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The Year End Is Prime Time for a Pay-Equity Review

A businessman and a woman sitting on a balance scale.

At this time of year, many employers are wrapping up the performance review process and making decisions about year-end bonuses and raises for next year. With heightened scrutiny applied to compensation decisions and new pay-equity laws in several states and localities, now is an ideal time for employers to evaluate their pay practices and correct any disparities.

Know the Legal Obligations

The federal Equal Pay Act (EPA) requires that men and women in the same workplace be compensated with equal pay for equal work. This means that employees who perform substantially equal work in the same establishment for jobs that require equal skill, effort and responsibility and are performed under similar working conditions must be compensated equally. Pay equity covers all forms of compensation, including base wages, overtime pay, bonuses, benefits and other perks. Under federal law, disparities in pay among employees with equal job duties are permissible only if they are based on a factor other than sex, such as seniority, merit, qualifications, skills, education or level of responsibility.

But the evaluation doesn't stop there. Nearly every state has its own law that also prohibits gender-based wage discrimination.

Many state pay-equity laws, especially ones passed in recent years, go well beyond the federal EPA and require that pay differentials be:

  • Justified by bona fide factors other than sex.
  • Job-related to the position in question.
  • Consistent with business necessity.

Certain bellwether states, such as California, Maryland, New Jersey and Oregon, have expanded their pay-equity laws to cover more than gender-based discrepancies, including those based on race, ethnicity and religion.

[SHRM members-only resource: Leave Laws by State and Municipality]

State pay-equity statutes may also provide employees with more remedies and higher monetary awards when employers violate the rules. As a result, businesses throughout the country are struggling to comply with not just the EPA but also with a morass of state law requirements that carry the possibility of significant liability.

Here's what employers can do to lower their risk and ensure compliance with federal, state and local requirements.  

Review Policies and Practices

Before finalizing year-end compensation decisions, employers should critically examine their compensation policies and practices to ensure that pay inequities among individuals with substantially equal job duties are not carried forward. Questions to consider include:

  • Are compensation decisions based on objective or subjective criteria?
  • Is there documentation to justify pay decisions?
  • If pay differentials are based on performance, do performance appraisals and documentation support the decisions?
  • Are there legitimate factors other than gender or other covered characteristics that justify a pay disparity between employees performing substantially similar work?

Depending on the answers, adjustments should be made before compensation decisions are finalized to ensure that they are based on objective, well-documented criteria and that any disparities among employees who perform substantially similar work are due to legitimate reasons identified under the applicable laws. In some locations across the country, employers are not allowed to base wage differentials on salary history.

Level the Playing Field

When reviewing pay practices, employers may notice red flags where compensation for employees performing the same job could not be explained by bona fide factors such as experience, education, seniority or responsibility. Now is the time to correct these disparities.

Employers could award end-of-year bonuses to bridge the gap between employees who performed substantially similar work in 2018. They can also offer raises to disadvantaged workers to remedy any pay disparities going into 2019 and beyond. Through a bonus payment or salary increase, employers can take steps to equalize compensation without drawing attention to a potential pay disparity. 

Conduct Audits

Some organizations make compensation decisions only once a year, but pay equity is an ongoing compliance issue that requires vigilance. After the year-end compensation decisions are made, employers should consider what additional steps they can take to stay ahead of any equal-pay issues.

Employers could conduct a privileged pay audit to identify potential pay disparities among employees performing comparable work, determine whether there are lawful explanations for those disparities, and take steps to correct disparities as appropriate.

An audit also provides an opportunity to identify and correct weaknesses in the organization's systems to protect against claims of pay disparity going forward. In some locations, there is a legal safe harbor for employers that can prove they undertook a valid pay-equity audit.

Audits should be conducted with advice from an attorney who understands the nuances of pay-equity laws so they are covered by attorney-client privilege and can remain confidential.

Consider Systemic Changes

Organizations should also consider making systemic changes. These would include drafting formal compensation policies and procedures and establishing safeguards to avoid exceptions that could result in unlawful pay differentials. Businesses could also implement standard pay ranges or guidelines for each position or job classification.

Furthermore, decision-makers should be trained on:

  • Making proper pay decisions that comply with organizational policies and the applicable law.
  • The appropriate factors to consider when making pay decisions.
  • Applying guidelines and exercising discretion properly.
  • Documenting compensation decisions.

By taking these steps, employers will be in a better position to make compensation decisions and ensure compliance with federal and state pay-equity laws. 

Kathleen McLeod Caminiti is an attorney with Fisher Phillips in Murray Hill, N.J., and New York City. Sarah Wieselthier is an attorney with Fisher Phillips in Murray Hill, N.J.


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