Conducting Gender Pay Audits in a Changing Landscape

As jurisdictions across the country adopt gender pay equity laws, you may need to take a fresh look at your organization's compensation policies.

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Illustration by Ellen Weinstein

​It may be time to review—and possibly alter—your compensation policies and practices.

Gender pay equity laws have been popping up around the country and are prompting closer scrutiny of pay issues, with more companies now prohibiting the use of prior salary to set starting pay, said Mickey Silberman, an attorney with Fortney & Scott in Denver.

Though every organization has pay disparities, not all of them are unlawful. Some can be explained by differences in education, job-related experience and other permitted factors. Others cannot.

Through a pay audit, employers can determine whether any vulnerabilities exist in their compensation structure and, more importantly, use it as a guide to address any issues, explained Lara de Leon, an attorney with Ogletree Deakins in Orange County, Calif., and San Antonio.

Here’s an added incentive: Several states now provide for a “safe harbor” or “affirmative defense” to liability when an employer conducts a pay audit and can demonstrate that it is taking good-faith steps to eliminate gender pay gaps.

Keep in mind that it’s important to conduct audits under the attorney-

client privilege. That can help protect components of the audit from disclosure to plaintiffs’ attorneys during litigation or to investigators during a government audit.

“This protection will allow for freer discussions with legal counsel to aid in identifying and correcting pay issues,” de Leon said. “The attorney-client privilege, however, is not bulletproof, and there may be certain instances where it is beneficial for an employer to disclose aspects of its audit.”

Employers should consider creating a separate nonprivileged business document that explains the process and results, said Jonathan A. Segal, an attorney with Duane Morris in Philadelphia and New York City. They will want the analysis to be protected, but may want to share certain information without potentially waiving the attorney-client privilege. 

Recent Trends

The 9th U.S. Circuit Court of Appeals recently ruled that an employer that based starting salaries on past pay violated the federal Equal Pay Act (EPA). (The court’s jurisdiction includes Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington.) This holding overturned the appellate court’s opposite conclusion in a 1982 case. 

This time around, the 9th Circuit judges looked closely at new state and local pay equity laws, which share the goal of halting perpetuation of the pay gap, Silberman noted. 

But there’s disagreement among the federal appellate courts. For example, the 7th Circuit has held that past pay can be a “factor other than sex” that employers may use to determine wages under the EPA.

“What’s clear at this point is that there are different standards in different locations on whether employers can consider salary history,” said Avi Kumin, an attorney with Katz, Marshall & Banks in Washington, D.C.

First and foremost, look to the applicable laws in the areas where your company does business—not just in the circuit where you operate, but also on the state level, de Leon said. State laws may have different definitions, criteria and burdens of proof.

Audit Steps

“While it’s becoming harder to have a one-size-fits-all approach, with some thought and discussion, employers can establish a defensible compensation structure that aligns with their core principles,” de Leon said.

Steps to conducting an audit include the following:

  • Carefully consider which jobs, locations or business units to assess.
  • Think about what data is available to include in the audit that would potentially impact pay. Factors typically include job title, pay grade, time in the role, work location, business unit and performance history. Other considerations may include education, special skills and experience. 
  • If a disparity exists that cannot be explained by legitimate factors, take steps to correct it. That often means increasing someone’s pay. Communicate that decision in a way that does not increase risk.

“Employers should look at correcting the cause of the disparity, as well as correcting it monetarily,” de Leon said. “Otherwise, a disparity will just repeat in the future.”

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