What Employers Don’t Know About Pay Equity Can Hurt Them

By Robert J. O’Hara January 29, 2020
a woman on a stack of coins by a man on a stack of thousands of dollars

​Why is pay equity all the rage, and why now? Consider the deluge of charges from politicians and pundits about massive income inequality. At one end of the range of concerns, there is growing unease about the vast wealth of the top 0.1 percent and the influence that wealth provides. At the other end, the "Fight for $15" movement to raise the federal minimum wage and related efforts is a dominant theme.

While initially focused exclusively on harassment, the #MeToo movement's attention has expanded to include gender pay equity, due to perceived power imbalances between men and women in business. Shareholder and employee activism, a well-known catalyst for corporate social responsibility on the environment and equal employment, have more recently entered the battle for fair treatment on pay.

This is not just a U.S. issue. The United Kingdom is leading the way on gender pay transparency by requiring employers with at least 250 employees to file annual pay-gap data on a government website, which is publicly accessible. The most recent data shows women are paid on average 17.3 percent less than men. This reporting concept did not go unnoticed in the U.S.

EEO-1 Component 2

The Equal Employment Opportunity Commission (EEOC) jumped into the debate in 2016 when it established reporting requirements for employers mandating that they show wages and hours worked by demographics and pay scales. The EEOC added Component 2 to the standard EEO-1 gender and race and ethnicity report that has been filed for decades. The purpose of the addition was to force employers to disclose wages and hours worked to illuminate pay gaps and thus lead to narrowing of those gaps by employers.

Unfortunately, this tactic was a blunt instrument. The pay data was layered on top of the demographic categories of race and ethnicity by job category, then layered once again onto 12 artificial pay bands that the EEOC created. So, for example, the data could tell if an employer had 10 Asian female managers in the company and where they would fall in the pay bands, but it revealed nothing about the employees' roles and responsibilities.

The hours-worked calculation was even more obtuse. If all 10 Asian female managers were in the same pay band, were full time and took two weeks of vacation a year, an employer would total the hours worked for that group and enter it in the grid: 20,000 hours (2,000 hours x 10 = 20,000). The Trump Administration decided this was not an appropriate or useful mechanism and rescinded the requirement. A group of workers' organizations sued last November to reinstate the requirement and won.

Most employers completed the filing of the new data report for 2017 and 2018 by the Sept. 30 deadline but will not be required to file going forward. The EEOC recently determined that the utility of the report was unproven, while the cost burden on employers was 10 times what was originally thought—in excess of $614 million. In October, the court extended the filing deadline until the EEOC confirms it has collected enough data to satisfy the court.

Ironically, the EEOC told the court it will cost $150,000 each week the reporting portal remains open, which is money that would otherwise be spent on enforcement activities. The court retained jurisdiction over the collection through January 2020.

[SHRM members-only toolkit: Managing Pay Equity]

Privileged Pay Analysis

So what should an employer do? They should treat pay equity as a business imperative and look at their pay systems and data.

Start with a privileged pay analysis. If attorneys are directing the analysis to provide legal advice, then employers will likely be able to shield the process and results from disclosure under the attorney-client privilege. This provides maximum protection.

A privileged pay analysis gives employers the information they need to identify disparities and, more important, diagnose why the disparities exist so they can be fixed. There may be legitimate reasons for pay differences based on an employee's education level, experience, job scope or tenure, among many other factors. Each employer places higher value on different qualifications. Some value education level more than experience, for example. A pay analysis shines a light on disparities and points out where further examination may be required.

The results of a pay equity analysis are often surprising, even in the best-run companies. If analysis confirms equitable treatment, an employer might want to share its findings with its employees or the public—like some large U.S. employers are starting to do. The war for talent is intense, and employers are always looking for ways to attract and retain the best employees.

If an employer finds issues through its pay analysis—and there usually are issues—it should get busy working through them. What does the data suggest? Are there systemic reasons (e.g., starting salary, merit increases or gender channeling) causing the gaps? Or are there simpler, nonsystemic reasons—a few key outlier hires, for example. Remember, every time an employer hires, fires, promotes or demotes an employee, it is changing the pay data and affecting the comparisons.

A multinational company may want to conduct a global pay analysis, in which case it should be sure to control for local market variables, such as cost of living. An engineer in India will not be paid the same as an engineer in the U.S. is paid. Comparable job titles are not the determining factor in most cases.

When an employer conducts a privileged analysis, it will be in complete control of any pay adjustments and timing—not a government regulator, a plaintiff's class-action firm, a shareholder activist or an employee group. Do not underestimate the value and flexibility this provides as an incentive to act. This type of analysis, protected by the attorney-client privilege, will give the employer the information and strategies it needs to make appropriate pay adjustments and identify and fix systemic compensation practices to prevent future disparities.

Robert J. O'Hara is an attorney with Epstein Becker Green in New York City.

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