Proposed Federal Contractor Rule Will Impose Pay Equity and Transparency

States began limiting employers’ right to seek pay history in 2017. Today, more than half of all states have such laws, varying from prohibiting the employer from requesting the information to banning relying on the information, even if volunteered by the applicant. At their core, these laws aim to reduce gender- and race-based pay disparities and promote equal compensation for comparable work.

Similarly, since 2020, states have passed additional laws requiring disclosure of the compensation anticipated for the job position. So far, 11 states (and a few localities) impose this “transparency” requirement, a trend that will continue to spread. The goal of such laws is to promote equal compensation by arming workers with information to better negotiate their compensation.

The FAR proposed rule mirrors these state law trends to ensure pay equity. These amendments will create a standard applicable to federal contractors and their subcontractors that not only bans compensation history inquiries but also requires compensation disclosure in job postings.

Given this trend toward pay transparency, contractors should also consider conducting a pay equity audit in partnership with legal counsel. Such audits assess the distribution of pay among employees performing equal or comparable work to determine if statistically significant disparities exist while controlling for factors that impact pay (e.g., experience, seniority, geography). Those audits provide the opportunity to improve their pay practices through remediation as well as better manage any potential legal risks.

RULE REQUIREMENTS

While proposed as a single rule, this proposal entails two separate components: (i) a prohibition on compensation history inquiries and (ii) a requirement for compensation disclosure.

A. Compensation History Ban

The proposed rule would prohibit contractors from requiring disclosure of compensation history as a condition of an applicant’s candidacy. It would also prohibit retaliation against applicants for failing to respond to an inquiry about compensation history.

Compensation under the proposed rule is defined broadly, expanding beyond just salary and wages to include overtime, shift differentials, bonuses, commissions, vacation and holiday pay, allowances, insurance, other benefits, stock options, profit sharing, and retirement.

Contractors are prohibited from requiring, or even seeking, this information in writing or orally directly from the applicant or retaliating against any applicant for failing to provide this information. Even if the applicant volunteers this information, the proposed rule prohibits the contractor from relying on that information at any stage in the hiring process – including in determining the compensation for the individual if hired.

The proposed rule mandates the inclusion of a specific clause in every job posting, notifying applicants of their rights: “Federal contractors and subcontractors may not inquire about or rely on an applicant’s compensation history to screen an applicant for employment or to determine the applicant’s pay for a position on or in connection with a Federal contract or subcontract, even when the information is offered without prompting.”

B. Compensation Disclosure Mandate

The proposed rule will require contractors to disclose the compensation to be offered in solicitations and advertisements for job openings placed by or on behalf of the contractor for any position to perform work on, or in connection with, the contract.

The rule defines “work on or in connection with” broadly, including any work called for by the contract or work activities necessary to the performance of the contract, even if not specifically called for by the contract itself.

For these designated positions, the contractor must disclose the salary or wages that it, in good faith, believes it will pay for the advertised position. The disclosure must also include a general description of the benefits and other forms of compensation also applicable to the job opportunity.

As with the ban on compensation history, the proposed rule mandates the inclusion of a specific clause in every job posting: “The employer must also disclose the compensation for the position in all advertisements for the job opening.”

Plus, the proposed rule also requires contractors to include contact information for the relevant government agency, directing applicants on how to submit a complaint if the contractor or subcontractor violates any requirements under the proposed rule.

C. Applicability

The rule is intended to apply sweepingly; the new rule will be imposed in all solicitations and contracts, with no exceptions for contracts below the simplified acquisition threshold or for commercial products and services, including commercially available off-the-shelf (COTS) items. Declining to make any exceptions based on contract or workforce size, the proposed rule states that “the benefits of pay equity and transparency requirements in this proposed rule are equally impactful in commercial and noncommercial settings as well as to large or small dollar contracts.”

The requirements of the proposed rule would also apply to all subcontractors, at any tier, “with a principal place of performance within the United States including its outlying areas.”

TAKEAWAYS

• All federal contractors and subcontractors will be prohibited from asking any compensation history information and from using such information, even if volunteered by the applicant.
• Compensation information is broadly defined by the rule. It is far more than just salary and wages, extending to other benefits such as vacation pay, insurance and retirement.
• The proposed rule includes specific language that all federal contractors and subcontractors must include in the job postings for all positions to perform work on, or in connection with, the contract.
• There are no exceptions to the broad application for contracts under the simplified acquisition threshold or for commercial items or services; all federal contractors will be subject to the clause. Plus, contractors will be required to flow down the rule to all subcontractors – again, no exceptions are provided.
• Federal contractors should consider conducting a pay equity audit, together with legal counsel, to properly evaluate their compensation practices, implement appropriate remediation (if needed) and manage potential legal risks.

For federal contractors and subcontractors operating in states that already impose these requirements, the proposed rule will be familiar. For all others, it will create novel challenges. All federal contractors and subcontractors will need to be aware of how the proposed clause defines such bans and disclosures as well as the incredibly broad application of these requirements.