Pay Equity FAQs: Answers to the Questions That Keep You Up at Night

As employers are learning about the many trends and changes that are bringing pay equity issues to the fore, they are asking questions regarding what they can do to protect themselves from potential liability. This article addresses some of the most frequently asked questions regarding pay equity issues.

What laws provide protection against gender-based pay disparities?

There are a number of state and federal laws, plus additional federal regulations, that govern pay equity.

The major federal laws that prohibit pay discrimination in employment are Title VII of the Civil Rights Act of 1964, the Lilly Ledbetter Fair Pay Act of 2009, and the Equal Pay Act of 1963 (EPA). The U.S. Equal Employment Opportunity Commission (EEOC) enforces and administers these laws. In particular, the EEOC has the authority to issue guidance and regulations as well as investigate administrative charges and pursue litigation under Title VII. The EEOC may also investigate administrative charges alleging violations of the EPA, although an EPA claimant need not exhaust his or her administrative remedies prior to filing a lawsuit like a Title VII claimant would.

Certain federal contractors also have pay equity obligations pursuant to regulations and guidance issued by the Office of Federal Contract Compliance Programs (OFCCP), which is a division of the U.S. Department of Labor. The OFCCP enforces these rules by auditing businesses, performing investigations, and pursuing claims against offending companies.

Several states have similarly enacted laws that address pay discrimination in employment. Many of these laws are similar, if not identical, to their federal counterparts. Recently, however, several states, including California, Massachusetts, Maryland, and New York, have passed pay equity legislation that provides broader protections to employees than the existing state and federal laws. Other states are also considering enacting additional pay equity legislation.

How do Title VII and the EPA offer protection against pay disparities?

Title VII prohibits discrimination in compensation based on certain protected characteristics, which include race, color, national origin, gender (including pregnancy), and religion. Under Title VII, an employee claiming discrimination must prove the employer’s intent to discriminate, either through direct or circumstantial evidence.

An employer can defend against a pay discrimination claim under Title VII by establishing that the pay differential is due to a legitimate, nondiscriminatory reason. Once this is established, to prevail on his or her claim, an employee must then show that this legitimate reason was merely a pretext for discrimination.

If the employee proves intentional discrimination, the employee is entitled to recover the difference between what he or she was paid and what he or she should have been paid based on his or her comparators’ compensation. In addition, he or she may recover compensatory damages and punitive damages up to a statutory cap based on the employer’s size.

The EPA prohibits an employer from paying different compensation to employees of opposite sexes who work within the same establishment and perform substantially equal work on jobs, the performance of which requires equal skill, effort, and responsibility and which are performed under similar working conditions. If an employee establishes that he or she was paid less than an opposite sex coworker for performing such equal work, the EPA provides that such differences may be justified by a seniority system, a merit system, a system that measures earnings by quantity or quality of production, or any other factor other than sex. If the employer cannot justify the pay disparity with one of these factors, the employee is entitled to recover the difference between what the employee was paid and what he she should have been paid based on his or her comparator’s compensation. In addition, the employee may recover liquidated damages.

Under both statutes, the prevailing employee may recover his or her reasonable attorneys’ fees and costs.

How does the Lilly Ledbetter Fair Pay Act fit in?

The Lilly Ledbetter Fair Pay Act (LLFPA) amends Title VII and was enacted in 2009. It was enacted in response to a Supreme Court of the United States decision, which held that the statute of limitations for a Title VII pay discrimination claim runs from the date the initial discriminatory decision was made. The LLFPA provides that the statute of limitations runs from each new paycheck affected by a discriminatory action, effectively extending the statute of limitations for pay discrimination claims under Title VII.

Does pay equity just apply to gender, or does it apply to other protected characteristics as well?

As noted above, Title VII’s prohibition against compensation discrimination applies to the other protected characteristics identified in that statute. Arguably, analogous federal laws with similar language prohibiting discrimination on the basis of other protected characteristics, such as the Age Discrimination in Employment Act (protecting employees over age 40 from discrimination) and the Americans with Disabilities Act (protecting qualified employees with disabilities from discrimination) could support pay discrimination claims as well.

In addition, some of the newer state laws and regulations are expanding pay equity protections beyond gender to include other characteristics such as gender identity.

If men were paid less than women in a particular job category, would it qualify as an illegal pay disparity?

It may qualify as an illegal pay disparity if it could not be justified by legitimate factors. The aforementioned pay equity statutes are not limited to pay discrimination against women, but address all pay discrimination based on gender.

How can an employer determine whether it has a pay equity issue?

The primary way for an employer proactively to determine if it has a pay equity concern is to analyze how employees are compensated through a pay audit.

What is a pay audit? What does the process entail?

A pay audit is, essentially, an analysis of the employer’s pay data. In addition, some employers also analyze the decision-making process for compensation decisions.

