Scope of Proposed Rule

As proposed, the new FAR clause would apply to all solicitations and contracts that are principally performed in the United States, regardless of dollar amount. This includes acquisitions at or below the simplified acquisition threshold as well as those for commercial products and services, including commercially available off-the-shelf (“COTS”) items. The proposed rule also must be “flowed down” to subcontractors at all tiers.

The proposed requirements would cover contractor recruitment and hiring actions for all positions that perform work “on or in connection with” a covered contract, defined as “work called for by the contract or work activities necessary to the performance of the contract but not specifically called for by the contract.”

Pay Transparency Requirements

The proposed rule imposes pay transparency requirements for contractor job advertisements involving work “on or in connection with” a government contract. Under the clause, all advertisements for such job openings must disclose the salary or wages (or range) that the contractor believes in good faith it will pay for the advertised position, as well as a “general description” of the job benefits and other compensation types (e.g., bonuses and commissions) offered. If 50% of more of the expected compensation is attributable to commissions, bonuses, and/or overtime pay, the contractor must indicate the dollar amount or percentage of overall compensation (or ranges thereof) for each type of compensation that the contractor believes in good faith it will pay for the advertised position. Job advertisements also may, but are not required to, include the contractor pay scale and the amount budgeted for the advertised position, and the compensation range for employees in similar jobs.

Salary History Ban

The new FAR clause would also prohibit contractors from seeking or using an applicant’s compensation history as part of the hiring process for work “on or in connection with” a government contract, including:

• Seeking an applicant’s compensation history either directly or indirectly;
• Requiring disclosure of compensation history as a condition of an applicant’s candidacy;
• Relying on an applicant’s compensation history as a screening criterion or to determine an applicant’s compensation upon hire, even if an applicant volunteers their salary history without prompting at any stage in the selection process; or
• Retaliating against any applicant for failing to respond to an inquiry regarding an applicant’s compensation history.

The proposed rule defines “compensation history” to mean the compensation an applicant is currently receiving or the compensation the applicant has been paid in a previous job. “Compensation” is broadly defined as any payments made to, or on behalf of, an employee or offered to an applicant as remuneration for employment, 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.

Notice Requirements

The proposed rule would require contractors to notify all covered job applicants of the pay transparency requirements and salary history ban. The notice, which would contain specific language provided in the proposed FAR clause, would be provided as part of the job announcement and/or during the application process. 

Enforcement

The proposed rule prescribes a mechanism for applicants to report contractor violations of these requirements by filing a complaint with the federal agency that issued the solicitation or awarded the contract within 180 days from the date of the alleged violation. The agency must review the complaint, confirm that the complainant is covered under the rule, and take appropriate action, although what constitutes “appropriate” action is unspecified. Complaints alleging discrimination will be forwarded to the Office of Federal Contract Compliance Programs (“OFCCP”) for investigation and appropriate action.

Implications for Government Contractors

If finalized, the Federal government will join a growing cohort of states and localities that have adopted compensation history and pay transparency laws of varying breadth, including, most recently, the District of Columbia. Consistent with the proposed rule, these laws typically ban employer inquiries into prior pay and require disclosing a good faith salary range or wage scale in job advertisements for positions that could be performed within the jurisdiction, however, the state rules are nuanced and differ in which job announcements are covered, and in which information must be disclosed to applicants. For example, some states require that information concerning benefits or other forms of compensation be disclosed in job postings, or require the posting of internal promotion opportunities. The varied scope of these laws makes compliance a challenge for multi-state employers, particularly those with employees working remotely from multiple jurisdictions, and penalties for noncompliance can be significant.

On its surface, the proposed rule seems simple, but compliance for many contractors will be a nuanced affair. For example, contractors subject to current state law pay transparency requirements must consider whether the language included in their current job advertisements covers the information required in the proposed rule, or must be updated. Additionally, the proposed rule also leaves unanswered critical questions about its application. For example, it offers no insight into the process or timeline by which an agency will investigate complaints into a contractor’s employment practices, or what due process rights are available to the contractor. Moreover, while the new requirements encompass work that is “in connection with” a covered contract, the accompanying definition does not impose any sort of de minimis threshold on the scope of job activities, thereby forcing contractors to make difficult calls as to whether certain positions are covered. For example, if an employee who works in the Information Technology department performing work “necessary to the performance” of a contract because the employer needs computers and other electronic resources in order to perform any sort of work?   

The proposed rule’s broad prohibition against seeking an applicant’s compensation history also conflicts with existing federal regulations that require contractors to be informed about incumbent compensation levels. For example, the rule may make it more difficult to comply with Service Contract Act requirements to compensate unionized employees at the same or higher rates earned under the predecessor contract. Additionally, the proposed rule stands at odds with FAR 52.222-46, “Evaluation of Compensation for Professional Employees,” which may require offerors to ascertain incumbent employees’ prior compensation to ensure the realism of their proposed labor rates.

Contractors should also be mindful of the potential bid protest implications that could be triggered by the proposed rule. In particular, the disclosure of salary or wage information in government contract-related job postings could bolster disappointed offerors’ ability to successfully challenge an awardee’s proposed labor rates and compensation levels or the agency’s cost/price realism determinations.

Contractors may submit comments on the proposed rule through April 1, 2024. In the meantime, contractors and subcontractors are encouraged to thoroughly review their hiring and compensation practices to determine whether, and to what extent, compensation history data is collected and used by the organization. Contractors should also begin identifying those positions that may be covered under the rule to determine the potential impact to business operations. 

Hogan Lovells continues to monitor the proposed rule and developments on this front. If you have questions about how the proposed rule will impact your company and how to prepare for it, please contact one of the authors of this alert, or the Hogan Lovells lawyer with whom you work.