Is It Time to Audit Your Pay Practices?

There have been many legislative and administrative law amendments made by the new administration, and there are sure to be more to come. One that should be on your radar is the Paycheck Fairness Act. Congressional Democrats have announced they are renewing their sponsorship for the Paycheck Fairness Act, which would amend and arguably strengthen the Equal Pay Act of 1963 (EPA) and make employers liable for unjustifiable pay disparities between men and women.

The EPA, enacted over 50 years ago, prohibits employers from paying unequal wages to men and women in the same workplace who perform substantially equal work. Specifically, the act prohibits paying women less for performing the same or substantially equal job with the same level of experience and qualifications at the same work establishment. “Substantially equal jobs” has been interpreted to mean jobs that require similar skill (experience, ability, education, and training), effort (physical and mental) and responsibility, and are performed under similar working conditions. An employer’s “work establishment” is generally understood to mean a distinct physical place of business rather than an entire business or enterprise.

In order to make a case, a plaintiff must prove that different wages are paid to employees of the opposite sex who work in jobs that require substantially equal skill, effort, and responsibility, and are performed under similar working conditions in the same work establishment. There are four affirmative defenses available under the current EPA that would allow for unequal pay for equal work: 1) a seniority system; 2) a merit system; 3) a system that measures earnings by quantity or quality of production or output; or 4) any factor other than sex. 

A prevailing plaintiff is entitled to an award of back pay, a pay raise to the level of the opposite-sex counterpart, and attorneys’ fees. While a plaintiff is not required to prove discriminatory intent, in cases involving intentional sex-based wage discrimination, the plaintiff may also recover liquidated damages equal to the amount of the back-pay award. The EPA does not currently allow for awards of compensatory or punitive damages.

The Paycheck Fairness Act would make substantive changes to the EPA, including:

• Prohibiting retaliation against workers who disclose their own wages or who inquire about their employers’ wage practices;
• Broadening the definition of “work establishment” and permitting reasonable comparisons between employees in defined geographical areas (i.e., an entire county) to determine fair wages;
• Narrowing the “factor other than sex” affirmative defense to require that the defense be based on a bona fide, job-related factor such as education, training, or experience that is consistent with business necessity;
• Prohibiting employers from screening applicants based on their salary history during the interview process;
• Fortifying penalties for equal pay violations and allowing for the recovery of compensatory (i.e., loss of reputation or mental anguish) and punitive damages (only in cases of intentional discrimination and not in cases against the U.S. government);
• Updating class action provisions to make it easier for EPA plaintiffs to participate in class action lawsuits by adopting Rule 23 of the Federal Rules of Civil Procedure, which require plaintiffs to “opt out” rather than “opt in” to class actions; and
• Strengthening enforcement methods by directing the EEOC and DOL to collect wage-related data to better discover violations; and
• Authorizing additional training for staff to better identify and handle wage disputes.

The argument in favor of the Paycheck Fairness Act is that the EPA has become stagnant and outdated over the years, and therefore has proven to be an ineffective remedy to sex-based wage discrimination. Proponents assert that across industries and occupations, women receive unequal pay for substantially equal work regardless of region, education and experience. According to information published by the DOL and based on studies performed by the Bureau of Labor Statistics, on average, women working full time and year round are paid 76 cents for every dollar earned by their male counterparts nationwide. Some studies that consider relevant career and family matters or personal choices still demonstrate an unexplained gap between men and women’s earnings in the same occupations immediately after graduation that continues to widen years after that.

Opponents of the Paycheck Fairness Act argue the law is unnecessary because equal pay for equal work is already the law and the Paycheck Fairness Act would have detrimental effects, including (1) undermining worker productivity by incentivizing businesses to move away from performance-based pay; and (2) making it difficult for employers to offer flexibility in hours or schedules, ultimately hurting women who desire such flexibility. Opponents also argue the act would lead to an increase in costly wage discrimination lawsuits.

The Paycheck Fairness Act was first introduced in 1997 and has been reintroduced in Congress many times. Most recently, it was reintroduced in the House on January 28, 2021, by Rep. Rosa DeLauro of Connecticut with 224 cosponsors. It has been referred to the House Education and Labor Committees, but it remains unknown whether it will pass in the House, make it to the Senate floor for debate and ultimately garner enough support to be signed into law.

Regardless of whether the Paycheck Fairness Act becomes law during the current administration, workers are demanding increased transparency when it comes to pay practices and pay equity, and some local jurisdictions are passing their own pay equity laws. For example, beginning this year, certain employers doing business in California will be required to comply with mandatory pay data reporting. The announced purpose of California SB 973 is to allow state government to efficiently identify wage patterns and allow for effective enforcement of equal pay or anti-discrimination laws, including the state’s own equal pay act when appropriate. In light of the legal developments that have already taken place in this area of the law, and the anticipation of more to come, we recommend that you began performing regular internal audits of your organization’s pay practices to identify and correct any unjustifiable pay disparities. That means taking the following steps under the direction of legal counsel:

• Establish the purpose and parameters of the audit, including what business units, physical locations, or departments will be covered and what time period will be analyzed
• Examine your pay practices and policies and how they are being implemented and enforced
• Collect relevant data not ordinarily captured by your payroll database
• Determine which employees perform the same or substantially the same work
• Analyze the data and assess whether any disparities are justified under the law
• Take corrective actions to remediate unjustifiable disparities

Engaging legal counsel to assist with a pay equity audit or, better yet, lead the effort has the benefit of protecting the audit’s confidentiality by preserving the attorney-client privilege and work product protections that can prevent disclosure of sensitive data. Even if you plan to hire a third party to assist with the audit, it is best to allow your legal counsel to engage a firm so that privileges attach. Legal counsel can also advise what pay equity laws your company must comply with across jurisdictions at the federal, state and local level. We highly recommend you engage legal counsel at the outset of your audit process so that privileges attach as early as possible. We understand the trepidation in performing a proactive pay equity audit to closely examine sensitive compensation information and the related demographics. Nevertheless, such a self-critical analysis is highly effective at minimizing exposure for wage discrimination claims and identifying and remediating any disparities, and it may ultimately provide an affirmative defense against claims of discrimination. In fact, of the many states that have enacted pay equity legislation, three states -- Massachusetts, Oregon and Colorado -- include safe harbor provisions in their new laws. Massachusetts specifically provides potential relief from liability and liquidated damages for employers that conduct a reasonable, good-faith pay audit before a lawsuit is filed and that make reasonable progress in eliminating any prohibited gender-based wage disparities discovered by the audit. The fact is a properly executed audit is a worthwhile exercise that will empower your organization to achieve pay equity and reduce the risk of costly pay discrimination litigation, as well as the reputational damage that accompanies disparity allegations.