Conducting an Effective and Preventative Compensation Review

With the passage of the Lilly Ledbetter Fair Pay Act, the EEOC's and OFCCP's increased focus on compensation discrimination, and the government's increased budget for these agencies, compensation decisions are destined to come under increased scrutiny from employees, their attorneys and the government.

What starts off as a minor compensation discrepancy can quickly compound over time. Uncorrected pay disparities lead to legal challenges and can impact employee morale. Conducting periodic reviews of compensation decisions and the effects of these decisions has become a necessary activity for employers.

The New Emphasis on Compensation Discrimination

On Jan. 29, 2009, the Lilly Ledbetter Fair Pay Act was enacted. The Ledbetter Act amended Title VII, the Age Discrimination in Employment Act, the Americans With Disabilities Act and the Rehabilitation Act. Under the Ledbetter Act, an unlawful compensation employment practice occurs when: 1) a discriminatory compensation decision or practice is adopted; 2) an individual becomes subject to a discriminatory compensation decision or practice; or 3) an individual is affected by the application of a discriminatory compensation decision or practice (including each time wages, benefits, or other compensation are paid resulting in whole or in part from such decision or practice).

The Ledbetter Act allows employees to bring a claim based on a decision that occurred years ago so long as the decision is still affecting the employee's current (or at least within the last 300 days) pay check.

The impact of this Act on compensation discrimination claims is significant. The Ledbetter Act increases the likelihood that compensation claims will be made. The statute of limitations that barred many earlier cases has all but been erased for pure compensation decisions. Because disparities increase over time, larger verdicts are now more probable, thereby enticing plaintiffs' attorneys. Similarly, claimants, who might not otherwise have had claims within the same statute of limitations, may now more easily attempt to assert class claims.

For employers, the biggest challenge will be defending claims that are based on decisions made years earlier. It is more important than ever that employers take proactive steps to protect themselves from future compensation discrimination claims.

Setting Consistent Policies and Procedures

Periodic compensation reviews are one way that employers can attempt to avoid costly compensation claims and disgruntled employees. Compensation reviews can take a variety of forms. Often, they start at the end, by reviewing and comparing salaries that are already in place for evidence of disparities or disparate impact. But compensation reviews can, and should, include a review of the beginning and the many decisions in between which affect compensation.

An employee's compensation is affected by myriad employment decisions. Some decisions have a direct and obvious impact on compensation, such as those about initial pay rates, promotion pay rates, merit pay increases, bonuses, stock options and other benefits. Other decisions, while not necessarily “compensation decisions,” can similarly impact compensation, such as promotions, demotions and annual reviews. Still other decisions impact compensation because they provide the opportunities for higher pay, including the placement of an employee in a particular position, the schedule an employee receives, the grade in which a position is classified, the location or territory to which an employee is assigned, the training opportunities provided, and the opportunities for overtime offered. Any of these decisions, if discriminatory, or even if simply inconsistent, could result in a claim for compensation discrimination.

Starting Pay

An employee's starting pay can have a significant impact on the employee's salary throughout his or her career. Annual adjustments often widen any initial gap. Employers who do not maintain a consistent procedure for establishing starting pay often run into subsequent compensation disparities.

Employers may consider a variety of factors to establish an employee's initial pay rate, including the individual's background, experience, education, bargaining power, prior salary and the market for the individual's skills at the time of hire. Some of these factors are more heavily scrutinized by the courts than others. Decisions based on market factors, an individual's bargaining power and an individual's prior salary are often heavily scrutinized as these factors arguably could condone past discrimination or discriminatory attitudes that men are better negotiators or are more valued in the market.

Because one's starting rate often plays a role in future salary disparities, it is important to document the reasons for the starting rate. Any disparity should be justified and should be re analyzed in connection with future adjustments.

When an employer pays more for one person than another, the assumption is that the higher paid employee will be more productive and skilled. That assumption may turn out to be wrong. Some courts have questioned a continuing salary
discrepancy when the underlying assumption (that experience and education would result in a higher level of performance) is proven wrong. If the employer continues to provide percentage increases, the lower performing employee may continue to be paid more (and increasingly more each year) based on the initial salary rate.

