1. An Introduction to Pay Equity
What is pay equity?
“Pay equity” is an umbrella term that includes issues related to the fairness of compensation paid by employers to their employees for performing comparable work, without regard to gender or race or other categories protected by law (such as national origin or sexual orientation).
It includes fairness both in terms of base pay and in total compensation, including bonuses, overtime, employee benefits, and opportunities for advancement.
Pay equity does not mean that all employees are paid the same. It is concerned with ensuring those employees performing comparable work are receiving comparable compensation and that any differences in pay can be explained by legitimate job-related factors, such as:
• Skills, Effort, Responsibility, Experience, Education, etc.
• Quality and Quantity of Production
• Location (depending on jurisdiction/locality)
Pay equity is also concerned with rectifying past injustices with respect to unequal pay. Pay equity is influenced by laws, policies, regulations, and internal practices.
2. A Brief History of Pay Equity Laws
In 1938, Congress enacted the Fair Labor Standards Act (FLSA), which ensures workplace protections such as the minimum wage and “time-and-a-half” overtime pay.
In 1945, Congress made history by introducing the Women’s Equal Pay Act. While the law was not enacted, it would have prohibited employers from paying women less than men for work of “comparable quality and quantity.”
In 1963, Congress passed the Equal Pay Act of 1963. It was described at the time of its passage as “the first step towards an adjustment of balance in pay for women.”
The Equal Pay Act requires that men and women be given equal pay for equal work in the same establishment.
Employers have four options they can claim under the Equal Pay Act to justify apparent pay disparities:
• A seniority-based pay system based on an employee’s tenure with an employer
• A merit-based pay system based on employee performance set by criteria established by the employer
• A pay system which measures earnings by quantity or quality of production
• A pay differential based on a factor other than sex (In some states, like California, it is increasingly harder to rely on this defense.)
3. Pay Equity and Congress
Congress has offered proposed changes to the federal Equal Pay Act to help close the gender wage gap, such as the Paycheck Fairness Act. The PFA, if passed, would make several significant changes to current law, including:
• Narrowing the ability of an employer to justify pay disparities based on a factor other than sex as a defense in court
• Strengthening non-retaliation provisions for employees that disclose information about wages in certain circumstances
• Mandating collection of compensation data by the EEOC, disaggregated by sex, race, and national origin
• Prohibiting employers from relying on wage history in the determination of wages
• Adding enhanced penalties for violations
While this legislative initiative is currently on hold, it provides perspective on what pay equity may look like in the U.S. in the future.
4. Pay Equity and the States
Recently, state and local governments have become more assertive in expanding the parameters of the federal Equal Pay Act. As the Paycheck Fairness Act, a federal bill aimed at ameliorating critical shortfalls of the Equal Pay Act, is currently languishing in Congress, some states are leading the pay equity compliance movement toward achieving equal compensation.
Starting in 2017, 35 states and many more local governments have passed or proposed new legislation to push employers towards providing equal pay for all of their workers. Some of these new laws:
- Push equal pay requirements beyond federal law
- Ban the use of salary history to determine future pay for new hires
- Prohibit hiring discrimination against applicants with criminal records
These state and local laws are adding new complexity to complying with equal pay regulations and heighten the potential liability of organizations not providing their workers with equal pay.
New Jersey, California, Massachusetts, New York, Oregon, and Washington are among the states that have passed laws building on the foundation of the federal EPA to encourage equal pay between men, women and other protected classes, such as minorities and people with disabilities, creating a patchwork of regulatory requirements and penalties challenging employers with facilities in multiple states to keep abreast of the latest initiatives.
5. Who Does Pay Equity Affect?
Pay equity affects all working people and their families because it aims to level the playing field in terms of compensation. It is of particular concern to women and members of racial and ethnic groups, and other groups that have historically been victims of wage discrimination.
