United States: Pay Equity: Employers Must Be Vigilant

Last Updated: December 12 2016
Article by Lauri A. Damrell and Jessica R. Perry

The pay-equity movement has gained steady momentum over the past eight years. And even with the anticipated transition in the Oval Office, it is unlikely to slow down.

President Barack Obama made pay equity a cornerstone of his administration. His first piece of signed legislation was the Lilly Ledbetter Fair Pay Act. He signed executive orders designed to close the pay gap for employees of federal contractors subject to oversight by the Office of Federal Contract Compliance Programs. The Equal Employment Opportunity Commission announced it would require employers under its jurisdiction to disclose aggregate pay data in their EEO-1 reports starting in 2018. And the "White House Equal Pay Pledge" challenged businesses nationwide to take action to reduce the pay gap.

Although few observers expect President-elect Donald Trump to prioritize pay equity, employers should not ignore it.

California, Maryland, Massachusetts and New York passed pay legislation heralded as more demanding and employee-friendly than their federal counterparts.

More than a dozen states have pay legislation pending. Shareholder activists have also leveraged their power to demand public disclosure of pay gaps. Pay equity has become not simply a matter of legal compliance, but a growing driver in demonstrating corporate social responsibility.

As a result, employers are now struggling with a patchwork of standards and no uniform definition of "equal pay."

Looking At Overall Pay Gap

Some initiatives, like the White House Pay Pledge and shareholder-activist demands, focus on the overall pay gap and whether women are, on average, paid the same as men.

Companies are asked to confirm "100 percent pay equity," but no one has defined who should be compared or the factors considered in that analysis.

The new EEO-1 report requires companies to compare employees within extraordinarily broad job categories — e.g., "professionals," "administrative support workers" and "craft workers" — without accounting for the many variables that could impact pay within those categories.

Federal and state statutes also have varying tests for identifying proper comparators, including examining those "similarly situated," those whose work is "equal," "substantially equal," "substantially similar when viewed as a composite of skill effort and responsibility," "comparable" or "of a comparable character."

There is some agreement that these standards are not intended to promote the principle of "comparable worth" — i.e., comparing dissimilar jobs that nonetheless require similar skills and responsibility or are of similar value to employers.

Courts and legislators have ­generally rejected the theory that courts, ­rather than markets, should determine the ­proper wage for a job. But how courts will identify proper comparators under the new laws and commonalities between jurisdictions remains an open issue.

The affirmative defenses available to employers under the new laws are also more rigorous.

In California, for example, ­employers relying on a factor other than sex to explain pay disparities must show that the factor is job-related, consistent with business necessity, applied reasonably, and accounts for the entire wage differential.

California prohibits employers from relying exclusively on prior salary to justify pay decisions — a variable that some argue is tainted by historical bias.

Massachusetts has gone one step further to completely ban employers from seeking applicant pay history.

Evaluate Pay Practices

Given these developments, it is more critical than ever for employers to prospectively examine their pay practices. This includes evaluating existing policies and procedures to ensure adequate documentation of compensation philosophy and the factors used in pay decisions, both company-wide and by individual.

These records will be key to defending pay claims, particularly those made contemporaneous to the challenged decisions.

Employers contemplating a public pay-equity disclosure, whether voluntary or due to external pressure, should consider conducting a nationwide analysis to determine if the company has an overall "wage gap." How to do this varies depending upon the legitimate factors that are relevant to each employer in setting compensation.

Although the standards are not very clear now, employers should expect that they will later have to explain how they achieved the end result.

Federal contractors and ­employers subject to EEO-1 disclosure ­requirements should consider an analysis based on establishment to determine what the employer's response will be in the event the Equal Employment Opportunity Commission or Office of Federal Contract Compliance Programs focuses on a particular location based on data submitted through the EEO-1 report.

Given the breadth of the EEO-1 job categories, employers should not make pay adjustments based solely on the results of this general analysis.

If disparities are discovered, employers should dig deeper to determine if they can be explained by nondiscriminatory factors.

California, Maryland, Massachusetts and New York employers should conduct state-based analyses that consider state equal pay law particularities.

Employers should also consider analyses of non-U.S. locations, particularly in the U.K., where certain pay disclosures will be required.

In conducting these analyses, it is important to ensure that the right data is analyzed. A proper analysis involves carefully identifying the proper comparator pools, as well as any legitimate factors that may explain pay disparities.

Legal counsel should direct these analyses to establish appropriate privilege over the analyses and any related communications. Counsel may also engage statistical experts, where appropriate, to address more nuanced issues.

Pay decisions are often highly individualized, and careful evaluation of the results of any analyses is crucial for understanding and mitigating potential risk for future pay claims in this uncharted territory.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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