The Changing Landscape of Compensation Equity Enforcement

The last two years have seen major changes in the legal and regulatory environment regarding compensation discrimination, and there are even more on the horizon. These changes encompass both individual claims and claims of systemic compensation discrimination. Three of the most important ones affect the very nature of a compensation discrimination claim, the compensation information collected by the government, and the possibility of wide-sweeping changes in the way businesses are permitted to compensate their employees. The latter are the result of the Ledbetter Fair Pay Act, the formation of the National Equal Pay Enforcement Task Force, and the Paycheck Fairness Act.

The Ledbetter Fair Pay Act

Signed into law on Jan. 29, 2009, the Ledbetter Fair Pay Act reversed a Supreme Court decision. It states that the 180-day statute of limitations for filing an equal pay lawsuit resets with each new discriminatory paycheck. This means that an employee can file a lawsuit for discriminatory pay decisions every time that decision is applied. This includes each time wages, benefits, or other compensation is paid, even if that decision occurred 20 or 30 years ago.

This presents a unique challenge: Without documentation, it's difficult to remember how pay increases were determined even five or ten years ago. It's nearly impossible to remember how those decisions were made 20 or 30 years ago. As time passes, memories fade, and the people who made those compensation decisions are less likely to still be employed by your organization.

From a practical standpoint, this means that each pay decision should be carefully documented, and that documentation should be retained. Specifically, this documentation should address the following:

• How were the compensation decisions made?
• How did the organization arrive at the specific compensation figures?
• What metrics and criteria were used to evaluate employees' performance?
• What compensation surveys or industry statistics were used to determine compensation?
• If a specific employee's compensation was affected by special circumstances (e.g., red-lining), what were the details of that circumstance?

The sure-fire method to eliminate any concern is to retain everything indefinitely. If you have a paper-based document retention system, indefinite retention is not so practical. But retaining electronic copies of this documentation is an efficient and cost-effective alternative. Like any decision, weigh the pros and cons: How much will storage cost? What level of risk are we, as an employer, willing to accept? For every document you destroy, ask what decision will go unsupported if you're involved in a compensation discrimination lawsuit.

As important as document retention is, it's not the only facet of the Ledbetter Fair Pay Act that poses a potential difficulty for employers. The Act states that the statute of limitations resets with each new “application of a discriminatory compensation decision or other practice, including each time wages, benefits or other compensation is paid.” The potential difficulty lies in two words: “other practices.”

'Other Practices'

Despite the fact that the Act was signed into law almost two years ago, the meaning of “other practices” remains unclear. In their article The Lilly Ledbetter Fair Pay Act of 2009: A Preliminary Report, Part Three, Joanna Grossman and Deborah Brake (See http://writ.news.findlaw.com/grossman/20091013.html) state that “the plain meaning of the Act suggests that it encompasses employment practices that cause an employee to receive lower compensation than she would have received but for the discriminatory practice.” From this perspective, an “other practice” could be any seemingly legitimate, non-discriminatory factor that has an effect on compensation, such as pay grade, department, location, or shift.

For example, assume that employees in Pay Grade 9 are paid between $40,000 and $45,000 and employees in Pay Grade 10 are paid between $50,000 and $55,000. Further assume that a statistical analysis of compensation reveals no evidence of discrimination with respect to gender or race in either of the two pay grades. Even though the compensation decisions within each pay grade are made equitably, an employee could make the claim that she should be in Pay Grade 10, but is in Pay Grade 9 because of discrimination. In this case, the pay decision at issue is not that within Pay Grade 9, but the assignment to pay grade. Assignment to pay grade becomes the “other practice” under the Fair Pay Act.

“Other practice” claims are a relatively new area, and it's not yet clear what kinds of “other practice” claims will be made. It's also not yet clear how successful these claims will be. While it may be difficult to prove, it's relatively easy to claim that you were assigned to the wrong pay grade, department, etc., because of discrimination.

Risk Management

From a risk-management perspective, this means that compensation decisions cannot be examined in isolation. All of these “other practices” are in play and need to be considered and incorporated. Additionally, any kind of decision at all, anywhere in the organization, likely will have a compensation component. It's critical that employers take a big-picture perspective of compensation and consider all of the potential “other practices.”

