During this time of year, it is common for employers to conduct employee performance reviews and make decisions about employee raises and year-end bonuses. Many employers fail to consider the federal and state pay-equity laws, and the level of heightened scrutiny surrounding compensation decisions, when making these decisions about employee bonuses and raises. This is why employers must review their year-end compensation practices.
An Employer’s Legal Obligations
Under the federal Equal Pay Act (“EPA”), employers are required to equally compensate men and women who perform similar or equal work in the same establishment. This means that employees performing substantially similar work in the same workplace, under similar working conditions, which require equal responsibilities, efforts, or skills, must be compensated equally. These factors are summarized below:
Skills are measured by factors such as the education, training, ability, and experience to perform the job. This issue at hand is the type of skills required to perform the job, not what skills the individual employees have. For example, two bookkeeping jobs could be considered equal under the EPA, even if one of the employees has a master’s degree in psychology, since that degree would not be required for the job.
Efforts are defined by the amount of mental or physical exertion needed to perform the job. For example, consider the scenario where both men and women work next to each other on a line assembling machine parts. The employees in the middle of the line are only piecing certain components of the machine part together. The employees at the end of the line complete the assembly of the machine part and then must lift the assembled product onto a board. The employees at the end of the assembly line are required to exert more effort than the other assembly line jobs, if the extra effort of lifting the assembled product onto the board is a substantial and regular part of the job. It would not be a violation to pay the employee at the end of the assembly line more, regardless of whether the job is held by a woman or a man.
Job responsibilities are measured by the degree of accountability required to perform the job. For example, a salesperson who is responsible to determine whether to accept a customer’s personal check has more responsibility than other salespeople. That is not the case where there is a minor difference in responsibility, such as the responsibility to turn on the lights in the morning and turn off the lights at the end of the day.
Working conditions encompasses two factors: (1) physical surroundings, including fumes, ventilation and temperature; and (2) workplace hazards.
Workplace or work establishment is defined as the distinct physical place of business and not an entire business or enterprise consisting of several locations of businesses. However, if a central administrative unit hires employees, sets their compensation, and assigns them to separate work locations, those separate work sites can be considered to be part of one work establishment.
Employers are obliged to ensure all forms of compensation, including base wages or salaries, bonuses, overtime, benefits and other perks, are allocated to employees equally regardless of gender. Aside from an employee’s gender, the EPA allows for disparities in pay among employees with substantially similar job duties if justified by bona fide factors, such as an employee’s education, sills, seniority, qualifications, objective merit, or level of responsibility.
In addition to the EPA, employers are subject to the Lily Ledbetter Fair Pay Act. The Lily Ledbetter Fair Pact was passed in 2009 after the Supreme Court denied a claim of unequal pay because the statute of limitations had run out, despite the fact that there was clear evidence of unequal and discriminatory pay practices. The Lily Ledbetter Fair Pay Act explicitly remedies the statute of limitations issue by rendering each new paycheck an employee receives to be deemed a new instance of pay discrimination. An employer’s original pay decision will no longer be protected by the statute of limitations because whether employees are paid daily, weekly, or bi-weekly, employees may have a potential claim for discriminatory pay practices if their employer violates the EPA.
However, an employer’s review of their compensation practices cannot stop after ensuring their policies comply with federal law. Nearly every state has enacted pay equity laws that prohibits discrimination in wages based on gender, and some states, including California, Oregon, New Jersey and New York have expanded their pay equity laws to extent to other legally protected groups, including race, ethnicity and religion.
As of October 8, 2019, New York expanded its pay equity laws among all protected groups-not just between male and female employees. The following classes are protected under New York’s pay equity laws: race, color, creed, age, gender identity or expression, disability, predisposing genetic characteristics, military status, familial status, domestic violence victim status, or any other employee or intern protected from discrimination under the New York State Human Rights Law. New York employers are required to ensure equal pay for employees based on (a) equal work on a job, the performance of which requires equal skill, effort and responsibility, and which is performed under similar working conditions, or (b) substantially similar work, when viewed as a composite of skill, effort, and responsibility, performed under similar working conditions. Like the EPA, New York’s pay equity laws provide factors for wage differentials based on (i) seniority, (ii) merit, (iii), a system measuring an employee’s earnings by quantity or quality of production, or (iv) a bona fide factor that is job-related and satisfies a specific business purpose other than the employee’s protected status, such as experience, education, or training. However, employers may not rely on any of the factors stated above if it results in disparate treatment of any of the protected classes and the employer refuses to adopt an alternative that would not produce a pay differential.
Employers must also note that many state pay equity laws provide greater reaching remedies and higher monetary awards than those provided under the EPA. For example, New York awards treble damages to plaintiffs as a result of violating New York’s pay equity laws. This is why employers must review their compensation practices to ensure compliance with both federal and state pay equity laws.
Review Compensation Policies and Practices
Before employers make final decisions regarding employee year-end bonuses and raises for next year, employers must critically examine their compensation practices and policies to ensure that any pay disparities among employees with substantially similar or equal job duties are not perpetuated into next year. The following questions should be considered during a review of an employer’s compensation policies and practices:
Are compensation decisions for year-end bonuses and raises based on objective or subjective criteria?
What, if any, documentation was used to justify the pay decisions? And, is the documentation based on objective or subjective criteria?
If a pay differential is based on job performance, does the performance appraisal and documentation justify the pay treatment?
Are there legitimate, bona fide factors, other than gender or another protected category, that substantiate unequal compensation between employees performing substantially similar work?
After reviewing your compensation policies and answering these questions, you should make any adjustments to your compensation practices before any decisions on bonuses and raises are decided to ensure any pay disparities among employees performing substantially similar work fall within the bona fide reasons set by the EPA and state law.
If a review or your compensation policies an
d practices, you notice red flags of pay inequities among employees performing substantially similar work that are not justified by any of the above-stated bona fide factors, there are ways for employers to cure the pay inequities. Year-end bonuses or raises can be offered to remedy any pay disparities to bridge the gap going into 2020, without drawing attention to a possible pay disparity claim.
Steps Employers Can Take Before Making Year-End Compensation Decisions
While employers may only make compensation decisions on a yearly basis, the issue of pay equity is ongoing and should be vigilantly and constantly monitored. One way to determine potential pay disparities in an organization is to conduct a full fledged pay audit. An audit will allow employers to identify and correct any pay disparities going forward if there are no legal explanations to justify those disparities.
When conducting a pay audit, consider what data and documentation will be used. It may be helpful to pull a snapshot on each employee that includes job information, age, and productivity information to help fully understand the data. Decide what job positions will be compared. Review job descriptions and only compare jobs that have a common core of tasks. It is a good idea to take into consideration the skills, efforts, job responsibilities, working conditions and workplace establishment of the positions being compared. Also, employers must decide whether certain employees will be excluded. For example, should sales employees who have differing quotas or regions be included? Should executives or union employees be included in the audit? Employers should also determine what type of compensation will be compared in the audit. Will the audit be based solely on base wages or salaries? Or will the audit include bonuses, commissions, and other benefits and perks offered? The ultimate goal of the audit is to determine what could pose the most risk to the employer and to analyze those factors.
The data used in the audit must be objective and reliable. Otherwise, the time and effort spent to conduct the audit will be wasted and the results will be useless. Further, any attempts to re-mediate a pay disparity based on bad information would be futile. By ensuring the data used is accurate in the audit, employers will be able to protect their organizations from potential claims of pay discrimination.