Show Me the Money: Contractors and Subcontractors May Soon Be Subject to Pay Transparency Requirements

Following a January 29, 2024 White House announcement and Fact Sheet, on January 30, 2024, the Federal Acquisition Regulation (FAR) Council issued a Notice of Proposed Rulemaking (Proposed Rule) on salary-history bans and pay transparency for applicants and employees of federal contractors and subcontractors. On the same day, the Office of Federal Contract Compliance Programs (OFCCP) issued some FAQs on the compensation history issue. These actions by the federal government to ban prior salary information and require compensation information in job postings echo the efforts of multiple states and municipal governments that have enacted similar salary history bans and/or compensation disclosure requirements:

New Jersey Enacts Salary History Ban
New York City Restricts Salary History Inquiries to Applicants for Employment
California Salary History Ban Enacted, Effective January 1, 2018
New York State Amends Pay Transparency Law

Contractors should consider how their policies and procedures may be impacted by the Proposed Rule and should be aware of potential bid protest issues that can arise with proposed new pay transparency obligations.

Key provisions of the Proposed Rule would:

• • Prohibit federal contractors and subcontractors from seeking and considering information about job applicants’ compensation history when hiring or setting pay for personnel working “on or in connection with” a government contract or subcontract.
  • Require federal contractors and subcontractors to disclose expected salary ranges in job postings for positions to perform work “on or in connection with” a government contract or subcontract. This disclosure would also have to include “a general description of the benefits and other forms of compensation applicable to the job. Where at least half of the expected compensation for the advertised position is derived from commissions, bonuses, and/or overtime pay, the contractor or subcontractor must specify the percentage of overall compensation or dollar amount, or ranges thereof, for each form of compensation, as applicable, that it in good faith believes will be paid for the advertised position.”
  • Require federal contractors and subcontractors to “provide applicants with notice of these requirements as either part of the job announcement or application process.”

Notably, the phrase “on or in connection with” extends the rule beyond just “direct charge” employees, to include employees whose work is necessary for contract performance but not specifically called for in the contract. Comments on the proposed rule are due on April 1, 2024.

The FAQs issued by the OFCCP on the same day as the Proposed Rule purport to clarify existing protections against discrimination in hiring or pay decisions. The new guidance is aimed at helping federal contractors and current and prospective contractor employees understand when reliance on an individual’s compensation history for hiring or pay decisions may result in unlawful discrimination.

In addition to monitoring the rulemaking process, contractors should be mindful of potential bid protest issues that could arise if the Proposed Rule is finalized in its current form.

• Difficulty in Complying with the Requirement Not to Consider Past Compensation: First, it is unclear how a prohibition on considering job applicants’ compensation history will be squared with requirements for contractors to retain incumbent contractor employees, and for contracting officers to evaluate offerors’ compensation plans for incumbent professional employees on service contracts under FAR 52.222-46, which requires agencies to evaluate an offeror’s understanding of the work and the realism of a price proposal that sets those incumbent employees’ compensation. For example, FAR 52.222-46(b) cautions contractors that “proposals envisioning compensation levels lower than those of predecessor contractors” may be considered to create risk of not retaining personnel, and contractors “are cautioned that lowered compensation for essentially the same professional work may indicate lack of sound management judgment and lack of understanding of the requirement.” The very compliance with new obligations to refrain from considering incumbent employees’ rates of pay may expose contractors competing under procurements to which FAR 52.222-46 applies to the risk that a protest will challenge their compliance with FAR 52.222-46.
• Additional Support for Protest Challenges: Although the new requirements may create difficulties in terms of compliance, they could also provide companies with assistance in pursuing bid protest challenges. Under the new requirements, government contractors will be required to disclose expected salary ranges in job postings. This information may provide information necessary to support challenges to cost realism determinations or professional employee compensation levels. Previously, for initial protest allegations developed without the benefit of a record, protesters have attempted to calculate their competitors’ proposed salary levels based on information such as a contract’s labor hours and total award price. The additional disclosures envisioned by the pay equity provisions may provide companies with additional insight into contractor employees’ compensation levels, thereby leading to more informed—and potentially more successful—protest challenges.

Contractors should consider submitting comments on the Proposed Rule, stay tuned for further developments regarding pay transparency obligations, and consider the impact of this proposed rule on potential protests.