Conducting Pay Equity Audits
 

Conducting Pay Equity Audits

Posted on 04-18-2018

By: Jeffrey M. Landes and Ann Knuckles Mahoney, Epstein Becker & Green, P.C.

This article provides advice and guidance to employers regarding how to ensure compliance with equal pay laws, particularly the Equal Pay Act of 1963 (EPA).

ALTHOUGH THE EPA HAS BEEN IN EFFECT FOR 50 YEARS, it gained renewed momentum with the Obama administration’s creation of the National Equal Pay Enforcement Task Force, composed of members of the Equal Employment Opportunity Commission (EEOC), the Department of Justice, the Office of Personnel Management, and the Department of Labor. The task force has aggressively pursued employers who have violated the EPA’s requirements and has collected significant amounts of money for victims of sex-based wage discrimination. While it remains to be seen what efforts the current White House administration takes concerning equal pay, the momentum has continued with state equal pay legislation. Several states have amended their equal pay laws to broaden their scope beyond what the EPA requires.

Virtually all employers must comply with the EPA and many, depending on their size and the state in which they are located, must also comply with other federal and state laws regarding equal pay. To limit exposure for equal pay violations, employers should adopt policies and procedures that satisfy the EPA and other federal and state requirements and help them meet their equal pay obligations and/or existing audit requirements.

Understanding the EPA

The EPA amends the Fair Labor Standards Act and generally requires employers to pay equal wages to men and women who perform work requiring substantially equal skill, effort, and responsibility, under similar working conditions (i.e., physical surroundings and hazards) within the same establishment.

Substantially equal does not mean identical. In evaluating whether two positions are substantially equal, you should disregard minor or insubstantial differences in work and should look to the overall job content rather than job title. Thus, employees who spend significant amounts of time on different tasks do not perform substantially equal work, while employees who spend a little time on different incidental tasks do. Additionally, wages is not limited to an employee’s regular rate of pay; it also includes overtime pay, bonuses, stock options, life insurance, vacation, holiday pay, and any other similar payments and benefits.

Employers nonetheless retain their right to pay employees differently as long as the reason is not sex-based and does not violate other anti-discrimination laws. Thus, pay differentials are permitted when based on seniority, merit, quantity or quality of production, or another factor other than sex. When an employer must correct a wage difference, the EPA requires the employer to increase the wage of the lower-paid employee. In other words, an employer may not reduce the wages of the higher-paid employee(s) to equalize pay.

The EPA applies to non-exempt employees as well as exempt administrative, executive, professional, and outside sales employees; however, it does not apply to other exempt employees (e.g., computer professionals).

EEOC Guidance

In 2016, the EEOC published a new fact sheet1 that highlights the agency’s interpretation of the EPA. As noted, the EPA prohibits employers from paying unequal wages to men and women who perform jobs that require substantially equal skill, effort, and responsibility under similar working conditions in the same establishment. The EEOC’s fact sheet summarizes its interpretation of each of these factors:

  • Skill. Skill is measured by factors such as an employee’s experience, education, ability, and training to perform a job. It is important to distinguish between the skills required for the specific job and the skills of the employee in general. An employee may have skills in a certain area, but if those skills are not relevant to the job (e.g., a graduate degree in an unrelated field), they should not be considered in the employer’s analysis.
  • Effort. The amount of physical or mental exertion needed to perform a job.
  • Responsibility. The degree of accountability required in performing a job. Note, however, that minor differences in responsibility will not justify a pay differential (e.g., turning off the lights at the end of the work day).
  • Working conditions. Working conditions refer to both (1) physical surroundings (e.g., temperature, fumes, and ventilation) and (2) hazards.
  • Establishment. An establishment is a distinct physical place of business rather than an entire business consisting of several places of business. However, in some circumstances, physically separate places of business may be treated as one establishment (e.g., if a central administrative unit hires employees, determines their compensation, and assigns them to separate work locations, the separate work sites can be considered part of one establishment).

Understanding Other Equal Pay Laws

In addition to the EPA, an employer’s pay practices must also comply with other federal and state laws, some of which are discussed briefly below. Although this article primarily focuses on EPA compliance, you should evaluate the employer’s pay practices under all applicable laws and recommend corrective action that minimizes the employer’s full range of liability.