The National Equal Pay Enforcement Task Force

In his 2010 State of the Union Address, President Obama promised to “crack down” on violations of equal pay laws. As a result of this promise, the National Equal Pay Enforcement Task Force was created. The Task Force consists of members from the EEOC, the Department of Justice (DOJ), the Department of Labor (DOL), and the Office of Personnel Management (OPM). One of the challenges to equal pay enforcement identified by the Task Force is the government's ability to understand the full scope of the wage gap and to identify and combat wage discrimination. To address this challenge, the Task Force is recommending the reinstatement of the Office of Federal Contract Compliance Programs (OFCCP) Equal Opportunity (EO) Survey or a similar survey. This recommendation was accompanied by the OFCCP's announcement on Aug. 17, 2010 that the Interpretive Standards for Systemic Compensation Discrimination and the Voluntary Guidelines for Self-Evaluation of Compensation Practices would be rescinded.

The EO Survey

The intention of the original EO survey was to increase compliance with equal opportunity requirements by improving self-awareness and encouraging self-evaluations, and to improve the use of federal enforcement resources by targeting those employers most likely to be out of compliance. The Task Force believes that the implementation of an EO Survey or similar instrument will allow: 1) better identification of those employers likely to be out of compliance with respect to compensation discrimination; 2) narrowing of the issues on which the resulting review will focus; and 3) identification of employers for corporation-wide and industry-focused reviews.

EEO Reports

The Task Force is also considering revamping the EEO reports. Currently, there are four versions of the EEO reports, but only one of the four versions collects any wage-related data. After reviewing the EEO reports and other data currently available, the EEOC concluded that there is no federal data source containing private sector employer-specific wage data by demographic characteristics.

Inter-agency cooperation of enforcement is also on the Task Force agenda. This is echoed in the DOL's Strategic Plan 2011-2016. According to the Strategic Plan, worker protection agencies are reforming their operations to increase collaboration with other federal, state and local agencies to ensure compliance throughout the workplace, and impose penalties and other remedies that are consistent with the seriousness of the violation.

It's not clear what the revised EO and EEO reports will look like, what specific compensation information will be collected, or exactly when the compensation Standards and Guidelines will officially be rescinded. What is clear is that the current administration has placed pay equity near the top of its agenda, and it will be taking a far more coordinated approach in enforcing pay equity.

Preparatory Action

Employers should prepare for the revamped EO Survey and for the strong possibility of revised EEO reports. Begin reviewing your compensation data with an eye toward production; ensure that your data is clean, organized, and well-documented. Any gaps in the compensation data, demographic characteristics of the workforce, or other human resources data should be filled in immediately. Taking preparatory action now will give organizations the time they need to ensure that they can prepare complete and accurate information about their workers and wages in the event that they are asked to do so.

The Paycheck Fairness Act

Passed by the House and scheduled for debate in the Senate, the Paycheck Fairness Act should also be on the minds of employers. In its current form, this Act has the potential to revolutionize the way businesses compensate their employees.

Under the Equal Pay Act, employers are prohibited from paying a female employee less than a male employee for “substantially equal” work. Employers will be found liable for pay differentials unless the differential is attributable to:

• A seniority system;
• A merit system;
• A system that measures earnings by quantity or quality of production; and
• Any factor other than gender.

Under the Paycheck Fairness Act, the 'any factor other than gender' defense would change. Employers would be required to show that the pay differential is caused by: 1) a bona fide factor other than gender; 2) a factor related to job performance; and is 3) consistent with business necessity.

To see how the Paycheck Fairness Act would affect the compensation policies of employers, consider the following three examples.

Example Number One

John and Jane have identical characteristics (education, work experience, etc.) except for gender. ABC Company makes offers of employment to John and Jane on the same day, for the same position, for the same starting salary: $45,000. Jane accepts the offer, but John negotiates the salary, and ends up with $50,000.

