On September 11, 2015, the Office of Federal Contract Compliance Programs (OFCCP) issued a final rule that prevents government contractors from having pay secrecy or confidentiality policies. Specifically, the rule prohibits discharging or otherwise discriminating against an employee or applicant because the employee or applicant inquired about, discussed, or disclosed the compensation of the employee or any other employee. But the rule allows contractors to require human resources personnel (who have access to employee compensation information as part of their job responsibilities) to keep such compensation information confidential.
The new rule goes into effect on January 1, 2016, and is estimated to affect about one quarter of the American workforce. (An estimated 22% of the American workforce works for federal government contractors.)
The rule was issued pursuant to President Barack Obama’s Executive Order 13665 issued on April 8, 2014. In news reports, this order has been referred to as a requirement for pay transparency.
Studies show that almost half of private-sector employers have a policy that prevents an employee from revealing his or her compensation amounts to another employee. The same study showed that only about 7% of employers had a “pay openness” policy—that is, a policy that reveals the compensation of all employees to all other employees.
In addition to preventing discrimination and retaliation for employees’ discussing compensation, the new rule also sets out new anti-discrimination language for government contracts, requires government contractors inform their employees of the new policy, and provides for two potential defenses against charges of discrimination under the rule.
In its rationale for the new rule, the OFCCP indicated that pay secrecy policies—
- Prevent underpaid employees (paid less because of their sex or race) from being aware of pay disparities.
- Discourage employees from speaking candidly to OFCCP investigators and auditors when they visit a contractor facility.
- Reduce worker productivity and increase distrust of management.
- Subject government contractors to a greater potential of disruption, delay, and expense that may affect contract performance.
The OFCCP observed that not having a pay secrecy policy is likely to—
- Reduce turnover, preserve institutional memory of an organization, and lower training and onboarding expenses.
- Allow a contractor to save money by not having to investigate baseless claims of compensation discrimination.
- Allow contractors to identify and resolve unwarranted disparities in compensation before an employee files a formal complaint or pursues litigation.
The rule applies to government contractors and their subcontractors if the contractor has a contract over $10,000 in value, has several contracts totaling more than $10,000 in value, holds government bills of lading, serves as a depository of Federal funds, or issues or pays U.S. savings bonds or notes.
Some limited protection of employees who don’t work for government contractors
Section 7 of the National Labor Relations Act (NLRA) protects non-supervisory employees who are covered by the act from employer retaliation when they discuss their wages or working conditions with their colleagues as part of a concerted activity to improve them, even if there is no union or other formal organization involved in the effort. These employee rights are enforced by the National Labor Relations Board (NLRB). Nevertheless, the NLRA does not address all situations where employers prohibit or discourage employees from discussing their pay with their colleagues. Indeed, the failure to address all situations has been part of the rationale for the Paycheck Fairness Act, yet to be passed by Congress.
What does this mean for employers?
Employers who are government contractors need to immediately review the new rule and their policy manuals or employee handbooks. Because a government agency may modify a contract, policies and practices in violation of the new rule may soon have to be changed—and certainly must be changed with any contract issued after December 31, 2015. The change may potentially come as a result of a purchase order or change order issued under a government contract.
Employers who are not government contractors need to carefully review their policy manuals or employee handbooks as well. They may want to seek legal counsel to determine whether there is any risk to having a pay privacy, non-disclosure, or confidentiality policy in their policy manuals or employee handbooks.
Items on this web page are general in nature. They cannot—and should not—replace consultation with a competent legal professional. Nothing on this web page should be considered rendering legal advice.