Federal Laws

In addition to the EPA, sex-based wage discrimination is also illegal under Title VII of the Civil Rights Act of 1964 (Title VII); thus, employees with EPA claims may also have Title VII claims. Title VII also prohibits wage discrimination based on race, color, religion, and national origin. Additionally, the Age Discrimination in Employment Act of 1967 (ADEA) and the Americans with Disabilities Act of 1990 (ADA) prohibit wage discrimination based on age and disability. Only employers with the requisite number of employees must comply with Title VII, the ADEA, and the ADA (i.e., 15 employees for Title VII and the ADA; 20 for the ADEA).

Federal Regulations and Guidance

In 2016, as part of the government’s renewed focus on the issue of equal pay, the Office of Federal Contract Compliance Programs (OFCCP) issued updated guidance on sex discrimination. The EEOC also put forth an equal pay data rule, which the Office of Management and Budget (OMB) later indefinitely stayed. The OFCCP guidance and the stayed EEOC equal pay data rule are addressed below.

OFCCP Guidance

The OFCCP rule updates its prior guidance on sex discrimination, which had last been updated in 1970, to bring it up to date with current law.2 The rule also specifically:

  • Prohibits sex-based wage discrimination and promotes fair pay practices (such as not denying opportunities for overtime work, training, higher pay, or higher-paying positions based on a person’s sex)
  • Allows employees to recover lost wages any time a federal contractor pays compensation that is the result of discrimination and not just when the decision to discriminate is made
  • Prohibits discrimination on the basis of sex as to fringe benefits, such as medical insurance, life insurance, and retirement benefits, as well as profit-sharing, bonuses, and leave
  • Requires federal contractors to give men and women equal access to jobs and workforce development opportunities unless they can meet the high bar of demonstrating that such requirements are a bona fide occupational qualification

The EEOC’s Equal Pay Data Rule (Indefinitely Stayed by the OMB

The EEOC’s equal pay data rule would have required employers with 100 or more employees to submit pay data by sex, race, and ethnicity on their EEO-1 Reports. Specifically, under the rule, employers were scheduled to provide:

  • Summary pay data. Employers were scheduled to provide aggregate data on pay ranges. Specifically, employers were to count the number of employees they had in each of 12 EEO- 1 pay bands for each of 10 job categories. After tallying the total number of employees in each pay band by job category, employers would then enter this information in the report based on the sex and ethnicity or race of the employees. For example, an employer could report that it had 11 employees who are white women in the Professionals job category in pay band 7.
  • Aggregate hours worked data. Employers were also scheduled to submit the aggregate hours worked by tallying the total number of hours worked by all of the employees in each pay band.

On August 29, 2017, the OMB stayed the EEOC’s equal pay data rule. The pay data and hours worked information was initially due on March 31, 2018; now it is uncertain if the OMB will reinstate these reporting requirements.

While the equal pay data rule requirements were meant to help employers evaluate their own business practices and prevent pay discrimination, they were also aimed at helping the EEOC and other enforcement agencies identify and investigate pay discrimination. Therefore, if the OMB lifts the stay on these reporting requirements, it is very likely that the risk of potential equal pay claims for employers will increase, making it more important than ever that employers monitor and, if necessary, correct their pay practices to prevent any such claims.

State Laws

Many states have equal pay laws that may govern an employer’s pay practices, and those states have begun to renew their focus on pay discrimination. While some states’ equal pay laws closely mirror the EPA, several states, including California, Delaware, Maryland, Massachusetts, New York, and Oregon, have amended their equal pay laws to broaden their scope, while other states have similar legislation pending. As a result of the states’ increased attention to equal pay matters, it is essential that you keep abreast of any developments in your clients’ state(s) to ensure that they make all necessary changes to their pay policies and audit procedures to avoid potential liability. Several of the most significant recent developments in states’ equal pay laws are briefly summarized below.

Bona fide factor. Most of the equal pay amendments modify the EPA’s exception that permits employers to pay employees unequally if the differential is based on any factor other than sex. The amendments generally state that such pay differentials must be based on a bona fide factor other than sex (i.e., a factor that is jobrelated with respect to the particular position and consistent with business necessity, such as education, training, or experience). This updated standard makes it easier for an employee to allege a prima facie case of wage disparity. Also, unlike under the EPA’s standard, it allows employees to claim that a neutral factor produced a wage differential that disparately impacts employees based on their sex and that the employer did not adopt an alternative business practice that would serve the same purpose without resulting in the wage differential.

