Companies need to take heed of new Fair Pay Act

Pay discrimination has become a hot topic in Washington. President Obama recently signed the Lilly Ledbetter Fair Pay Act, which relaxes the statute of limitations for pay discrimination claims. The Senate is also considering another bill, the Paycheck Fairness Act, to make pay discrimination claims easier to prosecute.

This legislative activity — and the publicity surrounding it — are expected to lead to an increase in pay discrimination lawsuits, including class and collective actions. With the stakes higher than ever, companies should take action to reduce their exposure to such lawsuits.

Consider a typical pay discrimination claim: A female employee is paid less than her male colleagues. She claims to be the victim of a series of discriminatory decisions that have cumulatively resulted in a large pay disparity.

Two primary federal legal remedies are available: a disparate treatment lawsuit under Title VII of the Civil Rights Act or a claim under the Equal Pay Act, or EPA, a law that prohibits paying men and women different wages for the same work. The employee also may be able to assert claims under pertinent state discrimination or equal pay laws.
Under Title VII, the employee must prove that the company acted with discriminatory intent in making the pay decisions at issue.

Under the Equal Pay Act, intent is irrelevant; a violation theoretically occurs whenever a woman is paid less than a man for the same work and the disparity cannot be attributed to something other than gender. However, because case law has substantially narrowed the EPA as a remedy for alleged pay disparities, most recent pay disparity litigation has focused on either Title VII or state law.

A pending bill in the Senate — the proposed Paycheck Fairness Act — may change this. The proposed law would amend the Equal Pay Act in a number of ways, such as by making employer defenses harder to establish, making class actions easier to bring and allowing juries to award higher damages awards.

While it is too early to predict the fate of the Paycheck Fairness Act, its introduction has brought renewed attention to the issue of pay discrimination.

Ledbetter measure

The Lilly Ledbetter Fair Pay Act, which became law in January, has already changed the legal landscape. The act was a response to the Supreme Court’s 2007 decision in Ledbetter v. Goodyear Tire & Rubber Co., Inc., 550 U.S. 618.

Lilly Ledbetter was the protagonist in the typical pay discrimination claim discussed above. By the time her suit reached the Supreme Court, she was pursuing only a Title VII claim. The issue before the court was whether her claims were barred by the statute of limitations.

Goodyear, her employer, argued that Ledbetter’s claims were time-barred because no discriminatory pay decisions had been made during the 180-day statute of limitations period preceding the filing of her charge with the Equal Employment Opportunity Commission. (In many states, the EEOC charge-filing period is 300 days). In response, Ledbetter argued that each paycheck tainted by prior discrimination started the statute of limitations period anew.

In a sharply divided decision, the Supreme Court sided with Goodyear, thus preventing a discrimination claim based on remote events.

Congress responded quickly by passing the Ledbetter Fair Pay Act, which applies to pay discrimination based on gender and other protected categories, such as race, age and disability. Under the measure, each paycheck infected by prior discrimination triggers a new statute of limitations period (although employees may only recover back pay for a two-year period).

As a result, employers can now face liability for allegedly discriminatory decisions that were made many years — even decades — ago by supervisors who are no longer employed by the employer. Likewise, compensation decisions made now could be subject to challenge far into the future.

What’s an employer to do?

With increased scrutiny on pay discrimination, companies may wonder how their current compensation systems, which reflect the effects of many past decisions, measure up. Now, more than ever, may be the appropriate time for employers to conduct an attorney/client privileged review of their current compensation structure. Doing so may enable employers to limit their ongoing risks related to past employment decisions.

For large employers with many employees in similar positions, a statistical analysis will likely be the most efficient and useful tool for comparing relative pay. For smaller employers and those with unique job positions, sample sizes may be too small to conduct meaningful statistical analysis. Nonetheless, such employers can still audit their compensation practices by following the process below and conducting more individualized assessments of compensation.

Before beginning an analysis of relative compensation, an organization should be sure it has the time, resources and internal commitment to address the results — whatever they may be.

It is also crucial that any compensation analysis be protected by the attorney/client privilege and shielded from future discovery. At the outset, companies can take the following steps to protect the privilege:

• Document that the analysis is being done at the request of counsel for the purpose of providing legal advice.
• Create a process for restricting access to key documents to a small control group and marking documents confidential and privileged.
• Involve outside counsel or make clear that in-house counsel is directing the analysis for the purpose of providing legal, rather than business, advice.

Current compensation relationships

It is important for an employer to first understand its overall philosophy toward compensation and how compensation decisions are made. Answering a few simple questions can provide a baseline of information from which to start a review: First, what is the relevant measure of compensation to be studied? Second, what employee- and employment-related factors affect compensation decisions? Third, what level of management makes compensation decisions? Finally, which employees are expected to have similar compensation levels?

After answering these questions, employers can then review the characteristics that are likely to impact compensation. Some of these characteristics will already be recorded and maintained through normal business practices while others, such as prior work experience, may need to be collected.

For most employers, employees are paid different compensation for a variety of reasons, including job and employee characteristics. These characteristics must be factored into any analysis of relative compensation. Such characteristics include: level of responsibility; work assignments; job performance; market for particular type of work; work experience; local labor market conditions; level and type of education; and organizational specific business processes.

As part of the analysis, legal counsel should determine whether certain subjective characteristics affecting compensation, including past performance evaluations or work assignments, should be analyzed independently to make sure they do not reflect significant protected group disparities. This determination is particularly important because the Ledbetter Fair Pay Act includes some practices that affect compensation indirectly within its reach.

In addition, it is also important to determine for which employees the employer will provide similar compensation for job and employee characteristics. For example, an employee’s level of education may be valued differently by a research and development department and a production department. In addition, consideration should be given to the organizational structure, the market structure, the requirements of particular positions and the level at which salary decisions are made.

When performing a statistical analysis, the comparator groups should be large enough to provide meaningful results but should not group together dissimilar employees whose characteristics are likely to be valued differently within the market or the employer. Improper groupings of employees can result in misleading statistical conclusions.
Statistical analyses are only the start of the compensation review process. Statistically significant differences indicate that the protected group salary difference is not likely to have occurred by chance. It may be that protected group members were, in fact, paid less than their non-protected counterparts, or it may be the case that the analysis has omitted factors that explain differences in compensation.

As such, groups showing statistically significant salary differences should be researched to determine whether the analysis has omitted factors related to compensation or whether there are individual employee salaries that do not “fit” with other employees in the comparison group. When feasible, omitted compensation-related characteristics should be collected and included in the compensation comparison, and individual “outliers” — and the reasons why such outliers exist — should be documented.

Results and remediation

A report summarizing the relative compensation analysis should be balanced. It should address the strengths and challenges of the employer’s compensation system as well as any pay disparities identified by the analysis.

Once the analysis is complete, the organization must be prepared to deal with the results and take action, if necessary. The appropriate course of action will depend on the results of the analysis. It could involve gathering more information to support compensation disparities, calibrating future compensation adjustments to eliminate disparities over time or considering changes to the overall compensation system going forward.

In addition to looking back, companies should also prepare for potential challenges of their current compensation decisions, which can now occur well into the future. Documentation is key to any defense, and companies should be sure to document the reasons for the compensation decisions they are making now.

Employers are also well advised to develop objective criteria for and to monitor compensation decisions, including starting salary, merit increases and promotional increases. This will help standardize compensation throughout an organization and reduce risk.

Kenneth Bello is a founding partner of the Boston law firm of Bello Black & Welsh where Jennifer Belli is an associate. David Lamoreaux and Matthew Thompson head the labor and employment practice at CRA International, a global business, financial and economic consulting firm.