By David A. Copus, Ogletree Deakins (Morristown)

On January 29, 2009, President Barack Obama signed the Lilly Ledbetter Fair Pay Act. The Act will require employers to redouble their efforts to ensure that their pay practices are non-discriminatory and to make certain that they keep the records needed to prove the fairness of their pay decisions.

The new law allows individuals to file charges of alleged pay discrimination under Title VII of the 1964 Civil Rights Act and other federal anti-discrimination laws without regard to the normal 180/300-day statutory charge filing period. By eliminating the normal charge filing period for pay discrimination claims, the statute allows the filing of charges alleging pay discrimination with the issuance of each paycheck tainted by alleged past discrimination. Thus, each new paycheck or post-retirement benefits check serves as a potentially unlawful employment practice for which an employee may timely file a charge, even if the allegedly discriminatory pay decision occurred years, perhaps even decades, before. An employee hired 10 years ago may now challenge her starting pay on the ground that each current pay check is tainted by that 10-year-old discriminatory decision.

The new law overturns the U.S. Supreme Court’s decision in Ledbetter v. Goodyear Tire and Rubber Co., Inc., 550 U.S. 618 (2007), where the Court held by a 5-4 vote that the plaintiff did not file a timely charge within the statutory 180/300-day time limit.

Although the courts will take years to sort out the full ramifications of the Act, the practical implications for employers are beginning to come into focus in at least three areas. Employers will need to examine their record retention policies and review their pay practices. Employers will also need to consider the appropriateness of conducting a statistical self-audit of recent pay decisions. While undertaking all these activities, employers should take steps to maximize the likelihood that they can cloak their efforts with the attorney-client privilege and possibly with the attorney work product doctrine.

Record Retention: Because current and former employees can now challenge pay decisions made in the distant past, employers should consider modifying their record retention policies and should consider retaining records surrounding pay decisions indefinitely.

Any analysis of record retention policies should begin with a review of current legal requirements. With respect to payroll and other related pay records, IRS regulations already require employers to keep those records for at least four years after the tax return period to which the records relate. This four-year payroll record retention period is longer than any record retention requirement in federal employment discrimination laws.

Of course, the IRS rule does not cover many types of employer records that relate to compensation decisions, such as documents justifying a particular starting salary or specific merit pay increases. The panoply of federal employment laws imposes a one-year record retention requirement on such records, however. In addition, OFCCP regulations require larger federal contractors to preserve all employment records for a minimum of two years and impose a one-year retention requirement on smaller contractors (those with fewer than 150 employees).

Many employers retain records far longer than one or two years required by federal regulations. For example, some employers maintain paper employment records for employees as long as they are employed and maintain certain electronic records indefinitely. In light of the Ledbetter Fair Pay Act’s essentially open-ended limitations period, employers should now evaluate the need to extend their recordkeeping policies relating to pay decisions. Employers should evaluate the risk of being without documents needed to defend decisions made in the distant past versus the advantage that prolonged record retention might provide to plaintiffs. Employers should also consider the cost and logistics of extending record retention periods.

There is no single record retention rule that will fit all records or all employers. Unfortunately, employers will need to make highly individualized decisions.

Review of Pay Policies: Employers should also give serious consideration to conducting an immediate self-audit of their written policies relating to pay decisions in three areas: (1) starting pay; (2) promotional pay increases; and (3) merit pay increases.

Professionally developed compensation schemes normally slot every position into some form of a hierarchy, such as pay grades or pay bands. Employers that do not have formal pay grades or bands should especially note the implications of the absence of a formal pay structure. Without established pay grades or bands, managers have wide discretion in setting pay – discretion which may turn out to be a liability in the post-Ledbetter Act era.

Regarding starting pay, most companies have policies that ostensibly limit managers’ discretion in setting starting pay. A Ledbetter Fair Pay self-audit should examine the written policies to assure that proper limits control managers’ discretion on setting starting pay and that safeguards are in place to ensure that the limits are followed. Written policies on starting pay should also provide appropriate guidance to managers on how to set starting pay.

Employers should similarly review their policies regarding promotional pay increases and merit pay increases to ensure that the policies establish decisional guidelines and limits on managers’ decision-making. The policies should also provide for proper monitoring to ensure that managers adhere to established limits.

Statistical Self-Audit: A Ledbetter Fair Pay self-audit should include a statistical analysis of pay decisions, including starting pay, promotional pay increase, and merit pay increase decisions over the last two years to see if any pattern of possible discrimination exists. Although a two-year look back will not reveal potential problems beyond the two years, such an audit is designed to make sure that current policies are not resulting in discrimination. A statistical analysis should also measure the extent to which actual pay decisions reflect adherence to written policies.

It is probably not practical for most employers to go back much beyond two years, not only because of data availability issues but because time is short and resources are limited. Henceforth, however, employers should consider conducting annual statistical analyses of their pay decisions.

Some employers may need outside assistance in statistically analyzing pay decisions, particularly if preliminary analyses reveal possible problem areas that need in-depth exploration.

Before embarking on a statistical analysis, however, employers should commit to taking appropriate remedial action to correct any identified problems. Nothing would be worse than an employer’s failure to correct potential problems that a self-audit uncovers.

Protecting the Self-Audit from Discovery: Employers should make every effort to protect their self-audit from discovery in future litigation or government investigations. However, employers should recognize that their best efforts to protect the self-audit from disclosure may ultimately fail. Nevertheless, if employers take proper care they can certainly maximize the likelihood that they can maintain the confidentiality of the self-audit.

First, employers should take proper steps to protect the self audit under the attorney-client communication privilege. An employer should initiate the self-audit with a privileged and confidential memo from the employer’s chief legal officer to the head of HR directing that certain information and data be gathered on a privileged and confidential basis so as to enable the chief legal officer to advise the company on steps needed to assure compliance with the Ledbetter Fair Pay Act. The attorney-client privilege has a very good chance of prevailing as long as the employer maintains the confidentiality of the audit, marks all documents as privileged and confidential, and limits dissemination of the audit materials to those who have a genuine need to know.

Employers should also at least try to cloak the self-audit with attorney work product protection on the basis of evaluating the potential for claims being filed under the recently passed Ledbetter Act. The work product doctrine is less likely to succeed than the attorney-client communication privilege unless the employer has reason to believe that some specific litigation is imminent. Nevertheless, the initial memorandum from the employer’s chief legal officer to HR should indicate that the chief legal officer needs to evaluate the likelihood of litigation arising from the new Act.

Employers should put no faith in the so-called “self-audit” privilege. Almost all courts that have considered a claim of self-audit privilege have rejected it.

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