Comparable and substantially similar work. Some states have also expanded equal pay protections beyond what the EPA provides by requiring equal pay not only for substantially equal work, but also for comparable or substantially similar work. For example, California requires equal pay for employees who perform substantially similar work and Massachusetts requires equal pay for employees who perform comparable work.

Expanded protections. Some states have begun to expand equal pay laws beyond pay equality based on sex. For example, California has expanded its law to protect race- and ethnicity-based pay differentials.

Geographical scope. The state equal pay amendments vary as to the reach of the protections. California and New York, for example, have eliminated the requirement that an employee show that he or she was not being paid at the same rate as an employee of the opposite sex at the same establishment for equal work. Instead, employees need only show that they are not being paid at the same rate for substantially similar work and working conditions (California) or for equal work and similar working conditions (New York). In other words, the comparison need not be between employees working at the same location. However, California’s law provides no geographic restriction whatsoever, whereas in New York, employees can only compare themselves to others in the same geographic region, which can be no larger than the same county.

Pay transparency provisions. In addition to expanding the scope and coverage of existing equal pay laws, several states have also amended their equal pay laws to include pay transparency provisions. These provisions prohibit employers from restricting employees’ ability to discuss their wages with coworkers. There are exceptions to this rule in some states. For example, in New York there may be limitations imposed on the ability of certain employees with access to employee wage information (such as human resources staff) to disclose employee wage information.

Salary history information. Another type of equal pay law that has been gaining momentum is those that prohibit employers from inquiring about an applicant’s salary history. These laws are meant to ensure that any past wage discrimination is not perpetuating so that employees do not continue to be underpaid as their careers progress. Massachusetts was the first state to bar employers from forcing prospective employees to divulge how much they were making at their previous jobs. Several other states including California, Delaware, Maine, and Oregon have also passed similar laws, as well as several cities including New York City, San Francisco, and Philadelphia (although Philadelphia has stayed enforcement of its law until a lawsuit about its constitutionality is resolved).

Steps for Auditing the Employer’s Equal Pay Practices

This section provides step-by-step guidance to help you audit an employer’s equal pay practices to ensure they are in compliance with the EPA. You should modify these steps, as necessary, to ensure compliance with any applicable state laws as well.

Step 1: Identify the Audit Scope

Before beginning the audit, you should develop an understanding with the employer of what departments, positions, and locations the audit will address. You should also lay the groundwork for protecting the audit from disclosure.

  • Establish parameters of the audit. Meet with the employer to determine the parameters of the audit. Determine whether any state or local equal pay laws apply and which protected categories the employer will analyze. If a company-wide audit is cost-prohibitive or not otherwise possible, consider audits that target specific high-risk facilities, departments, or positions; more limited audits are less costly and time consuming and often more palatable for employers. While targeted audits are effective, they have shortcomings that you should discuss with the employer before a decision is made. Although the scope of the audit should be set at the very outset, you should continue to assess whether it makes sense to enlarge the scope based on information revealed during the audit.
  • Take steps to preserve the attorney-client privilege and work product. Use an engagement letter (for outside counsel) or memorandum (for in-house counsel) to establish that the scope of the audit includes providing legal advice and/or assistance in defending against anticipated litigation.

Any assessment of an organization’s pay system should include an evaluation of the pay rates of all employees. When determining which employees to compare, you must ensure that the employees at issue perform equal, substantially similar, or comparable work. This typically requires substantially similar skill, effort, and responsibility, and the performance of those responsibilities under similar working conditions. You must compare pay rates by using one uniform period of time, most likely the actual or projected yearly wage, as employees tend to care most about their yearly income. Unless the pay system and/or the factors considered in determining rate of pay are complex, you need not use a compensation expert or consultant to evaluate an employer’s pay system.

Step 2: Conduct the Audit

In assisting an employer to ensure that its pay systems do not raise any equal pay issues, you should consider its performance evaluation system, compensation system, job descriptions, training programs, and other factors that influence the employer’s pay rates. You must identify the various factors the employer considers in deciding how and what to pay its employees, such as length of service, years of experience in the industry, education, and geography, and you should assess whether sex, or any other protected category, factors into pay rate decisions. When analyzing employees’ compensation, you will need to make sure that you compare similarly situated employees who perform like duties, even if their titles or positions do not reflect that. If you are conducting a company-wide audit, refine the audit procedures and analysis as you go and modify as needed.

