN and that the NOV must reasonably address all concerns and defenses that were raised by the contractor in response to the PDN.
Again, federal contractors will welcome these changes, which should contribute to a more fair and efficient process for resolving concerns of discrimination when they arise.
Expedited Conciliation Option
The new rule permits a contractor to voluntarily waive its rights to receive and respond to a PDN and NOV and enter directly into a conciliation agreement. Contractors would have welcomed an amendment to the rules encouraging early resolution through means less formal than a conciliation agreement such as letters of commitment, which OFCCP has utilized in the past. However, experience indicates that the expedited conciliation option created by the new rule is not going to be an attractive option for most contractors in most circumstances.
The most significant changes under the new rule relate to the standards OFCCP will use for triggering formal allegations of contractor discrimination.
In its effort to adopt such standards, OFCCP first looks to what it describes as “qualitative” and “quantitative” evidence.
“Qualitative evidence” is defined by the new rule to include
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.10
In other words, qualitative evidence is basically defined as anything other than quantitative evidence.
“Quantitative evidence” is then defined to include
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.
For the most part, we could substantially shorten this definition to simply state that quantitative evidence means evidence involving numbers or mathematical operations.
To this extent, the additional of these definitions to the Code of Federal Regulations is not a significant development. However, there is one component of the definition of quantitative evidence that is critically important—the codification of two standard deviations as a meaningful basis for inferring discrimination. Although a detailed discussion of this issue is outside the scope of this article, the reliance upon two standard deviation disparities by OFCCP is often misplaced based on the type of data that is typically at issue and the applicable legal standards.
Briefly, because of the size of the data sets involved in auditing large contractors and the number of different ways in which OFCCP requires contractors to analyze employment-related data, it would be surprising if we did not see with some regularity disparities in selection rates, for example, in hiring data that exceed three standard deviations.
The courts have been far from uniform in accepting two or even three standard deviations as an appropriate basis for finding discrimination, if unsupported by other evidence. Concerns with reliance upon two standard deviations as the basis for a finding of significance also has been an increasingly important topic in the natural sciences and social sciences.11
For OFCCP to use two or three standard deviations as one of several metrics to use in deciding how to proceed in an audit is not unreasonable. But incorporating this standard into the agency’s regulations seems unwise.
Nevertheless, without minimizing this concern, contractors are going to appreciate the increased transparency that will result from the new rule. Contractors have too often found themselves in the unreasonable position of having to respond to allegations that were purportedly based upon statistical findings which the contractor could not replicate and which OFCCP would not explain. Under the new rule, the OFCCP will now have to explain the basis for its findings and provide the contractor with its statistical model including all variables and explaining why any variables were excluded. These are very encouraging developments.
Disparate Treatment and Disparate Impact
The regulations recognize two distinct theories of discrimination—disparate treatment, a theory of intentional discrimination, and disparate impact, a theory that challenges policies and practices that are fair in form but impact particular demographic groups disproportionately. Quantitative evidence plays a large role in systemic claims of disparate treatment, which are usually couched in terms of “pattern or practice,” and disparate impact, although the evidence in each instance is distinct.
Systemic cases of disparate treatment generally must be supported by qualitative evidence as well as quantitative proof. In other words, it will be the rare case in which statistics alone will suffice to prove a pattern or practice of discrimination. Rather, as the Supreme Court observed, qualitative evidence is necessary to bring statistics “convincingly to life.”12 The new regulations provide an exception when there is an “extraordinarily compelling [statistical] disparity,” but fail to define how large that must be. It is a fair inference that the disparity must at least exceed “two or three standard deviations,” the conventional statistical threshold in discrimination cases.
“Disparate impact” is a very circumscribed theory of discrimination and requires proof of a neutral hurdle or barrier that applicants or employees must overcome to be considered for hiring, promotion, bonuses, etc. This theory first was recognized by the Supreme Court and then incorporated into Title VII. The regulations indicate OFCCP acknowledges it is bound by these authorities.
If OFCCP pursues a disparate impact theory, its initial burden is to identify the specific, facially-neutral practice it alleges caused a disparate impact on a particular group. If this practice is multifaceted, the agency’s burden is to distinguish which facet of the challenged practice, for example, employee interviews, is responsible for the adverse impact. The agency is excused from disentangling these effects only if it proves the hiring criteria are incapable of separation for analysis.
Once OFCCP identifies the specific practice, it then must present quantitative evidence demonstrating that the neutral practice produces an adverse impact. The statistical threshold that applies to this demonstration is the same as applies to systemic discrimination. The employer can defend against this finding by proving that the practice in question is job-related and consistent with business necessity.
The Supreme Court recognized that subjective practices can be the focus of disparate impact claims, as well as systemic claims of discrimination, and the new regulations indicate OFCCP subscribes to that view. For example, a policy delegating discretionary decision-making to managers can be challenged in terms of its disparate impact as well as the claim that these decisions reflect discriminatory animus. If OFCCP successfully proves that subjectivity caused a significant disparity, an employer presumably could defend itself by demonstrating that subjective decision-making is required by considerations that are job-related and consistent with business necessity.
“Practical significance,” as the term is used in the new rule, represents OFCCP’s judgment that disparities may be statistically significant yet nevertheless immaterial from an enforcement perspective. In part, this reflects the recognition that “statistical significance” depends on the number of employees included in the statistical analysis. As a result, large employers may find that disparities of just a percentage point or two are significant in purely statistical terms. The new rule recognizes that in some instances the enforcement efforts required to prove and eliminate this small difference do not merit expending the agency’s scarce resources. If so, the disparity is deemed to be of no practical significance.
Although some courts have viewed “practical significance” as a de minimis exception to liability, the regulations do not adopt that perspective. Rather, they make clear that practical significance refers to enforcement criteria the agency will adopt, which it will have discretion to waive in appropriate circumstances. In matters involving disparities in selection, the regulations reinforce the 80% rule, which derives from Impact Ratio Analysis. When the selection rate of the disfavored group is expressed as a fraction of the selection rate of the favored group, OFCCP will view ratios of .9 or greater as very unlikely to prompt enforcement actions, and those between .8 and .9, if accompanied by additional evidence of nondiscrimination, as unlikely to prompt enforcement.
Pay differences will be assessed in terms of the percentage difference in pay between favored and disfavored groups. In these cases, the corresponding benchmarks are a 1% pay difference being associated with “very unlikely” findings of practical significance, and differences of 2% associated with “unlikely” findings. Once again, employers are reminded these are not safe harbors but merely administrative rules of thumb.
OFCCP’s increased recognition of practical significance is a positive step forward. Again, however, instead of relying on practical significance as an exercise of enforcement discretion, we would have preferred to see OFCCP recognize the inherently limited relevance of a two or three standard deviation standard in situations that involve very large data sets or many different “cuts” of the data.
The new rule brings the agency closer to incorporating the elements of proof and evidentiary standards prescribed by Title VII into its procedures. However, Title VII is exacting in terms of formal statistical requirements and the new regulations therefore are likely to stretch the resources and expertise of both the agency and contractors. The agency’s promise of greater clarity and objectivity, therefore, will likely be found to have been purchased at the cost of greater investigative, compliance, and litigation expenses.
More generally, the new rule offers some appropriate relief to contractors and should help to reduce the burden of a compliance review on contractors and increase OFCCP’s efficiency. However, the new rule does not address the most common problems that arise in dealing with the agency. Those issues will not be fixed through rulemaking, but can only be addressed through better internal training and oversight.