Promotions and Training

Promotions and upward mobility also have a significant effect on salary. Employers should review their training and promotional opportunities. Are employees fairly selected for participation? Is there a disparate impact on any protected classification? Do employees have a fair chance to compete for promotions?

Where possible, job openings should be posted. Promotions that are competitive with an application process are more likely to be viewed as “fair” and more likely to be based on legitimate, objective criteria. To avoid subjective, discriminatory decisions, employers should establish clear criteria for consideration for promotions and for particular positions.

Annual Reviews

Many employers use annual reviews as a basis for awarding salary increases. Once again, consistency is key. Performance reviews should review conduct that is relevant or required for the particular job. The criteria reviewed should be objective, behavior-based and within the control of the employee.

Performance reviews may be conducted in a variety of ways. Often, the most effective reviews are those in which:

• Employees are aware of the criteria and involved in setting specific performance objectives/ goals.
• Employees receive notice of performance deficiencies and an opportunity to correct the deficiencies.
• The review process is ongoing throughout the year.
• Evaluators are trained.
• Multiple evaluators (preferably diverse in sex and race) are used.
• Peer reviews and self evaluations are utilized.
• Evaluators provide specific examples of good and bad conduct.
• Employees have the opportunity to provide feedback and/or appeal the process.

Whenever possible, reviews and other decisions that affect compensation should undergo a second level of review before any decisions are finalized. Any pay decision should be supported by the review, the underlying facts and the company's policy.

Conducting Effective Compensation Reviews

Once an employer's policies and procedures are in place, an employer should evaluate the impact of its policies to determine whether they create an adverse impact on any protected group. However, employers should do so cautiously. Such self-audits or risk assessments may be discoverable in future litigation. Nothing is more frustrating for a proactive employer than conducting a self-evaluation only to have it used against the employer in litigation. If the analysis is undertaken with an attorney's involvement, the attorney-client privilege may apply to protect the review from disclosure.

A thorough compensation review should include a review of compensation as a whole and by its individual components, including pay rate, overtime. bonuses and benefits.

Most compensation reviews involve a comparison of pay among employees in a particular pool. The employer needs to determine what pool of employees is the appropriate pool for comparison purposes. An initial review should compare individuals within the same job title. Are there individuals whose compensation is outside the norm for their particular job title? Sometimes these individuals are performing jobs different from those of other employees and may be improperly titled. Employees who share the same job title, but who perform different functions and are, therefore, paid differently, can create issues.

In most cases there are not sufficient numbers within a job title to construct a meaningful statistical analysis. The Office of Federal Contract Compliance Programs (OFCCP), Equal Employment Opportunity Commission (EEOC) and/or plaintiffs' attorneys will attempt to expand the pool by comparing employees by department; by job group or job family; by rank or grade; by EEO code; or by similarly situated employee groupings. Similarly situated employee groupings include jobs that involve similar tasks, similar skill, similar effort and responsibility, similar working conditions, and that are similarly complex or difficult. Job descriptions, salary grades, department and reporting level may all be considered by adversaries in determining which jobs to pool or group together.

An effective compensation review should compare employees by one or more of these other groupings. If a company's compensation is challenged, multiple job titles may be grouped. The employer will want to review what such an analysis will reveal before it is in litigation, when it still has an opportunity to correct it. This review may also reveal that the company's groupings, job descriptions, job grades, or job titles need adjusting or updating. Positions with similar job descriptions, titles, ranks or grades are the most likely to be pooled together. The employer should structure these in a manner that accurately reflects comparables. This will help prevent adversaries from lumping improper comparators together.

