Before You Decide Pay Raises, Do a Pay Fairness Audit

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Oct 7, 2019

At this time of year, many employers are beginning the performance review process and will soon make decisions about year-end bonuses and raises for next year. With heightened scrutiny applied to compensation decisions, and the advent of new pay equity legislation in several states and local jurisdictions, now is an ideal time to evaluate your pay practices and correct any disparities to minimize potential risk for litigation.

Federal equal pay

The federal Equal Pay Act (EPA) requires that men and women in the same workplace be compensated with equal pay for equal work. This means that employees who perform “substantially equal” work in the same “establishment” on jobs requiring equal skill, effort, and responsibility, and performed under similar working conditions, must be compensated the same. Equality in pay includes all forms of compensation, including base salary or wages, overtime, bonuses, benefits, and any other perks or remuneration. Under federal law, disparities in pay among employees with substantially equal job duties are only legally permissible if based upon a factor other than sex, such as seniority, merit, qualifications, skills, education, or level of responsibility.

 State equal pay laws

Nearly every state has its own law that also prohibits discrimination in wages on the basis of gender. Many state pay equity laws — especially ones passed in recent years — go well beyond the federal EPA and require that pay differentials be justified by bona fide factor(s) other than sex, be job-related to the position in question, and be consistent with business necessity. Certain bellwether states, such as California, Maryland, New Jersey, and Oregon, have expanded their pay equity laws to go beyond gender and extend to other legally protected categories, including race, ethnicity, and religion. For a full listing of requirements in all jurisdictions, see the Fisher Phillips Pay Equity Interactive Map.

 State pay equity statutes provide for far-reaching remedies, including treble damages in states such as New York and New Jersey. As a result, businesses throughout the country are struggling to comply with not just the EPA but also with a morass of state law requirements, each of which carries with it the possibility of significant liability.

 Steps to ensure compliance

 With all of the buzz surrounding pay equity, and with sweeping legislation being enacted from coast to coast, many employers have already begun taking steps to review their compensation practices. Now more than ever, it is critical that you ensure your organization complies with federal and state laws. No matter what stage your organization is in, the end of the year is an ideal time to review and update compensation policies and practices and make adjustments to alleviate potential pay equity concerns.

1. Review compensation process

 Before finalizing year-end compensation decisions, critically examine your compensation policies and practices to ensure that, moving forward, pay inequality does not persist among individuals with substantially equal job duties. Questions to consider include:

  • Are compensation decisions based on objective or subjective criteria?
  • Is there documentation to justify the pay decisions?
  • If pay differentials are based upon performance, do the performance appraisals and documentation substantiate the pay treatment?
  • Are there legitimate factors other than gender (or another protected category, depending on the state) that justify a pay disparity between employees performing substantially similar work?

 Based on your answers to these questions, adjustments should be made before compensation decisions are finalized to ensure that they are based upon objective, well-documented criteria, and that any disparities among employees who perform substantially similar work are due to legitimate reasons identified under applicable federal and state law. In some locations across the country, you are not permitted to justify a wage differential because of salary history; check with your legal counsel if you are unsure whether this standard applies to your organization.

2. Level the playing field

 Whether you conducted a pay audit earlier this year or informally reviewed the compensation paid to your employees, you may have noticed a few “red flags” where compensation for employees performing the same job could not be explained by bona fide factors like experience, education, seniority, or responsibility. Now is the prime time to correct these disparities.

 One strategy to employ could be to award end-of-year bonuses to bridge the gap between disparate compensation for employees who perform substantially similar work. Additionally, this is the time to increase compensation of those disadvantaged to remedy any pay disparities going forward into 2020 and beyond. Through a bonus payment or salary increase, you can take steps to equalize compensation without drawing attention to a potential pay disparity.

3. Ongoing compliance

 While your organization may only make compensation decisions on an annual basis, pay equity is an ongoing compliance issue that requires vigilance. After the end-of-year compensation decisions are made, your company should consider what additional steps it can take to stay ahead of any equal pay issues.

 One of the best ways to determine whether your company has any significant pay disparities is to conduct a privileged pay audit. Through an audit, you will be able to identify potential pay disparities among employees performing comparable work, determine whether there are lawful explanations for those disparities, and take steps to correct disparities as appropriate. An audit also provides an opportunity to identify and correct weaknesses in the organization’s systems to protect against claims of pay disparity going forward. In some locations, you may even be able to avail yourself of a legal safe harbor if you can prove you undertook a valid pay equity audit.

We recommend that any such audit be conducted with advice from an attorney, preferably someone who understands the nuances of pay equity laws, so that it is cloaked with the attorney-client privilege and can remain confidential.

 Organizations may also want to consider any systemic changes that should be made going forward. This would include drafting formal compensation policies and procedures and establishing safeguards to avoid exceptions that could result in unlawful pay differentials. Some companies may want to implement standard pay ranges or guidelines for each position or job classification. Moving forward, decision-makers should be trained on how to make proper pay decisions that comply with organizational policies and the applicable law, the appropriate factors to consider when making pay decisions, how to apply guidelines and exercise discretion properly, and how to document compensation decisions.

 By taking these steps, your organization will be better positioned to make compensation decisions and ensure compliance with federal and state equal pay laws.

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