In our recent article, “Crafting diversity initiatives? Tap legal before moving forward,” we highlighted the fine line companies tread in setting targets for diversity hiring and falling foul of potentially discriminatory methods to achieve those targets.

The issue was highlighted by the actions of the US Department of Labor’s Office of Federal Contract Compliance (OFCCP), which reviews and evaluates the affirmative action program for federal contractors laid down by Executive Order 11246 (EO 11246). It was reported that the OFCCP had sent letters to Microsoft and Wells Fargo stating their actions in pledging to hire more Black executives for senior management positions could, in fact, be discriminatory. The agency indicated that statements made by Microsoft CEO Satya Nadella and Wells Fargo President and CEO Charles Scharf could violate EO 11246.

The Executive Order

So, what does EO 11246 actually say? And how should companies interpret it to stay the right side of the law?

EO 11246 was issued by President Lyndon Johnson on Sept. 24, 1965, in the wake of the Civil Rights Act of 1964. EO 11246 charged the Secretary of Labor with the responsibility of ensuring equal opportunity for minorities in federal contractors’ recruitment, hiring, training and other employment practices. Amended and expanded over the years, EO 11246 today protects approximately one-fifth of the entire US labor force — workers employed by federal contractors— from discrimination. The OFCCP was created in 2009 as a standalone program reporting directly to the Secretary of Labor on the abolition of the Employment Standards Administration.

EO 11246 also required all government agencies to include in every government contract a stipulation that federal contractors not discriminate against any employee or applicant for employment because of race, color, religion, sex, sexual orientation, gender identity, or national origin. Further that the contractor will take affirmative action to ensure that applicants are employed, and that employees are treated during employment, without regard to their race, color, religion, sex, sexual orientation, gender identity, or national origin.

Those required to comply with EO 11246 include every nonconstruction contractor and subcontractor with 50 or more employees. They are required to develop a written Affirmative Action Program for each of their establishments within 120 days from the start of the federal contract, if they:

  • Have a federal contract or subcontract of $50,000 or more;
  • Have government bills of lading which in any 12-month period total, or can reasonably be expected to total, $50,000 or more;
  • Serve as a depository of federal funds in any amount; or
  • Are a financial institution that is an issuing and paying agent for U.S. savings bonds and savings notes in any amount.

In Good Faith

The OFCCP maintains that affirmative action goals established under its regulations are flexible targets, not rigid quotas. Failure to meet such goals should not result in sanctions as this may result in an adverse impact if this is not required by business necessity. Businesses with formal affirmative action programs may find themselves on the receiving end of reverse discrimination lawsuits brought by, for instance, white male employees or applicants who believe they have been passed over in favor of women or minorities.

A federal contractor who shows good faith in trying to improve diversity will not face sanctions but when contractors fail to come up with adequate affirmative action programs on their own, the government may do it for them.

Employment discrimination generally results when a person is treated differently (usually less favorably) because of his or her race, color, religion, sex, sexual orientation, gender identity, or national origin. In addition, employment discrimination can result when a neutral policy or practice has an adverse impact on the members of any race, sex, or ethnic group and the policy or practice is not job related or required by business necessity.

In 1973, American sociologist Nathan Glazer argued against the use of quotas in the Harvard Crimson:

“Why aren’t quotas a good way of overcoming the effects of past discrimination? The main reason is that it would divide the American people — more than they are now — into ethnic-racial-religious compartments, determined by law rather than by any act of voluntary choice, and because benefits and penalties would now attach to those compartments. We would thus have the obscene spectacle of people trying to place themselves into and out of the proper categories to receive benefits and avoid penalties. People would try to advance on the basis of group membership rather than individual capacity. This is the principal argument against quotas.”

The Supreme Court has permitted the use of hiring goals as part of a voluntary affirmative action plan, but the circumstances under which such goals may be used are quite limited: (1) the plan must be designed to eliminate a conspicuous racial imbalance in traditionally segregated job categories; (2) the plan may not impede the interests of the non-minority employees; and (3) the plan is temporary in nature, intended to eliminate a manifest imbalance and not to maintain balance. The Equal Employment Opportunities Commission (EEOC) reiterates these principles in its Compliance Manual as well.

State Mandates

But away from federal law, there are moves at state level to change the diversity of America’s commercial organizations using quotas. California passed a law in 2018 requiring all public companies based in the state to have at least one female director by the end of 2019. At the close of 2021, boards with five directors must have at least two women, and those with six or more have at least three. Failure to comply costs $100,000 the first year and three times as much after that. California’s law is facing legal challenges but in the meantime, companies are taking steps to comply. And on Sept. 30, Gov. Gavin Newsom signed legislation expanding those diversity requirements to include at least one director from underrepresented communities.

Flexibility over rigidity is the key to setting diversity goals and they work best when both aligned to business strategy and when considering facts and relevant data. A useful analogy in a staffing context is comparing quotas and targets with service-level agreements and key performance indicators. Quotas are either a ceiling or a floor for the employment of minorities or women. Placement goals are reasonably attainable objectives or targets that are used to measure progress toward achieving equal employment opportunity.

An affirmative action plan should set out possible means for implementation of the diversity goals. It should lay out methods which the contractor will use to communicate his equal employment opportunity policy to his supervisors and employees, to unions and other recruiting sources, etc. Each contractor should develop audit and reporting systems which will measure the effectiveness of the program against the goals or targets identified as necessary for attainment of the business’ strategy.