Q&A: How to Ensure Compliance with California’s New Fair Pay Law

By June D. Bell Nov 25, 2015
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This spring—as California’s Fair Pay Act was moving through legislative committees—Salesforce.com began scrutinizing the salaries of all its female employees. Its findings prompted the San Francisco-based software company to take action.

CEO Marc Benioff announced this fall that his business was making $3 million in salary adjustments to put women’s pay on par with their male counterparts’ earnings. “We can say we pay women the same as we pay men,” Benioff announced in November at the Fortune Global Forum.

Salesforce is one California company that is likely already in compliance with the state’s Fair Pay Act, which takes effect Jan. 1, 2016. The law mandates that male and female employees doing “substantially similar” work be paid the same wages, unless employers can demonstrate that certain factors such as seniority, a merit system, education, training, experience or productivity can account for the gender disparities.

As 2015 winds down, other companies either based in California or operating in the state may still be scrambling to ensure they’re prepared for the new law. SHRM Online asked three experts to share their views about statistical analyses, labor law and compliance measures related to the Fair Pay Act. (Some responses have been shortened or paraphrased for clarity.) They are:

Jeff Polsky, a San Francisco-based partner in Fox Rothschild’s labor and employment division.

Elaine Reardon, an economist and consultant on litigation involving employment matters. She is a director at Resolution Economics in Beverly Hills, which has conducted hundreds of analyses for businesses facing claims involving gender, race and age discrimination, and wage and hour issues.

Mark Terman, a Los Angeles-based partner at Drinker Biddle & Reath and national vice chair of the firm’s labor and employment group.

Ensuring equal pay for “substantially similar” work is a tall order. Where do I start?

Terman: For each position, look at the essential job description to make a reasonable judgment as to what’s a substantially similar position. Once you’ve developed this matrix of substantially similar positions, factor in skill, effort and responsibility. Next, identify all the forms of compensation people get for those positions. Then identify how decisions about pay are made and determine if there’s an inequity due to gender.

Through this process, patterns will emerge and you’ll see that some compensation for some positions is grouped closely and some may be wildly different. If they’re different based on a gender breakdown, is there a defensible basis for those differences?

The goal is to not only collect the data but to try to understand why there are any gender disparities and then, if there are anomalies, it’s great to know it now so the company can modify the compensation system and change job descriptions or functions to make the pay practices both defensible and fair. It’s a labor-intensive process, and you can assign some of it to consultants, but it takes time.

How long will it take to complete an internal, companywide salary analysis?

Reardon: It depends on how available the information is. It can take three to six months to pull all this information together, particularly if it means extracting data from paper records. It’s something we would do full time, using electronic HR and payroll systems. It’s not anything that’s going to be done in a couple of weeks. And it’s a continuous monitoring process once you have the infrastructure in place.

How can my company protect its compensation data and analysis from being used against us if workers later file claims?

Terman: If you hire a consulting company to do a salary analysis, it’s a good idea to have the evaluation done at the direction of counsel so the company can be shielded by the attorney work product and attorney-client privilege. That allows the company to dig in and, if there are problems, to work to fix them in a productive way and not worry that the work product will be discovered in later litigation and used against the company.

The benefits of attorney-client privilege and attorney work product don’t come unless the attorney is actually involved in the process and the work the company is doing is done at the direction of counsel. Otherwise, all this work and your efforts to do the right thing can be used against you.

Polsky: Have your internal payroll people analyze the data with an attorney’s involvement. If changes are needed, do it and document them so you can refer to them down the road. Employers need to carefully document reasons for compensation decisions.

What critical information is often missing from personnel files that would help when analyzing compensation?

Reardon: My ideal would be to have documentation of what someone’s prior job was, [and] their pay [and] their company. And then the same with their education: Where is their degree from, what was their major, what year did they get the degree? Because when they’re coming in the door, that’s where a lot of the differences [in pay] lie.

When we conduct an analysis, a lot of times we have to ask for resumes and applications because the HR systems don’t document prior experience. If it turns out, for example, that the store managers you’re bringing in from outside are being paid more and are more likely to be male, then you have a problem. So it’s helpful to document what prior experience they bring to a job. You need the documentation to say, “These are the decisions we made and this is why.”

Once they’re an employee, is there a way to record additional training they’ve received? Anything that happens internally tends to be recorded, but if you go outside and, say, get a master’s degree, it’s an open question as to whether it ever gets recorded in your company’s database.

Presumably, if you have a merit-based system, then people are going to be proactive about making sure their records are up-to-date because that’s how you’d move ahead. Thinking about how to systematically keep track of skills and training would help in these kinds of cases.

We’d prefer to analyze and adjust salaries over the course of the year, as workers’ annual reviews come due. Is this OK?

Polsky: The law takes effect Jan. 1, so employees are unlikely to face lawsuits under this law on Jan. 2. But employers should not wait to correct disparities if they determine that they exist. Depending on the size of the employer and the complexity of the issues, 90 days is certainly reasonable (but the judges and arbitrators who make these decisions don’t necessarily ask for my opinion).

When setting salaries for new hires, our company has typically looked at the compensation they received at their previous job and then started them at a slightly higher rate—regardless of their gender. We apply this policy fairly to men and women, so can we continue to do this?

Polsky: The people who make compensation decisions need to understand what are and what aren’t permissible variables. What someone made in their previous job may not be relevant if their salary can’t be justified by their education, experience or training, or other permissible variables in the new law. Prior compensation isn’t one of the permissible variables.

Remember that prior salary may also reflect the worker’s skill at negotiating a higher salary. And there’s at least a perception that men are more likely to negotiate than women. If a company does want to hire a superstar, [it needs] to be prepared to adjust the compensation of others doing substantially similar work and who have the same education, training and experience.

Despite our best efforts to close the pay gap, we may still see some minute variations in compensation for men and women doing substantially similar work when they have the same education, experience, training, etc. Is that acceptable?

Terman: The law doesn’t require a to-the-penny type of precision. Variances of more than 5 percent that can’t be explained by education, experience, etc. will stick out and should be addressed first.

Polsky: I don’t know that any compensation plan will ever be bulletproof. Different statisticians could come up with disparities that others didn’t find. And what exactly does “substantially similar” mean? That question will have to be taken up by the courts and the appellate system.

June D. Bell is a San Francisco-based journalist. Contact her at june@junebell.com.

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