May 2013

The New Rules for OFCCP Onsite Audits:
How Much “Cause” is “Probable” Enough?

I think many readers are going to be very surprised by this column because OFCCP has recently completed a very BIG change to its audit procedures, but did not tell anyone. No News Release. No Federal Register Notice. No Webinar. Not even a “podium policy” announcement. And yet, the change was monumental, in my judgment, and is only the fourth such change in OFCCP’s nearly 50 year audit history. And, it changes the way EVERY contractor defends onsite audits (as rare as those will be in coming years due to related changes to OFCCP’s recently unveiled new audit strategies). More importantly, the recent BIG change to OFCCP’s audit procedures now changes dramatically the circumstances and proof OFCCP District Offices now need to pony up before they may lawfully come onsite to inspect contractor establishments. This change also now changes and truncates, dramatically, the range of issues/documents OFCCP may review onsite…IF the contractor chooses to and knows how to challenge, demand proof, and “push back”, where appropriate.

Many people remember where they were when President Kennedy was shot or when the planes crashed into the World Trade Center Towers. But do you remember where you were on February 28, 2013 when the BIG change happened at OFCCP…just three short months ago? I remember February 28 like it was yesterday…but only because of the BIG change at OFCCP. February 28, 2013. Remember that date. What happened as to OFCCP on February 28, 2013?

OFCCP issued Directive 307 (“Procedures for Reviewing Contractor Compensation Systems and Practices”) on February 28, 2013 amid a BIG “Puffer Fish” media blast designed to make it appear that OFCCP was going to enlarge its investigatory footprint in hot pursuit of federal contractors and their compensation systems. (I call it “Puffer Fish publicity” because, like Puffer Fish, the OFCCP-generated media was intended to momentarily swell the public’s sense of OFCCP’s importance to pay issues and to make the OFCCP appear larger in the space than it really was). But, the news around Directive 307 emphasized many different policy points (all old news – for years and most for decades), but did NOT even identify, let alone emphasize, the one sentence which contained the only thing new in the Directive. Here’s the sentence:

  • “If at any point during the process of reviewing data and information, the CO determines either that there is evidence of potential compensation discrimination, or that more data or information is needed to make that determination, OFCCP may (emphasis added) proceed to an onsite investigation.” 7 (see footnote 7, below)
  • Footnote 7 “This includes a situation where the compensation information provided at the desk audit does not include individual employee-level data and/or the data is (sic) not complete, accurate, readable or useable for analysis.” Directive 307 at p. 7.

Through the simple use of the word “may” (“…OFCCP may proceed to an onsite investigation”), this seemingly simple and innocuous sentence heralded the end of OFCCP’s third phase of audit protocols since OFCCP (and its predecessor agencies) first began to audit federal contractors in the late 1960s. And, here is the importance of the sentence: As a result of the sentence, OFCCP no longer has to create (and, in fact, is not doing so) a “neutral administrative plan” to select contractors for audit. (Indeed, the 30 year era of “routine, random audits” is over.) In the “old days” before February 28, 2013, there were times (from October 1972 to October 1996 and from June 4, 2010 to February 28, 2013) during which OFCCP was legally mandated to have a “neutral administrative plan” to select contractors for audit since OFCCP audits in those time periods called for onsite audits 100% of the time.

LEGAL NOTE: Pursuant to the United States Supreme Court’s Barlow’s 1978 case decision, the Fourth Amendment to the United States Constitution requires federal civil agencies, like OFCCP, to have “probable cause” to obtain a warrant before they may come onsite to inspect a business. But let’s stop right there for a moment. What is the “probable cause” which is required? Here is how the Barlow’s decision described a civil agency’s standard of proof in very general terms:

  • “Probable cause in the criminal law sense is not required. For purposes of an administrative search such as this [a proposed OSHA onsite investigation], probable cause justifying the issuance of a warrant may be based not only on specific evidence of an existing violation, [Footnote 16 omitted] but also on a showing that ‘reasonable legislative or administrative standards for conducting an . . . inspection are satisfied with respect to a particular [establishment]’.”

So, to conduct an onsite audit, OFCCP must prove either that:

  1. it has “specific evidence of an existing violation” and/or
  2. that it has a “reasonable administrative standard”.

Previously, when OFCCP came onsite in every audit, the agency had a “reasonable administrative standard” which the agency used to select contractors for audit and thus permitted OFCCP to later come onsite following its Desk Audit of the contractor. I helped create the first such “neutral administrative plan” in 1982 with Robert Gerlerter and his OFCCP Policy Division Branch. I named that neutral audit selection system EEDS: the Equal Employment Data System. (The Bush Administration 25 years later changed the name to FCSS – The Federal Contractor Selection System, the name it now bears.) While the Obama Administration has changed the audit selection system entirely in recent years, that first contractor audit selection system relied on contractor EE0-1 filings and selection algorithms which compared the percentages of minorities and women each similarly situated contractor employed.

EEDS was legally necessary because OFCCP’s regulations stated explicitly (from 1972 until 1996) that OFCCP audits (100 times out of 100) had to go through all three component parts of an OFCCP audit (Desk Audit; Onsite; Off-site). Shirley Wilshire, in the second Clinton Administration, interrupted that first phase of OFCCP’s audit architecture by issuing new regulations in 1996 which eliminated OFCCP’s regulatory language which had obligated OFCCP to always go onsite in every audit. That second phase of OFCCP’s audit architecture existed and lasted from October 1996 until June 4, 2010 when OFCCP issued “secret” Directive 289.