If a review uncovers significant disparities, further review including, potentially, a statistical regression analysis should be performed. To perform this analysis, the employer will need to assess what factors are used to affect an individual's pay. These factors may include: time in job; time in grade; time with the company; department; shift; full or part-time status; performance ratings; productivity; education; prior work experience; jobs held at the company; job family; leaves of absence; year degree earned; job at hire; and initial compensation allocation. From this analysis, the employer will need to determine whether there are legitimate non-discriminatory reasons for any disparities.

Fixing Compensation Disparities

If a disparity cannot be explained, the next step is determining how to fix it. First and foremost, the employer must address the root cause. Is it starting pay? Performance reviews? An issue with a particular manager? Promotions? Overtime? Bonus structure? Job titles or other groupings?

Depending upon the issue and the degree of disparity, the employer may need to consider making pay equity adjustments. However, adjusting an employee's pay based solely on his or her race (or other protected classification) may create its own issues. Under Ricci v. DeStefano, 129 S. Ct. 2658 (2009), an employer that takes action because of an employee's race or sex, even if the action is taken in good faith to correct a disparity, may be liable for disparate treatment discrimination. An employer must have a strong basis in evidence of disparate impact liability before it can take action based on an employee's race or sex. A prima facie case or a significant statistical disparity is not enough. After Ricci, employers must proceed cautiously with equity adjustments. In many cases, employers will need to adjust the salaries for all employees (including those in both race or gender groups) who are below the appropriate mark.

Conclusion

The impact of Ricci is yet another reason that it is important to review compensation from the beginning. Adjusting compensation decisions before they are finalized or before disparities become significant is essential. Before a decision is finalized, the decisionmaker should be required to explain or justify the decision. Maintaining some second level of review for all decisions that affect compensation can help avoid future issues. If the initial decision-maker cannot adequately explain or justify the decision when it is first made, he certainly will not be able to explain or justify it years later, when it is challenged in litigation.

Patricia Anderson Pryor, a member of this newsletter's Board of Editors, is a partner in the Labor and Employment Department at Taft, Stettinius & Hollister LLP. Ms. Pryor is a frequent speaker at legal seminars and to employers and professional groups, and has been featured on the radio broadcast, Employment Straight Talk.

With the passage of the Lilly Ledbetter Fair Pay Act, the EEOC's and OFCCP's increased focus on compensation discrimination, and the government's increased budget for these agencies, compensation decisions are destined to come under increased scrutiny from employees, their attorneys and the government.

What starts off as a minor compensation discrepancy can quickly compound over time. Uncorrected pay disparities lead to legal challenges and can impact employee morale. Conducting periodic reviews of compensation decisions and the effects of these decisions has become a necessary activity for employers.

The New Emphasis on Compensation Discrimination

On Jan. 29, 2009, the Lilly Ledbetter Fair Pay Act was enacted. The Ledbetter Act amended Title VII, the Age Discrimination in Employment Act, the Americans With Disabilities Act and the Rehabilitation Act. Under the Ledbetter Act, an unlawful compensation employment practice occurs when: 1) a discriminatory compensation decision or practice is adopted; 2) an individual becomes subject to a discriminatory compensation decision or practice; or 3) an individual is affected by the application of a discriminatory compensation decision or practice (including each time wages, benefits, or other compensation are paid resulting in whole or in part from such decision or practice).

The Ledbetter Act allows employees to bring a claim based on a decision that occurred years ago so long as the decision is still affecting the employee's current (or at least within the last 300 days) pay check.

The impact of this Act on compensation discrimination claims is significant. The Ledbetter Act increases the likelihood that compensation claims will be made. The statute of limitations that barred many earlier cases has all but been erased for pure compensation decisions. Because disparities increase over time, larger verdicts are now more probable, thereby enticing plaintiffs' attorneys. Similarly, claimants, who might not otherwise have had claims within the same statute of limitations, may now more easily attempt to assert class claims.

For employers, the biggest challenge will be defending claims that are based on decisions made years earlier. It is more important than ever that employers take proactive steps to protect themselves from future compensation discrimination claims.

