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W-2 info may not reveal pay discrimination
The Equal Employment Opportunity Commission (EEOC) wants to collect information from employees' W-2 forms in an attempt to compare pay and find possible pay discrimination in companies. But comparing individuals' W-2s won't give the agency the full story on how each person is compensated, according to the Society for Human Resource Management (SHRM).
SHRM asked on April 1 that the EEOC withdraw its proposal to collect W-2 wage information on EEO-1 reports for employers with 100 or more employees. If the commission’s proposal to collect information to root out pay discrimination is finalized, SHRM recommended that the EEOC use annualized base salary or wage rate instead of W-2 pay.
Using the base salary “allows the EEOC to conduct a more direct comparison of pay between employees in the same job category since, unlike W-2 wage information, it does not include things like bonuses or shift differentials and it does not reflect earnings the employee may set aside in an employer-sponsored retirement or child care account,” Nancy Hammer, senior government affairs policy counsel for SHRM, told
The Problem with W-2s
W-2s include payments to employees that are driven primarily by employee choice, not pay discrimination, according to the letter from Mike Aitken, SHRM vice president of government affairs, with assistance from Lynn Clements, director of regulatory affairs at Berkshire Associates in Columbia, Md. Berkshire Associates is an HR consulting and technology firm specializing in affirmative action compliance and applicant management.
Take two employees—a man and a woman. They may earn the exact same base pay, bonuses and other compensation, but if the woman contributes fully to her 401(k) account and the man does not, it will appear that the male employee is earning almost $18,000 more, SHRM noted.
And two production workers could have different W-2 earnings if one was excused from working overtime hours as a reasonable accommodation under the Americans with Disabilities Act (ADA) while the other worked all overtime hours available to her.
“Pay is anything but static,” SHRM observed.
Two employees may have the same stock options, for example, but may cash them out in different years. “W-2 wages would make it appear that one employee received significantly more compensation than the other, even though both had the same benefit,” SHRM noted.
Two employees may report different W-2 wages in a calendar year if one received a $25,000 signing bonus that year but the other did not. That’s true even if the other employee received the same $25,000 signing bonus when she began employment in a different year.
The midyear promotion of a woman may make it appear on a W-2 as if she is earning less than others in her new position, when she could be receiving the same salary. And it will appear she is earning more than those in her old position.
Another example: If someone starts a new job on May 1, 2015, and has an annual salary of $150,000 a year, but works only eight months that year, the employee will get a W-2 that reflects earnings of $100,000. Had the person worked the full 12 months, the worker’s W-2 would reflect an amount closer to $150,000. “The $50,000 difference has nothing to do with gender or race discrimination, but rather the timing of the employee’s start date,” Alissa Horvitz, an attorney with Roffman Horvitz in McLean, Va., told
She added, “Another illustration of why the W-2 amount is a misleading data point from a pay equity perspective stems from the types of income and taxable fringe benefit categories that are included in W-2 amounts, in addition to base salary.” The W-2 includes bonuses and shift differentials. Bonus programs often reward employees for individual or unit performance—unrelated to the other data point the EEOC is collecting, hours worked.
Other examples of taxable fringe benefits included in W-2 income are “athletic club membership fees, the value of the personal use of an employer-provided vehicle, relocation expenses and group term life insurance provided to employees in excess of $50,000,” Horvitz observed.
If an employee elects to obtain life insurance through his or her employer for amounts in excess of $50,000, the employer may “gross up” the employee’s paycheck to pay for the taxes associated with the value of the insurance, and these amounts are reflected in the employee’s W-2. Another employee may have declined to purchase life insurance through the employer, so that employee doesn’t need any gross-up. “The fact that two employees in the same job with the same base annualized salary have different W-2 amounts is a reflection of one employee’s choice to purchase life insurance through the employer, not race or gender discrimination,” Horvitz said.
Annualized Base Salary
SHRM recommended that if the EEOC goes forward with the compensation reporting obligation, it use the annualized base salary or wage rate. This “is a more meaningful data point to collect for conducting a preliminary analysis of employers’ compensation practices” than W-2 pay is, SHRM said. The annualized base salary information is regularly in most employers’ HR information systems (HRIS), which is where race, ethnicity, gender and EEO-1 information is already stored.
SHRM noted that advantages of looking at annualized base salary or wage rate instead of W-2 pay include eliminating:
“SHRM agrees that we need to root out unlawful compensation discrimination wherever it may exist,” Hammer said. “Our main concern about the EEOC’s proposal is that the highly aggregated nature of the data the commission seeks will not help identify discrimination and will be burdensome.”
Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him
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