Among many other things, “secret” Directive 289 (which OFCCP has never released to the public) required OFCCP COs (“Compliance Officers”) to go onsite (100 times out of 100) when contractors failed or refused to provide OFCCP certain compensation data that OFCCP directed the COs to gather from federal contractors in virtually every case (that is, in every case in which the contractor’s response to OFCCP’s (legally authorized) Desk Audit request for compensation data (the so-called “Paragraph 11 (to the “Itemized Listing” of documents OFCCP attaches to every Supply and Service audit Scheduling Letter) compensation data request) showed a difference of either $2,000 or 2% between protected groups (i.e. Men vs. Women; Minorities vs. Non-Minorities, etc.)).

Virtually every contractor’s Paragraph 11 compensation data submission to OFCCP failed OFCCP’s $2,000 or 2% differential test. Directive 289 then instructed OFCCP’s COs to then follow-up, during the Desk Audit, and demand from the contractor what Directive 289 called “Supplemental Data Requests” (i.e. document requests for additional compensation data to contractors in the form of OFCCP e-mails, phone calls or letters demanding, typically, the contractor supply 14 factors of compensation data to OFCCP. However, what converted that Desk Audit procedure into an onsite audit was both the fact that:

  1. Pursuant to the Paperwork Reduction Act, OFCCP had no legal authority to make demand of contractors more than 9 times, seeking the same kind of additional compensation information (like the standardized 14 factors of compensation information Directive 289 instructed OFCCP COs to routinely collect); and
  2. Secret OFCCP Directive 289 instructed the CO to go onsite (100 times out of 100) to gather the requested compensation data if the contractor stood on its legal rights and refused to tender the compensation data during the Desk Audit.

So, the upshot was that secret Directive 289 converted Shirley Wilshire’s 1996 to June 4, 2010 audit architecture (which lacked a mandatory onsite component) into a mandatory onsite audit program. Phase III of OFCCP’s changing audit architecture thus silently began on June 4, 2010.

With publication of the February 28, 2013 Directive 307 (which silently reversed, without reference, Directive 289’s instruction that CO’s “must” go onsite if compensation data is not forthcoming), OFCCP now first conducts a Desk Audit, and then makes a subsequent discretionary decision whether to undertake an onsite audit. But, that onsite decision now needs legal justification…just like it did until 1996. Specifically, OFCCP must, of course, have “probable cause” before it may come onsite.

So, let’s review:

  1. Has OFCCP developed a “reasonable administrative standard” before it comes onsite. No. OFCCP has developed no such system.
  2. Following the Desk Audit, does OFCCP have “specific evidence of an existing violation”? Maybe, maybe not. That all depends on the audit, what information and documents OFCCP obtains during the Desk Audit, and what that information and those documents reveal. What is clear, though, is that OFCCP may NOT simply assume, as it was able to do before February 28, 2013, that it may automatically march onsite and begin inspecting whatever it wants.
BATTING PRACTICE

Example 1: Failure to Hire

Let’s assume:

  • OFCCP wants to come onsite to interview because it observes “significant hiring disparities” during the Desk Audit.
  • Does OFCCP have a right to come onsite?
    • Yes, but what if the contractor has “disposition codes” articulating a legitimate non-discriminatory reason for each and every rejected applicant? In that case, not so fast OFCCP, since where is the “probable cause”?
    • But, what if the contractor has inconsistencies in its disposition codes for hires? (i.e. the Applicant coded “not interested” appears, in fact, on the contractor’s Hires Log which the contractor gave to OFCCP during the Desk Audit?)

Example 2: Compensation

  • OFCCP wants to come onsite to interview because it observes, during the Desk Audit, a “pattern” of compensation underpayments to women.
  • Does OFCCP have a right to come onsite?
    • Probably so.
    • What if the contractor, however, had delivered to OFCCP (either voluntarily or in response to an OFCCP request, in response to the Notice of Desk Audit, reasons why several female employee “outliers” severely depressed the average pay for women, and – as properly explained and adjusted – there is no pay disparity based on gender?

Example 3: Affirmative Action Requirements, Generally

  • OFCCP wants to come onsite to interview because it observes, during the Desk Audit, “significant hiring disparities” (let’s assume there are such disparities) and once onsite, OFCCP wants to ALSO see FMLA forms, all disability accommodation requests and denials, and all EEO posters on display.
  • Does OFCCP have a right to come onsite?
    • Yes.

  • If so, does OFCCP have a legal right to review the FMLA forms, all disability accommodation requests and denials, and all EEO posters on display?
    • No. Not so fast OFCCP. What do you have probable cause to do? (Investigate “significant hiring disparities”.) Does OFCCP have “probable cause” to come onsite to investigate reasonable accommodation request denials? No.

CONCLUSIONS and TAKEAWAYS

Contractors are now going to have to consider carefully whether OFCCP has “probable cause” to come onsite, not only because OFCCP’s changed audit procedures now require OFCCP to demonstrate “probable cause” at point of its election to come onsite, but also because OFCCP, these days, almost always reserves the use of onsite audits for audits in which it has preliminarily determined that unlawful employment discrimination has occurred. An onsite visit from OFCCP, as rare as onsite audits are these days, is not a social visit to have tea.

NOTE to ponder: What limits OFCCP, if anything, from sitting at Desk Audit and sending to contractors a never-ending barrage of e-mail and letter requests (“streaming SDR’s–Supplemental Data Requests”) for documents and information? We will discuss these issues much more at the NELI Affirmative Action Briefings in October.

Be careful out there.

Thanks…John

THIS COLUMN IS MEANT TO ASSIST IN A GENERAL UNDERSTANDING OF THE CURRENT LAW AND PRACTICE RELATING TO OFCCP. IT IS NOT TO BE REGARDED AS LEGAL ADVICE. COMPANIES OR INDIVIDUALS WITH PARTICULAR QUESTIONS SHOULD SEEK ADVICE OF COUNSEL.