Setting Consistent Policies and Procedures

Periodic compensation reviews are one way that employers can attempt to avoid costly compensation claims and disgruntled employees. Compensation reviews can take a variety of forms. Often, they start at the end, by reviewing and comparing salaries that are already in place for evidence of disparities or disparate impact. But compensation reviews can, and should, include a review of the beginning and the many decisions in between which affect compensation.

An employee's compensation is affected by myriad employment decisions. Some decisions have a direct and obvious impact on compensation, such as those about initial pay rates, promotion pay rates, merit pay increases, bonuses, stock options and other benefits. Other decisions, while not necessarily “compensation decisions,” can similarly impact compensation, such as promotions, demotions and annual reviews. Still other decisions impact compensation because they provide the opportunities for higher pay, including the placement of an employee in a particular position, the schedule an employee receives, the grade in which a position is classified, the location or territory to which an employee is assigned, the training opportunities provided, and the opportunities for overtime offered. Any of these decisions, if discriminatory, or even if simply inconsistent, could result in a claim for compensation discrimination.

Starting Pay

An employee's starting pay can have a significant impact on the employee's salary throughout his or her career. Annual adjustments often widen any initial gap. Employers who do not maintain a consistent procedure for establishing starting pay often run into subsequent compensation disparities.

Employers may consider a variety of factors to establish an employee's initial pay rate, including the individual's background, experience, education, bargaining power, prior salary and the market for the individual's skills at the time of hire. Some of these factors are more heavily scrutinized by the courts than others. Decisions based on market factors, an individual's bargaining power and an individual's prior salary are often heavily scrutinized as these factors arguably could condone past discrimination or discriminatory attitudes that men are better negotiators or are more valued in the market.

Because one's starting rate often plays a role in future salary disparities, it is important to document the reasons for the starting rate. Any disparity should be justified and should be re analyzed in connection with future adjustments.

When an employer pays more for one person than another, the assumption is that the higher paid employee will be more productive and skilled. That assumption may turn out to be wrong. Some courts have questioned a continuing salary
discrepancy when the underlying assumption (that experience and education would result in a higher level of performance) is proven wrong. If the employer continues to provide percentage increases, the lower performing employee may continue to be paid more (and increasingly more each year) based on the initial salary rate.

Promotions and Training

Promotions and upward mobility also have a significant effect on salary. Employers should review their training and promotional opportunities. Are employees fairly selected for participation? Is there a disparate impact on any protected classification? Do employees have a fair chance to compete for promotions?

Where possible, job openings should be posted. Promotions that are competitive with an application process are more likely to be viewed as “fair” and more likely to be based on legitimate, objective criteria. To avoid subjective, discriminatory decisions, employers should establish clear criteria for consideration for promotions and for particular positions.

Annual Reviews

Many employers use annual reviews as a basis for awarding salary increases. Once again, consistency is key. Performance reviews should review conduct that is relevant or required for the particular job. The criteria reviewed should be objective, behavior-based and within the control of the employee.

Performance reviews may be conducted in a variety of ways. Often, the most effective reviews are those in which:

• Employees are aware of the criteria and involved in setting specific performance objectives/ goals.
• Employees receive notice of performance deficiencies and an opportunity to correct the deficiencies.
• The review process is ongoing throughout the year.
• Evaluators are trained.
• Multiple evaluators (preferably diverse in sex and race) are used.
• Peer reviews and self evaluations are utilized.
• Evaluators provide specific examples of good and bad conduct.
• Employees have the opportunity to provide feedback and/or appeal the process.

Whenever possible, reviews and other decisions that affect compensation should undergo a second level of review before any decisions are finalized. Any pay decision should be supported by the review, the underlying facts and the company's policy.

Conducting Effective Compensation Reviews

Once an employer's policies and procedures are in place, an employer should evaluate the impact of its policies to determine whether they create an adverse impact on any protected group. However, employers should do so cautiously. Such self-audits or risk assessments may be discoverable in future litigation. Nothing is more frustrating for a proactive employer than conducting a self-evaluation only to have it used against the employer in litigation. If the analysis is undertaken with an attorney's involvement, the attorney-client privilege may apply to protect the review from disclosure.

