By Susan Schoenfeld, JD, Senior Legal Editor

In September 2015, the Office of Federal Contract Compliance Programs (OFCCP) published a final rule implementing Executive Order (EO) 13665, Non-Retaliation for Disclosure of Compensation Information. The final rule and the EO prohibit federal contractors from discharging or discriminating in any way against employees or applicants who inquire about, discuss, or disclose their own compensation or the compensation of another employee or applicant.

The final rule is scheduled to take effect on January 11, 2016 for all covered federal contracts entered into or modified on or after January 11.

Contractors’ defenses

There are two broad categories that may not be protected under the final rule, and which employers can use to defend against alleged violations of the pay transparency rule.

1. First, the essential job functions defense allows that inquiries, discussions, or disclosures of compensation information that employees obtain through their essential job functions are not protected under the final rule. So for example discussions or disclosures of compensation information by certain benefits or HR personnel may not be protected.
2. Second is the general or workplace rule defense, which allows contractors to defend against alleged violations of the pay transparency rule so long as that defense is not based on a rule or policy that prohibits employees or applicants from discussing or disclosing compensation information. This defense could apply, for example, in situations where a contractor disciplines an employee for a violation of a consistently and uniformly applied workplace rule.

Essential job function defense

What is it? The essential job functions defense is available to contractors when an employee, as part of his or her essential job functions has access to the compensation information of other employees or applicants; and the employee discloses the compensation information to individuals who do not otherwise have access to it. Those communications are not protected under the rule.

So, what is an essential job function? According to the final rule, information is obtained as a part of an employee’s essential job functions if:

• Access to compensation information is necessary to perform that function or another routinely assigned business task, or
• The function or duties of the position include protecting and maintaining the privacy of employee personnel records, including compensation information.

Essential job functions distinguished. Now, the term “essential job functions” sounds familiar, right? In human resources we talk a lot about essential job functions and the Americans with Disabilities Act (ADA).

But, the final rule’s definition of “essential job functions” is different from the ADA in that it emphasizes access to and the use of compensation data, while the ADA focuses on the general duties and uniqueness of a position.

With the essential job function defense, the people the rule most likely envisioned to fall within the defense are your compensation managers, benefits professionals, and HR managers who have access to the sensitive compensation information of others within an organization.

In the example of a human resource manager— he or she has authorized access to compensation information to perform routinely assigned business tasks. A human resource manager also has a duty to protect this type of information from disclosure.

Therefore, if that manager discloses or discusses the compensation information that she obtained through the performance of her job (and with people who otherwise would not have access to that information), her discussion is not protected under the Final Rule.

The FAQs to the final rule also provide an interesting example of a janitor as someone who may have incidental access to confidential compensation information when he or she empties the trash or overhears a confidential discussion regarding compensation, but whose essential job functions does NOT meet the final rule’s standard for an exception or defense.

We know that the janitor’s essential job function is to clean—and that function does not include maintaining the privacy of compensation records. As a result, the janitor would be protected by the final rule and would not fall under the employer’s essential job functions defense.

Exceptions. For employees with essential job functions related to compensation information there are some exceptions in the rule under which those employees may discuss compensation information and may NOT be disciplined or discriminated against.

Under the final rule, the employer’s essential job functions defense does NOT apply when the employee with access to compensation information:

• Discusses his or her own compensation with other employees or
• Discusses pay information in response to a formal complaint or addresses compensation disparities with a management official, or if he or she is using the company’s internal complaint process.

So, even if an employee has access to compensation information as part of her essential job functions, she may disclose or discuss compensation information in response to a formal complaint or charge, investigation, proceeding, hearing, or action.

Finally, employees that have access to compensation information are also protected to the extent that their compensation discussion is based on information received through means other than essential job functions access.

This is the water cooler exception, where an HR manager learns something he or she did not know about compensation while talking with coworkers around the proverbial water cooler. Any discussions the HR manager has on that topic would be protected because the information was not obtained through essential job functions.

General workplace rule defense

The final rule provides a second defense for contractors in the event that compensation inquiries are made while the employee is violating a consistently and uniformly applied workplace rule, so long as that rule doesn’t generally prohibit compensation disclosures.

As an example of the general workplace rule defense, the U.S. Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) provides a scenario where a federal contractor has a policy that employees who exceed their allotted break time by 5 minutes get a verbal warning.

Under the general workplace rule defense, a contractor could issue a verbal warning to an employee or employees who exceed their break time even if they stayed too long on their break because they were discussing compensation.

In order for the defense to apply, the rule must be enforced in a uniform manner, so for example, the fact that the employees were discussing compensation should not impact the severity of the discipline they receive under the employer’s workplace rule.

Although contractors are not permitted to have policies that generally prohibit discussion of compensation, a company may have a policy that is narrowly tailored to prohibit disclosure of specific proprietary business information or trade secrets, or a policy that is otherwise designed to be consistent with federal or state privacy laws. These types of narrowly tailored policies may be permissible under the rule and may be used under the general workplace rule defense.

This article is the second of three articles on the new pay transparency rule for federal contractors. Find the other articles here:

• Part I: Pay transparency: What it is and what it does
• Part III: Pay Transparency Rule: What Else Must Contractors Do?