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How to Conduct a Fair-Pay Audit in California

A woman sitting at a desk and talking on the phone.

Recent changes to pay equity laws in California make it essential for employers to periodically audit their pay practices. But employment attorneys say it's critical for HR professionals to get executive buy-in before starting the process.

The Golden State has had a pay equity law for decades, but it was given more teeth in 2016 when the Fair Pay Act took effect. Instead of requiring "equal pay for equal work," the state requires fair pay for men and women who perform "substantially similar work, when viewed as a composite of skill, effort, and responsibility." Effective Jan. 1, the fair pay law was expanded to include race and ethnicity.

If there is a salary disparity that needs to be adjusted, that can lead to a significant monetary decision for the business, said Michelle Lee Flores, an attorney with Cozen O'Connor in Los Angeles. Therefore, the first step in conducting a fair-pay audit is to get management and the people who make budget and compensation decisions on board and supportive of rectifying any disparities that may be found during the audit, she said.

[SHRM members-only toolkit: Managing Pay Equity]

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.

Flores and de Leon both cautioned that attorney-client privilege doesn't always apply, and there are times when an employer may want to waive the privilege to show the audit steps it took as a defense in a lawsuit.

"Privilege may not attach, but in general you can at least try," Flores said. "It's all about endeavoring to put in place some safeguards that can come into play later if needed."

So, how can HR professionals set up good systems to correct and prevent unintended wage disparity? Once all the relevant decision-makers are on board, here are some additional audit steps to follow.

Gather Information

HR professionals should take a look at what type of data they can pull from their human resources 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."

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

Job Grouping

Once the information is collected, employers should 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.

For example, she said, receptionists on different floors or administrative assistant in different departments should be compared. Punctuality, customer service, answering phones and greeting people may be the essential responsibilities for all receptionists whether they're on the first, 10th or 18th floor.

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? What's at the root of the pay differential?"

California law is stricter than federal law when it comes to comparing jobs, de Leon said. The state law is broader, so employers might want to look at workers in similar jobs or across compensation bands rather than just those in the same band or with the same job title, she said, because expanding the parameters can provide a better picture.

California's fair-pay law doesn't limit the comparison to jobs within an establishment. Therefore, employers in the state should consider running comparisons between locations—such as offices in Irvine and Long Beach.

Mind the Gap

Flores cautioned that if fair-pay evaluations aren't done proactively in California, they may have to be done under the microscope of a lawsuit.

There are going to be some differences in education and experience that justify pay disparities, she said. "When you start looking at differences, there may be some good reasons, but 'better negotiator' isn't going to fly anymore."

Gender bias can be at play when stereotypes are made about negotiation skills, she added. "Women who negotiate may be seen as pushy or aggressive. They may have learned to ask for things in different ways or to not ask at all."

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.

Compensation guidelines should be developed and possibly revised to set parameters for starting pay and increases. The guidelines can be flexible, but consistency is the goal, de Leon said.

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."

On the Horizon

The Fair Pay Act already provides that "prior salary cannot, by itself, justify any disparity in compensation." Proposed legislation, however, would altogether ban employers from asking job applicants about their salary history.

Similar bills have been unsuccessfully introduced in California in the past, but laws like this are gaining momentum. A ban on salary history increases will hit employers in Philadelphia in May and a Massachusetts ban will take effect in 2018.

Either way, de Leon said, employers should be aware that pay equity is an area of continued focus for lawmakers.

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