More specifically, you should do the following:

  • Conduct a statistical analysis. An employer can most effectively assess a pay rate and the impact of sex and/or other protected categories, if any, on that rate by performing a statistical analysis of male employees versus female employees. You can conduct this analysis in several ways—and, depending on its complexity, you may want to involve a compensation consultant or statistician—but the effect should be to separate out and compare the rate of pay for men and women based purely on position and grade. If a disparity exists, consider whether other factors explain the disparity such as seniority, experience, expertise, employment history, or any other neutral factors that are not based on sex or any other protected category
  • Assess performance review procedures. Similarly, analyze job evaluation systems to ensure the employer applies them consistently and does not tend to favor certain individuals over others. Conduct this analysis by reviewing all of the factors used in determining rate of pay and assessing if the employer applies them uniformly. Make sure that the employer evaluates all positions in the same grade and/or category using similar benchmarks and scoring rubrics. A significant disparity between rates of pay among those in the same grade and position may trigger further analysis to ensure the decision-maker did not consider sex or any other protected category as a factor in setting the rate of pay.
  • Analyze compensation factors. Assess what employee contributions and/or qualifications the employer uses or values in determining employee raises and bonuses. You can obtain this information through interviews of and/or questionnaires provided to decision-makers or by simply requiring decision-makers to submit explanations of what factors they considered in deciding raise and bonus amounts. In conjunction with this assessment, evaluate whether all positions allow employees to exhibit those qualifications or provide those contributions for purposes of earning pay raises and bonuses.
  • Ascertain prevalence of women, minorities, and older workers. Evaluate any data the employer maintains regarding the demographics of its workforce to determine if women, minorities, and/or older workers tend to occupy certain positions and/or grades in the company. If so, analyze whether the preponderance of women, minorities, and older workers in certain roles impacts their pay relative to their male, non-minority, and younger counterparts. Try to limit any comparisons to employees within the same grade, department, or position and with similar experience. If pay disparities do exist among employees performing equal work, look for factor(s) other than sex or any other protected category that would explain the pay differential. For instance, perhaps the males have more seniority than female employees in these like positions, which would account for the difference in pay rates.

Step 3: Present Your Findings to the Employer

Depending on the scope of the audit, you may present your findings and recommendations on an interim basis or at the conclusion of the audit. You and the employer should carefully consider if, and to what extent, you should provide a written report of the audit results, keeping in mind that despite efforts to protect communications and documents as privileged and/or attorney work product, your report, in whole or in part, may ultimately be deemed discoverable. If you provide a written report to the employer, also provide specific written instructions about maintaining confidentiality, including limiting distribution of the report and information contained in it to those who need to know.

Step 4: Take Remedial Actions

At the conclusion of the audit, the employer should address any unjustified disparities. This may entail a subsequent evaluation of an employee’s rate of pay to determine if any reasonable basis justifies the disparity. If not, the employer must raise the affected employee’s rate of pay to a level comparable to those performing equal work.

Non-routine adjustments to employee status or pay engender risk because they signal deficiencies in the employer’s wage and hour compliance. Therefore, employers should give honest, brief, and general reasons for pay adjustments flowing from the audit. For example, an employer might say that the adjustment is the result of ongoing compliance efforts or, if appropriate, allows the employer to keep pace with competitors or the job market.

Step 5: Consider Future Best Practices

In addition to regular assessments of its compensation systems, the employer should also follow these best compliance practices:

  • Be transparent. Advise the employer to share how it establishes each employee’s rate of pay and how raises/bonuses are awarded so that employees understand differentials in pay. Handbooks may be helpful to lay out general compensation policies, but the factors considered when determining who should receive a bonus may change from year to year. Instead, the employer may want to provide an annual distribution to all employees detailing how it will determine discretionary and non-discretionary bonuses for that year. You should also recommend that the employer hold one-on-one meetings with each employee specifically to discuss the employee’s set rate of pay and how to reach individual targets to increase compensation. The employer can hold these meetings in conjunction with annual evaluations or at the discretion of the employer when it considers an employee for a raise or bonus.
  • Elicit employees’ views. Solicit feedback from employees regarding their perception of pay rate differentials to determine whether employees perceive differences based on sex or any other protected category. Feedback acquired anonymously will provide the most useful insights. The employer can provide questionnaires regarding employee perception during employee evaluation periods or during any other time when it assesses the current compensation system. The employer should consider making changes to its evaluation system based on feedback and/or useful employee recommendations to demonstrate to employees that their feedback has significance.
  • Provide training. Counsel the employer to include compensation determination in the employer’s regular Equal Employment Opportunity (EEO) training, particularly any individual training offered to managers, supervisors, or others involved in determining compensation, raises, and bonuses.
  • Make sure job descriptions are current. The employer should regularly update position qualifications, skills, and duties when necessary to accurately reflect current practice and characterization. The employer should also ensure that all job descriptions are completely sex-neutral unless a specific component of the position would require otherwise.

Jeffrey M. Landes is a member in Epstein Becker & Green’s Employment, Labor & Workforce Management practice, in the firm’s New York office. His practice includes counseling clients in a variety of industries—including financial services, retail, and communications—in all facets of employment law, including compliance with EEO laws and other statutes governing the workplace, independent contractor issues, pay equity issues, wage/ hour compliance, executive terminations, restrictive covenants, drug testing, background checks, employee discipline and terminations, reorganizations, workplace investigations, leaves of absence, and development of handbooks and personnel policies and procedures. Ann Knuckles Mahoney’s practice focuses on labor and workforce management in the New York office of Epstein Becker & Green. She counsels employers on practices and procedures to promote compliance with employment-related laws and prepares employment, consulting, and separation agreements; employment applications; employee handbooks; and stand-alone policies. Ann assists in defending employers in labor and employment-related litigation in a broad array of matters, such as discrimination, harassment, retaliation, and wage and hour disputes. She assists with representation of management in labor-related matters, including arbitration, the defense of unfair labor practice charges, and collective bargaining negotiations.

To find this article in Lexis Practice Advisor, follow this research path:

RESEARCH PATH: Labor & Employment > Discrimination and Retaliation > EEO Laws and Protections > Practice Notes

For more information on the Equal Pay Act, see

> HEEDING THE EQUAL PAY ACT

RESEARCH PATH:Labor & Employment > Discrimination and Retaliation > EEO Laws and Protections > Practice Notes

For the unique requirements of the various state equal pay laws, see

> THE WAGE AND HOUR RETALIATION AND DISCRIMINATION LAWS COLUMN OF WAGE AND HOUR STATE PRACTICE NOTES CHART

RESEARCH PATH: Labor & Employment > Employment Litigation > Class and Collective Actions > Practice Notes

For guidance on analyzing the employer’s obligations under Title VII, see

> COMPLYING WITH TITLE VII

RESEARCH PATH: Labor & Employment > Discrimination and Retaliation > EEO Law and Protections > Practice Notes

For a discussion of the employer’s obligations under the Age Discrimination in Employment Act (ADEA), see

> Labor and Employment > Discrimination and Retaliation > EEO Laws and Protections > Practice Notes

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For an analysis of the employer requirements under the Americans with Disabilities Act, see

> AMERICANS WITH DISABILITIES ACT: EMPLOYER REQUIREMENTS AND REASONABLE ACCOMMODATIONS

RESEARCH PATH: Labor & Employment > Attendance, Leaves, and Disabilities > The ADA and Disability Management > Practice Notes

For details on preserving the attorney-client privilege and work product, see

> PRESERVING THE ATTORNEY-CLIENT PRIVILEGE AND WORK PRODUCT PROTECTION DURING INVESTIGATIONS

RESEARCH PATH: Labor & Employment > Discrimination and Retaliation > Claims and Investigations > Practice Notes

1. Facts About Equal Pay and Compensation Discrimination, https://www.eeoc.gov/eeoc/publications/fs-epa.cfm. 2. See 41 C.F.R. §§ 60-20.1–20.8, OFCCP’s Sex Discrimination Final Rule – Fact Sheet, https://www.dol.gov/ofccp/SexDiscrimination/SexDiscrimFinalRuleFactSheet_JRFQA508c.pdf, and OFCCP Sex Discrimination FAQs, https://www.dol.gov/ofccp/SexDiscrimination/sexdiscrimination_faqs.htm.