It affects employers who have to comply with federal, state, and local pay equity regulations. Some of the potential risks for employers associated with disregarding pay equity laws include:
- Regulatory audits and penalties
- Lawsuits (individual and class-action)
- OFCCP enforcement and audits that may lead to lost government contracts
- Compliance challenges as more states and local jurisdictions pass pay equity laws with accompanying penalties for non-compliance
- Employee dissatisfaction, leading to lower productivity and higher turnover
- Adverse effect on talent acquisition and retention
- Poor public relations and brand image
6. Pay Equity Enforcement
The Office of Federal Contract Compliance Programs (OFCCP), a part of the U.S. Department of Labor, is responsible for ensuring that employers that engage in business with the federal government comply with the laws and regulations requiring nondiscrimination, such as Executive Order (EO) 11246. EO 11246 requires various equal employment practices of government contractors with at least $10,000 in government contracts.
These businesses must periodically self-audit their pay practices to address disparities based on race or national origin and gender. If selected for a compliance evaluation by the OFCCP, contractors must provide compensation information to the government.
Part of OFCCP’s oversight mission is to ensure that federal government contractors and subcontractors comply with the legal requirement to take affirmative action and not discriminate on the basis of race, color, sex, sexual orientation, gender identity, religion, national origin, disability, or status as a protected veteran. In addition, contractors and subcontractors are prohibited from discharging or otherwise discriminating against applicants or employees who inquire about, discuss or disclose their compensation or that of others, subject to certain limitations.
OFCCP obligations for employers can include:
- Preparation of Affirmative Action Programs (AAPs)
- Retention, documentation, and analysis of applicant, hire, promotion, termination, and compensation data
- Preservation of all personnel or employment records; time frame depending on size of workforce
- Inclusion of equal employment opportunity statement in job advertisements
- Posting of anti-discrimination and pay transparency notices
- Permitting access to compensation data to OFCCP for the purpose of conducting compliance evaluations and complaint investigations
The U.S. Equal Employment Opportunity Commission (EEOC) is responsible for enforcing federal laws that make it illegal to discriminate against a job applicant or an employee because of the person's race, color, religion, sex (including pregnancy, gender identity, and sexual orientation), national origin, age (40 or older), disability or genetic information. It also is illegal to discriminate against a person because the person complained about discrimination, filed a charge of discrimination, or participated in an employment discrimination investigation or lawsuit.
Most employers with at least 15 employees are covered by EEOC laws (20 employees in age discrimination cases). Most labor unions and employment agencies are also covered.
The agency performs two core functions:
- Collects equal employment data from employers throughout the U.S. via annual EEO-1 Report filings, which collects employment data from employers throughout the U.S.
- Investigates equal employment complaints that are reported to the EEOC by alleging employees.
The EEOC only investigates complaints if employees file a timely complaint, and the EEOC determines that there is merit to the allegations.
Individual states and local governments also have agencies that enforce state and local pay equity laws.
7. Pay Equity Costs
The penalties for violating equal pay regulations can be expensive.
The EEOC secured approximately $505 million and other relief for more than 67,860 victims of workplace discrimination for fiscal year 2018. The OFCCP has obtained more than $143 million in monetary relief for employees and job seekers who were discriminated against between 2008–2018. Both the EEOC and the OFCCP continue to enforce and litigate pay discrimination cases.
Penalties also can add up if violating state and municipal pay equity laws. For instance, in New York City, violations jump from up to $125,000 for unknowingly violating the salary inquiry ban to $250,000 for knowingly continuing to do so. In San Francisco, the city’s “Parity in Pay” ordinance grows from $100 for the first offense to $200 for the second to $500 for every offense thereafter.
Many companies faced with equal pay lawsuits, including Uber, Google and Nike, have found themselves settling these cases for tens of millions of dollars and facing damage to their corporate reputations.
8. Pay Equity Reporting Requirements
There is no current nationwide form to submit to report pay practices. In the U.S., new pay reporting requirements to be provided in the EEO-1 Report have currently been postponed. The OFCCP, under Directive 2018-05, has set guidelines for federal contractors’ audits of pay discriminations.