A thorough compensation review should include a review of compensation as a whole and by its individual components, including pay rate, overtime. bonuses and benefits.

Most compensation reviews involve a comparison of pay among employees in a particular pool. The employer needs to determine what pool of employees is the appropriate pool for comparison purposes. An initial review should compare individuals within the same job title. Are there individuals whose compensation is outside the norm for their particular job title? Sometimes these individuals are performing jobs different from those of other employees and may be improperly titled. Employees who share the same job title, but who perform different functions and are, therefore, paid differently, can create issues.

In most cases there are not sufficient numbers within a job title to construct a meaningful statistical analysis. The Office of Federal Contract Compliance Programs (OFCCP), Equal Employment Opportunity Commission (EEOC) and/or plaintiffs' attorneys will attempt to expand the pool by comparing employees by department; by job group or job family; by rank or grade; by EEO code; or by similarly situated employee groupings. Similarly situated employee groupings include jobs that involve similar tasks, similar skill, similar effort and responsibility, similar working conditions, and that are similarly complex or difficult. Job descriptions, salary grades, department and reporting level may all be considered by adversaries in determining which jobs to pool or group together.

An effective compensation review should compare employees by one or more of these other groupings. If a company's compensation is challenged, multiple job titles may be grouped. The employer will want to review what such an analysis will reveal before it is in litigation, when it still has an opportunity to correct it. This review may also reveal that the company's groupings, job descriptions, job grades, or job titles need adjusting or updating. Positions with similar job descriptions, titles, ranks or grades are the most likely to be pooled together. The employer should structure these in a manner that accurately reflects comparables. This will help prevent adversaries from lumping improper comparators together.

If a review uncovers significant disparities, further review including, potentially, a statistical regression analysis should be performed. To perform this analysis, the employer will need to assess what factors are used to affect an individual's pay. These factors may include: time in job; time in grade; time with the company; department; shift; full or part-time status; performance ratings; productivity; education; prior work experience; jobs held at the company; job family; leaves of absence; year degree earned; job at hire; and initial compensation allocation. From this analysis, the employer will need to determine whether there are legitimate non-discriminatory reasons for any disparities.

Fixing Compensation Disparities

If a disparity cannot be explained, the next step is determining how to fix it. First and foremost, the employer must address the root cause. Is it starting pay? Performance reviews? An issue with a particular manager? Promotions? Overtime? Bonus structure? Job titles or other groupings?

Depending upon the issue and the degree of disparity, the employer may need to consider making pay equity adjustments. However, adjusting an employee's pay based solely on his or her race (or other protected classification) may create its own issues. Under Ricci v. DeStefano , 129 S. Ct. 2658 (2009), an employer that takes action because of an employee's race or sex, even if the action is taken in good faith to correct a disparity, may be liable for disparate treatment discrimination. An employer must have a strong basis in evidence of disparate impact liability before it can take action based on an employee's race or sex. A prima facie case or a significant statistical disparity is not enough. After Ricci, employers must proceed cautiously with equity adjustments. In many cases, employers will need to adjust the salaries for all employees (including those in both race or gender groups) who are below the appropriate mark.

Conclusion

The impact of Ricci is yet another reason that it is important to review compensation from the beginning. Adjusting compensation decisions before they are finalized or before disparities become significant is essential. Before a decision is finalized, the decisionmaker should be required to explain or justify the decision. Maintaining some second level of review for all decisions that affect compensation can help avoid future issues. If the initial decision-maker cannot adequately explain or justify the decision when it is first made, he certainly will not be able to explain or justify it years later, when it is challenged in litigation.

Patricia Anderson Pryor, a member of this newsletter's Board of Editors, is a partner in the Labor and Employment Department at Taft, Stettinius & Hollister LLP. Ms. Pryor is a frequent speaker at legal seminars and to employers and professional groups, and has been featured on the radio broadcast, Employment Straight Talk.