Example Number Two

Sam and Sally have the same education, work experience, etc., and are both hired by WidgetCo on the same day. The company sets both Sam's and Sally's starting salary at $2,500 more than they were making at their previous jobs. Sam was earning $37,500 at his previous job, and Sally was earning $36,000; their starting salaries at WidgetCo are $40,000 and $38,500, respectively.

Example Number Three

Brad and Bridget both work for Alpha Inc., have the same job title, same level of responsibility, etc., and they are both earning $100,000 per year. Brad asks for a 5% raise, but Bridget doesn't ask for a raise. Brad gets the raise and ends up earning more than Bridget.

In each of these three examples, the differences in pay between the male and female employees are attributable to a factor other than gender. Under the current equal pay laws, the above scenarios are perfectly fine. However, under the Paycheck Fairness Act, the outcome would be very different. An employer would have to demonstrate that its pay practices are divorced from any discrimination in its workplace or at the employee's prior workplace, that the pay practice is job related, and that it is consistent with business necessity.

The Paycheck Fairness Act would substantially alter the way American businesses are permitted to compensate their employees. The Act would limit the flexibility employers have in addressing different salary histories, different salary demands, etc. Businesses would have to make adjustments for any gender differences in negotiating skills ' and willingness to engage in negotiations. They will also be required to right previous wrongs of the employees' previous employers.

Conclusion

It remains to be seen whether the Paycheck Fairness Act will be signed into law, but there seems to be substantial support for this Act. Organizations should review their compensation practices to determine which of their practices would be affected by the Paycheck Fairness Act, and should begin making some contingency plans under the assumption that the Act will be signed into law. The Paycheck Fairness Act has sweeping implications for all businesses; proactive employers will begin preparing now for those implications.

Stephanie R. Thomas, Ph.D., is the Director of the Equal Employment Advisory and Litigation Support Division of MCG, Providence, RI. Her practice focuses on the application of statistical analysis to EEO issues and workplace discrimination claims relating to compensation, hiring, promotion, and involuntary termination. Dr. Thomas has provided expert economic and statistical testimony in federal and state courts throughout the U.S.

The last two years have seen major changes in the legal and regulatory environment regarding compensation discrimination, and there are even more on the horizon. These changes encompass both individual claims and claims of systemic compensation discrimination. Three of the most important ones affect the very nature of a compensation discrimination claim, the compensation information collected by the government, and the possibility of wide-sweeping changes in the way businesses are permitted to compensate their employees. The latter are the result of the Ledbetter Fair Pay Act, the formation of the National Equal Pay Enforcement Task Force, and the Paycheck Fairness Act.

The Ledbetter Fair Pay Act

Signed into law on Jan. 29, 2009, the Ledbetter Fair Pay Act reversed a Supreme Court decision. It states that the 180-day statute of limitations for filing an equal pay lawsuit resets with each new discriminatory paycheck. This means that an employee can file a lawsuit for discriminatory pay decisions every time that decision is applied. This includes each time wages, benefits, or other compensation is paid, even if that decision occurred 20 or 30 years ago.

This presents a unique challenge: Without documentation, it's difficult to remember how pay increases were determined even five or ten years ago. It's nearly impossible to remember how those decisions were made 20 or 30 years ago. As time passes, memories fade, and the people who made those compensation decisions are less likely to still be employed by your organization.

From a practical standpoint, this means that each pay decision should be carefully documented, and that documentation should be retained. Specifically, this documentation should address the following:

• How were the compensation decisions made?
• How did the organization arrive at the specific compensation figures?
• What metrics and criteria were used to evaluate employees' performance?
• What compensation surveys or industry statistics were used to determine compensation?
• If a specific employee's compensation was affected by special circumstances (e.g., red-lining), what were the details of that circumstance?

The sure-fire method to eliminate any concern is to retain everything indefinitely. If you have a paper-based document retention system, indefinite retention is not so practical. But retaining electronic copies of this documentation is an efficient and cost-effective alternative. Like any decision, weigh the pros and cons: How much will storage cost? What level of risk are we, as an employer, willing to accept? For every document you destroy, ask what decision will go unsupported if you're involved in a compensation discrimination lawsuit.