Individual states are passing aggressive pay equity legislation that far exceed the federal standards of the federal Equal Pay Act.
9. The EEO-1 Report
The EEO-1 Report, formally called the Employer Information Report EEO-1, contains employment data to be categorized by race/ethnicity, gender and job category. It is filed annually by employers with more than 100 employees and federal contractors with more than 50 employees and at least $50,000 in federal contracts. The EEOC shares the information presented in the report with the Office of Federal Contract Compliance Programs (OFCCP).
The EEO-1 Report must be filed by employers by March 31 each year. The deadline for the 2018 report is March 31, 2019. Employment data must be gathered from one pay period in October, November or December of the current report year. For example, EEO-1 Reports filed in 2019 must use data gathered in the fourth quarter of 2018.
10. The Value of Pay Equity Audits
Failure to comply with pay equity laws can have far reaching impacts for your business. It’s important to understand where your organization stands in meeting federal and state equal pay requirements. A Proactive Pay Equity Audit is a way to do that.
Many federal and state regulators are encouraging employers to conduct equal pay audits. The OFFCP has established guidelines for federal contractors to conduct pay equity self-audits and then correct any issues that are found before they lead to violations.
Several states incentivize organizations to conduct self-audits by offering safe harbor protections in the event of an equal pay claim. For instance, in Massachusetts a provision has been codified in state law that encourages organizations to voluntarily conduct a pay equity audit. The law provides that “an employer…who, within the previous 3 years and prior to the commencement of the action, has both completed a self-evaluation of its pay practices in good faith and can demonstrate that reasonable progress has been made towards eliminating wage differentials based on gender for comparable work…shall have an affirmative defense to liability…”
It is important to note, however, that these state safe harbors do not act as defenses to claims brought under federal law, or other non-pay-equity-related state law claims.
11. A Proactive Pay Equity Audit Can Protect Businesses
A Proactive Pay Equity Audit identifies pay differences between employees that cannot be explained due to job-related factors. It is a multi-disciplinary effort that requires extensive domain knowledge expertise in labor law across various jurisdictions, such as econometrics, statistics and statistical modeling, workforce data management, and knowledge of regulatory audit processes by agencies such as the OFCCP and EEOC.
This type of audit not only identifies problems, but also provides actionable solutions. It gives employers an opportunity to ensure fairness in pay and prevent employee issues. It allows the employer to minimize risk by identifying and remediating deficiencies, providing the employer with greater standing to defend against and win claims of discrimination.
The findings from the audit can and should be privileged. The term “privilege” relates to attorney-client communications and attorney work product. The audit itself should be conducted under attorney oversight so that it is privileged and documents from the audit can be protected from discovery in a court of law. The purpose of the privilege is not to hide or cover-up any wrongdoing; rather, it is intended to allow the attorney overseeing the matter to facilitate candid discussions with the client or his or her company about the findings.
12. Who Performs Your Pay Equity Audit Matters
Pay equity has far-reaching impacts on many elements of your workforce, including legal, financial, and human resources.
We recommend consulting with your general counsel, or outside counsel, accountants, and, most importantly, experts in data cleansing and validation.
Data is the fuel of the business engine of the 21st century. It has become the core economic input of business. If fuel contains impurities, the engine will not run smoothly.
At First Capitol, a relentless focus on data quality and data validity are core competencies that distinguish us from our competitors.
First Capitol ensures that our client’s business engines run smoothly by acting as a purity filter for their data.
As the saying goes, garbage in, garbage out (GIGO) — a meaningful review of pay practices depends on the integrity of your organization’s employment data.
Overall, a comprehensive Proactive Pay Equity Audit is the best place to start to understand what your company is doing right, and where it can improve, before regulatory investigations and employee lawsuits require you to provide this information.
Take action to be a leader in the effort to provide equal pay to your workers and reap the rewards of a more enthusiastic workforce, positive PR, and avoiding costly regulatory penalties and litigation.