MEPA is coming: an overview of the audit process

Major changes to the Massachusetts Equal Pay Act, G.L.c. 149, §105A, will take effect July 1. In some ways, the Massachusetts legislation goes farther than any prior pay equity legislation in the U.S.

Is your company prepared? The best way to avoid pay equity claims — and take advantage of a unique affirmative defense under the new Massachusetts law — is to conduct a pay equity audit under the protection of the attorney-client privilege.

Overview of the law

New justifications for wage differentials

The existing Massachusetts law and the Federal Equal Pay Act have long required “equal pay” for “equal work.” The new law, in contrast, will prohibit differences in wages for people of different genders who perform “comparable work”:  work that is “substantially similar in that it requires substantially similar skill, effort and responsibility and is performed under similar working conditions.” “Wages” are defined broadly to include “all forms of remuneration for employment.”

In contrast, the prior version of the law, which was in effect for decades but hardly litigated, required employees to prove that they earned less than an employee of the opposite gender who performed a job with similar content.

In two decisions interpreting that version (the Jancey decisions), female school cafeteria workers sued a school committee alleging that they were paid less than male custodians. The Supreme Judicial Court ruled in favor of the school committee, concluding that the jobs were not comparable because their content was not similar.

After the Jancey decisions, the statute was essentially ignored by plaintiffs’ attorneys. Until now.

When the law takes effect, an employer will be permitted to explain wage differentials between employees of opposite genders by relying on one or more of the following factors: (i) a system that rewards seniority (provided that time spent on protected parental, family and medical leave does not reduce seniority); (ii) a merit system; (iii) a system that measures earnings by quantity or quality of production, sales or revenue; (iv) geographic location in which job is performed; (v) education, training or experience (to the extent such factors are reasonably related to the job); and (vi) travel (if a regular and necessary condition of the job).

The federal and most state-level pay equity laws provide a catchall defense for any “factor other than sex,” but the Massachusetts statute has no similar provision.

The law will be enforced by the Attorney General’s Office. While the AG’s Office is not required to promulgate regulations or issue informal guidance, we anticipate that it will do so soon. Information provided by various sources indicates that the AG’s Office is preparing definitions and guidance related to the six factors.

For example, we anticipate that the AG’s Office may provide guidance on what constitutes a “system.” Does it have to be in writing? Does it have to be objective and/or measurable? We also anticipate guidance on when geographic location may be a valid reason for a wage disparity.

Other new requirements

Among other changes, the new law makes it unlawful for employers to prohibit employees from discussing or disclosing wages, and prohibits Massachusetts employers from requesting the compensation history of an applicant prior to making an offer, unless the applicant “voluntarily” discloses such information.

New self-evaluation defense

The new law creates an affirmative defense to wage discrimination claims for an employer that has (1) completed a self-evaluation of its pay practices that is “reasonable in detail and scope in light of the size of the employer” within the three years prior to commencement of the action; and (2) made “reasonable progress” toward eliminating pay differentials uncovered by the evaluation.

The new law contains no information on what is required to establish that an audit is “reasonable” or what constitutes “reasonable progress.” Because this defense is unique to Massachusetts, there is no other body of law or experience that sheds useful light on what these standards may require of an employer.

As mentioned above, the Attorney General’s Office is expected to issue informal guidance that addresses these standards. We anticipate, based on several sources, that the AG’s Office will define “reasonable” as depending on the size and complexity of an employer’s workforce, the jobs and employees and information evaluated, and the sophistication of the method used.

The AG’s Office is expected to provide a guide for employers about how to conduct a self-evaluation, potentially including template forms. And the office is expected to define “reasonable progress” with respect to the size and resources of the employer.

Risks of the defense

While the new self-evaluation defense may have advantages, it also creates substantial risks. If not adequately protected, any evaluation used to substantiate a defense under state law might be used against a company in litigation under the federal Equal Pay Act or Title VII, which provides no similar defense.

Thus, Massachusetts employers should work with counsel in order to protect the assessment process and results with the attorney-client privilege, as discussed below.

Protection of attorney-client privilege

Employers conducting a pay equity assessment should protect the process and results by working closely with legal counsel and limiting the number of internal personnel involved in the process. Without these protections, the self-evaluation (and any wage differentials identified by it) may be discoverable in the event of a lawsuit.

Protecting the assessment does not restrict an employer’s ability to share or rely on the results at a later stage, but rather permits the employer to decide whether and when to do so.

Even Massachusetts employers that anticipate relying on the self-evaluation defense would be wise to cloak the entire audit process with the attorney-client privilege until they can evaluate the results and determine whether to rely on the defense. Otherwise, if the assessment uncovers significant wage differentials, and it is prohibitively expensive for the employer to make “reasonable progress” toward remediation, the “defense” will provide no protection.

Protecting a pay equity review with the cloak of the privilege requires caution and diligence as to the creation, storage and sharing of documents, including limiting the dissemination of documents by email, encrypting files that may contain personal or other sensitive information, and taking care to include the attorney/client privilege designation on all materials.

The materials created in the course of a pay equity review can be extraordinarily sensitive and subject to exploitation by adverse parties once disclosed, which may favor the use of outside counsel to avoid any challenges to the asserted privilege based on an assertion that an in-house attorney (who may have limited expertise in pay equity matters) was acting in an executive capacity rather than providing legal advice.

The audit process — time-consuming and iterative

The audit process can be time-consuming, as merely gathering the necessary data can be laborious. Data are often stored in multiple electronic systems that do not interact with each other, or in physical files in different offices, sometimes requiring a significant amount of time to gather.

Experts — such as certified project management professionals — can assist the employer with identifying and gathering the necessary data efficiently and comprehensively.

The iterative nature of the audit process also takes time. The key steps in a typical audit are: 1) selecting the internal and external team, including attorneys and labor economists; 2) collecting the data needed; 3) conducting the initial analysis; 4) collecting additional data and revising the analysis to address unexplained differentials; and 5) considering remediation and revisions to policies and/or practices.

After an employer gathers the initial data and a labor economist performs the initial statistical analysis, the team typically identifies employees whose pay is not explained by the factors considered in the initial model, e.g., their pay appears too low or too high. The team may then review personnel records and other data about the flagged employees in order to determine whether there is a non-gender (or race) based explanation for the differential that has not previously been incorporated into the model.

This iterative process may continue until the employer fully explains the apparent wage differential or concludes there is a problem area and determines whether and how to remediate it.

Finally, remediation can be time-consuming as well, as employers have to decide which employees should receive an adjustment, how the adjustments will be calculated, and when the adjustments will occur, and the internal team must obtain the necessary approvals.

With all of these tasks, an effective pay equity review can take several weeks or even months to complete, depending primarily on the internal resources that the employer can bring to bear on the project.

In light of the July 1 effective date of the new law, employers should consider now whether and when to conduct a pay equity audit by consulting with an attorney experienced in such assessments.

Barry J. Miller is a labor and employment partner at Seyfarth Shaw in Boston and member of the firm’s pay equity group. He can be contacted at [email protected]. Hillary J. Massey is an associate in the firm’s labor and employment department. She can be contacted at [email protected].