As important as document retention is, it's not the only facet of the Ledbetter Fair Pay Act that poses a potential difficulty for employers. The Act states that the statute of limitations resets with each new “application of a discriminatory compensation decision or other practice, including each time wages, benefits or other compensation is paid.” The potential difficulty lies in two words: “other practices.”

'Other Practices'

Despite the fact that the Act was signed into law almost two years ago, the meaning of “other practices” remains unclear. In their article The Lilly Ledbetter Fair Pay Act of 2009: A Preliminary Report, Part Three, Joanna Grossman and Deborah Brake (See http://writ.news.findlaw.com/grossman/20091013.html) state that “the plain meaning of the Act suggests that it encompasses employment practices that cause an employee to receive lower compensation than she would have received but for the discriminatory practice.” From this perspective, an “other practice” could be any seemingly legitimate, non-discriminatory factor that has an effect on compensation, such as pay grade, department, location, or shift.

For example, assume that employees in Pay Grade 9 are paid between $40,000 and $45,000 and employees in Pay Grade 10 are paid between $50,000 and $55,000. Further assume that a statistical analysis of compensation reveals no evidence of discrimination with respect to gender or race in either of the two pay grades. Even though the compensation decisions within each pay grade are made equitably, an employee could make the claim that she should be in Pay Grade 10, but is in Pay Grade 9 because of discrimination. In this case, the pay decision at issue is not that within Pay Grade 9, but the assignment to pay grade. Assignment to pay grade becomes the “other practice” under the Fair Pay Act.

“Other practice” claims are a relatively new area, and it's not yet clear what kinds of “other practice” claims will be made. It's also not yet clear how successful these claims will be. While it may be difficult to prove, it's relatively easy to claim that you were assigned to the wrong pay grade, department, etc., because of discrimination.

Risk Management

From a risk-management perspective, this means that compensation decisions cannot be examined in isolation. All of these “other practices” are in play and need to be considered and incorporated. Additionally, any kind of decision at all, anywhere in the organization, likely will have a compensation component. It's critical that employers take a big-picture perspective of compensation and consider all of the potential “other practices.”

The National Equal Pay Enforcement Task Force

In his 2010 State of the Union Address, President Obama promised to “crack down” on violations of equal pay laws. As a result of this promise, the National Equal Pay Enforcement Task Force was created. The Task Force consists of members from the EEOC, the Department of Justice (DOJ), the Department of Labor (DOL), and the Office of Personnel Management (OPM). One of the challenges to equal pay enforcement identified by the Task Force is the government's ability to understand the full scope of the wage gap and to identify and combat wage discrimination. To address this challenge, the Task Force is recommending the reinstatement of the Office of Federal Contract Compliance Programs (OFCCP) Equal Opportunity (EO) Survey or a similar survey. This recommendation was accompanied by the OFCCP's announcement on Aug. 17, 2010 that the Interpretive Standards for Systemic Compensation Discrimination and the Voluntary Guidelines for Self-Evaluation of Compensation Practices would be rescinded.

The EO Survey

The intention of the original EO survey was to increase compliance with equal opportunity requirements by improving self-awareness and encouraging self-evaluations, and to improve the use of federal enforcement resources by targeting those employers most likely to be out of compliance. The Task Force believes that the implementation of an EO Survey or similar instrument will allow: 1) better identification of those employers likely to be out of compliance with respect to compensation discrimination; 2) narrowing of the issues on which the resulting review will focus; and 3) identification of employers for corporation-wide and industry-focused reviews.

EEO Reports

The Task Force is also considering revamping the EEO reports. Currently, there are four versions of the EEO reports, but only one of the four versions collects any wage-related data. After reviewing the EEO reports and other data currently available, the EEOC concluded that there is no federal data source containing private sector employer-specific wage data by demographic characteristics.

Inter-agency cooperation of enforcement is also on the Task Force agenda. This is echoed in the DOL's Strategic Plan 2011-2016. According to the Strategic Plan, worker protection agencies are reforming their operations to increase collaboration with other federal, state and local agencies to ensure compliance throughout the workplace, and impose penalties and other remedies that are consistent with the seriousness of the violation.