There is no one-size-fits-all approach to conducting pay equity audits. However, a pay audit typically begins with a fact investigation that provides information about the employer’s workforce and its relevant compensation-related policies and practices. That investigation will help inform the appropriate parameters and factors to be considered in the analysis of the data.

Then the pay data is analyzed to determine whether there are differences in how men and women (or between other protected classes, as appropriate) within identified jobs are compensated, and whether those differences are statistically significant.

If there are particular jobs or areas where the analysis has identified statistically significant disparities, then the pay audit typically focuses on discovering whether there are legitimate factors outside the data set that may justify the pay differences. If such additional factors do not justify the pay differences—or do not justify them entirely—then the employer may need to do further analysis to determine if it has a pay equity problem with respect to those job titles.

Should I conduct my pay audit under the attorney-client privilege?

Conducting an audit under the attorney-client privilege may protect certain aspects of the audit from disclosure. Whether an audit is protected by the attorney-client privilege is a function of the state law defining that privilege. Generally, the attorney-client privilege will protect a communication from disclosure if it is made between privileged persons, in confidence, and for the purpose of obtaining or providing legal assistance for the client. Thus, while typically the data underlying the analysis would not be privileged, the analysis and conclusions drawn as well as the strategy for addressing any concerns would be protected from disclosure.

What types of compensation need to be reviewed in connection with determining if there is a pay equity concern?

Arguably, all aspects of compensation may be considered in determining whether there is a pay equity issue—including bonuses and other incentives.

In many cases, a pay audit will focus on base pay, as commissions, bonuses, and other incentives may either be uniform or tied directly to objective performance indicators that are less likely to be connected to pay discrimination. However, if incentive compensation or other aspects of compensation are tied closely to base pay (for example where an employee receives a lower base salary plus stock options), the audit may need to include those forms of compensation.

Who is a “comparator” for determining if there is a pay equity concern?

Each statute defines the term differently. Under Title VII, a claimant must show that a “similarly situated” employee is compensated more favorably. Under the EPA, a claimant must show that a coworker of the opposite gender in the same establishment who performs a job that requires substantially equal skill, effort, and responsibility under similar working conditions is compensated more favorably. New state pay equity laws have their own definitions of who may qualify as a comparator as well.

What does the term “statistically significant” mean?

Technically, it means 1.96 standard deviations or higher. In the context of pay equity, it means that the information included in the data set does not explain the difference and the difference is not likely to be the result of random chance.

How much of a pay difference will be considered a problem?

There is no set dollar amount that renders a pay difference “problematic.” In theory, any difference that cannot be explained could give rise to a concern.

In reality, whether a pay difference is problematic will correlate to the amount of overall compensation involved and the factors included in the statistical model.

What can an employer do if the pay audit identifies pay disparities that cannot be explained?

If the pay audit has exhausted all options for including legitimate, relevant factors in the analysis and there is still a pay disparity that cannot be explained, the employer would be wise to take steps to correct it.

An employer cannot correct a pay disparity by reducing the pay of the comparators who are more highly paid. The EPA and some state statutes expressly prohibit this step as a corrective measure. Thus, the primary way to correct a pay disparity is to increase the pay of those individuals who are underpaid.

Other solutions that are tied more directly to the employer’s business model may exist. For example, perhaps it would be appropriate to create a new job title or classification that accounts for certain aspects of the job that warrant a pay difference. However, employers need to proceed with caution in implementing these kinds of changes, as they need to be legitimate changes that are tied to relevant business factors and not merely an effort to disguise pay discrimination.

What steps can an employer take to make sure that it does not have pay disparities in the future?

A conscientious employer may take a critical look at its existing policies and procedures with respect to compensation to identify deficiencies that may be causing pay disparities. Then, the employer can implement modifications to those policies and procedures to prevent pay disparities in the future.

For example, if an employer has salary guidelines but decision-makers are not following them (i.e., they are paying some employees below the minimum and/or others above the maximum), there may be an opportunity to make a modification. In this case, the employer may consider issuing guidance regarding utilization of the salary guidelines along with implementing a process that ensures salaries are set within those guidelines (e.g., an additional layer of approval or a human resources information system kick back of any salaries that fall outside the guidelines). In addition, the employer may consider whether the guidelines need updating or whether it needs to conduct further training for its managers.

What should I do if an employee complains about pay equity?

If an employer receives an internal complaint regarding an alleged pay inequity, it would be appropriate to promptly investigate the allegation, just as the employer would investigate any other internal complaint. Oftentimes, internal complaints of pay equity are grounded in rumors and suppositions about what another employee makes. Alternatively, if the claim can be substantiated after review, the employer will have the opportunity to promptly correct the issue with the employee and, hopefully, the possibility of a future claim. Complaining or inquiring about compensation practices is a protected activity, so an employer must not retaliate against an employee who does so.