How to Conduct a Multistate Fair-Pay Audit


The gender pay gap has been in the spotlight lately as states and cities debate expanded fair-pay laws and bans on salary history inquiries in the hiring process. But a patchwork of local laws creates compliance challenges for multistate employers that want to equalize pay among male and female employees.

Employment attorneys told SHRM Online that businesses can be proactive by conducting regular fair-pay audits and fixing any unexplainable pay disparities.

Michelle Lee Flores, an attorney with Cozen O'Connor in Los Angeles, said the first step in conducting a fair-pay audit is to get the support of management and the people who make budget and compensation decisions to rectify any disparities uncovered in the audit.

Furthermore, the audit should be conducted under attorney-client privilege, said Lara de Leon, an attorney with Ogletree Deakins in Orange County, Calif., and San Antonio. There are legal risks associated with conducting an audit, and working under attorney-client privilege can potentially protect information from discovery during litigation or a government audit.

Unique State Laws

The best practice for multistate employers is to conduct a federal analysis to see if their pay practices are in line with the Equal Pay Act and Title VII of the Civil Rights Act of 1964, explained Mickey Silberman, an attorney with Jackson Lewis in Denver.

[SHRM members-only toolkit: Managing Pay Equity]

Consider doing separate analyses in jurisdictions with their own pay equity laws, especially in California, Massachusetts and Puerto Rico, because those locations impose unique obligations on employers, he said.

The federal Equal Pay Act prohibits employers from paying workers of one sex less than the other for performing substantially the same job, unless the pay difference can be justified by:

  • A seniority system.
  • A merit system.
  • A system that measures pay by the quantity or quality of production.
  • A differential based on a factor other than sex.

In California and Massachusetts, however, the legal standard is broader, Silberman said.

California's Fair Pay Act took effect in 2016, requiring fair pay for men and women who perform "substantially similar work, when viewed as a composite of skill, effort, and responsibility." The law was expanded to include race and ethnicity, effective Jan. 1.

Beginning on July 1, 2018, the Massachusetts equal pay law will prohibit wage discrimination for "comparable work" based on gender.

Therefore, one reason to consider doing separate analyses for California and Massachusetts is that pay disparities may exist under their laws that don't exist under federal law, Silberman said.

Safe Harbor

The Massachusetts and Puerto Rico laws have offered some opportunities for employers, Silberman said.

Massachusetts provides a "safe harbor" if an employer can show it conducted a reasonable pay analysis within the last three years before a claim was brought and that it has taken remedial steps to begin addressing the pay disparity. This will serve as an affirmative defense to a pay discrimination claim. 

In Puerto Rico, the analysis must have been done with the last year prior to a claim. Although the audit and subsequent remedial steps aren't a complete defense to a pay equity claim in Puerto Rico, an employer that has met the safe harbor requirements won't be subject to certain double penalties under the new law.

This is another reason to conduct a narrow audit in these jurisdictions, Silberman said. If an employer doesn't want to show plaintiffs' attorneys an entire nationwide analysis, it can conduct separate audits for these locations and take advantage of the safe harbor.

Job Grouping

Once employers have decided how to approach the audit, they will need to gather relevant information.

HR professionals should take a look at what type of data they can pull from their human resource information system (HRIS), de Leon said. "Demographics, job title, compensation bands, performance information and anything else that is relevant to an employee's pay should be considered."

Silberman noted that because the job-grouping standard is broader under California and Massachusetts law than under federal law, the parameters should be adjusted accordingly in those states.

Pulling HRIS information may be easier said than done, de Leon cautioned. "Make sure you have up-to-date and accurate data, as some things may need to be fixed."

Employers should then determine how jobs can be grouped together, Flores said. This could be done on a department-by-department basis, but jobs should also be cross-referenced with the same or similar jobs in different departments.

If there's a pay disparity, the employer will need to figure out the reason, Flores added. "Are the employees doing different things while they are sitting there? Does one employee have seniority or is something else going on?"

De Leon noted that the comparison in California isn't limited to a single establishment like it is under federal law. Therefore, employers in the state should consider running comparisons between locations, too—such as offices in Irvine and Long Beach.

Bridging the Gap

Businesses need to be prepared to address any issues they find in an audit, de Leon noted. "You may need to give some workers an increase and reclassify others that aren't really in the right job category."

Through the audit process, employers may discover gaps in their policies for setting starting pay and calculating merit increases or promotions, she added. It may be necessary to train managers on making consistent compensation decisions.

She added that pay decisions should be documented, particularly when they are outside the norm. "If you have that one special person who deserves more pay, document why so there's a record about the reasons the decision was made."

Silberman said he expects more state pay equity laws to pop up over the next few years. "Pay equity has been such a focus, and it has traction," he said. "It will be interesting to follow the developments over the next few years and to see what happens if these laws succeed in narrowing the pay gap."


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