It's not clear what the revised EO and EEO reports will look like, what specific compensation information will be collected, or exactly when the compensation Standards and Guidelines will officially be rescinded. What is clear is that the current administration has placed pay equity near the top of its agenda, and it will be taking a far more coordinated approach in enforcing pay equity.

Preparatory Action

Employers should prepare for the revamped EO Survey and for the strong possibility of revised EEO reports. Begin reviewing your compensation data with an eye toward production; ensure that your data is clean, organized, and well-documented. Any gaps in the compensation data, demographic characteristics of the workforce, or other human resources data should be filled in immediately. Taking preparatory action now will give organizations the time they need to ensure that they can prepare complete and accurate information about their workers and wages in the event that they are asked to do so.

The Paycheck Fairness Act

Passed by the House and scheduled for debate in the Senate, the Paycheck Fairness Act should also be on the minds of employers. In its current form, this Act has the potential to revolutionize the way businesses compensate their employees.

Under the Equal Pay Act, employers are prohibited from paying a female employee less than a male employee for “substantially equal” work. Employers will be found liable for pay differentials unless the differential is attributable to:

• A seniority system;
• A merit system;
• A system that measures earnings by quantity or quality of production; and
• Any factor other than gender.

Under the Paycheck Fairness Act, the 'any factor other than gender' defense would change. Employers would be required to show that the pay differential is caused by: 1) a bona fide factor other than gender; 2) a factor related to job performance; and is 3) consistent with business necessity.

To see how the Paycheck Fairness Act would affect the compensation policies of employers, consider the following three examples.

Example Number One

John and Jane have identical characteristics (education, work experience, etc.) except for gender. ABC Company makes offers of employment to John and Jane on the same day, for the same position, for the same starting salary: $45,000. Jane accepts the offer, but John negotiates the salary, and ends up with $50,000.

Example Number Two

Sam and Sally have the same education, work experience, etc., and are both hired by WidgetCo on the same day. The company sets both Sam's and Sally's starting salary at $2,500 more than they were making at their previous jobs. Sam was earning $37,500 at his previous job, and Sally was earning $36,000; their starting salaries at WidgetCo are $40,000 and $38,500, respectively.

Example Number Three

Brad and Bridget both work for Alpha Inc., have the same job title, same level of responsibility, etc., and they are both earning $100,000 per year. Brad asks for a 5% raise, but Bridget doesn't ask for a raise. Brad gets the raise and ends up earning more than Bridget.

In each of these three examples, the differences in pay between the male and female employees are attributable to a factor other than gender. Under the current equal pay laws, the above scenarios are perfectly fine. However, under the Paycheck Fairness Act, the outcome would be very different. An employer would have to demonstrate that its pay practices are divorced from any discrimination in its workplace or at the employee's prior workplace, that the pay practice is job related, and that it is consistent with business necessity.

The Paycheck Fairness Act would substantially alter the way American businesses are permitted to compensate their employees. The Act would limit the flexibility employers have in addressing different salary histories, different salary demands, etc. Businesses would have to make adjustments for any gender differences in negotiating skills ' and willingness to engage in negotiations. They will also be required to right previous wrongs of the employees' previous employers.

Conclusion

It remains to be seen whether the Paycheck Fairness Act will be signed into law, but there seems to be substantial support for this Act. Organizations should review their compensation practices to determine which of their practices would be affected by the Paycheck Fairness Act, and should begin making some contingency plans under the assumption that the Act will be signed into law. The Paycheck Fairness Act has sweeping implications for all businesses; proactive employers will begin preparing now for those implications.

Stephanie R. Thomas, Ph.D., is the Director of the Equal Employment Advisory and Litigation Support Division of MCG, Providence, RI. Her practice focuses on the application of statistical analysis to EEO issues and workplace discrimination claims relating to compensation, hiring, promotion, and involuntary termination. Dr. Thomas has provided expert economic and statistical testimony in federal and state courts throughout the U.S.