Recently, social movements and environmental, social, and governance (ESG) goals have pushed pay equity to the top of many companies’ list of priorities. Forces spurring employers to evaluate where they stand now include activist shareholder proposals, federal and state government efforts, and demands from employees for greater transparency.
Pay equity was first brought to the forefront with the passage of the Equal Pay Act (EPA) in 1963. The EPA outlaws many overt policies and practices that paid women and men differently for equal work.
Title VII of the Civil Rights Act of 1964 addressed many of those same practices based on gender, race, national origin, and other protected classes. The Lilly Ledbetter Fair Pay Act of 2009 breathed new life into pay equity by overturning the US Supreme Court’s Ledbetter decision and allowing an individual to file pay discrimination claims each time a paycheck is issued based on the alleged past discrimination.
Subsequently, state legislatures began passing or enhancing their own laws to address pay equity and the pay gap. Currently, all 50 states have laws on the books.
What Is Pay Equity?
“Pay equity” means that employees, regardless of protected class, receive the same pay for the same work. However, it is not always the case that any two employees are exactly comparable in terms of assigned tasks or productivity. Therefore, in practice, pay equity is a measure of the systemic differences in pay across protected group status for workers who perform the same or substantially similar work depending on various federal or state laws.
In addition to specific job tasks, pay comparisons should take into account various legitimate business factors that may affect employee compensation, such as education, training, years of service, geography, and performance.
Measuring a Pay Gap vs. Evaluating Pay Equity
There are key conceptual differences between measuring a pay gap and evaluating pay equity.
For example, depending on the specific measure, women in the US earn about 82 cents for every dollar earned by a man.
In contrast, pay equity analyses take into account the differences in the types of jobs across gender by encouraging measurement among similarly situated workers.
Note that inequities in other employment practices such as hiring, promotions, and terminations can lead to differences in the overall pay gap as opposed to the narrower definition of pay equity.
Determining Pay Equity
Pay equity analysis often boils down to three questions for employers:
- What groups of employees are appropriate for comparison?
- Are there legitimate business-related factors that may account for additional pay differences within those groups? In other words, do factors such as geographic location, job skills, and relevant experience explain the pay differences among similar employees?
- Is there a statistically significant pay difference between employees in different protected classes?
Evolving state legislative actions and federal court decisions have complicated these inquiries. For example, many states have expanded the relevant comparison group from employees performing equal jobs to those performing comparable jobs.
At the same time, many state and federal courts have narrowed the range of explanations for pay differences. For example, salary at a prior employer has been widely banned as an appropriate factor.
Legal Considerations for Employers
Employers seeking to understand where they stand on pay equity must undertake rigorous studies of their workforce. Evaluating pay is no longer a “should do” but is fast becoming a “must do.” ESG standards routinely include voluntary reporting of pay data. High-profile lawsuits by the government or class action law firms can blindside and cause reputational harm to those who have not evaluated their pay systems.
Employers in Illinois, for example, will face complex obligations in 2024 requiring them to certify their compliance with all state and federal pay equity statutes or face a fine of 1% of gross profits. At the other end of the spectrum, Mississippi’s governor signed a law in April making Mississippi the last state to ban pay discrimination.
Federal contractors, in particular, have added obligations to evaluate their compensation systems under regulations implementing executive order 11246, issued in 1965 and amended since.
Transparency considerations are also paramount. Greater pay equity emphasis by state legislatures and advocates has spurred several states to pass laws requiring the posting of pay ranges for open positions. At present, Colorado, Washington, and New York City threaten fines for not including pay ranges in job postings. (New York City’s law goes into effect Nov. 1.)
Additional transparency requires thoughtful consideration of not only competitiveness concerns about releasing compensation information but also the types of privacy and privilege issues that may be triggered.
Latest Trends in Pay Equity
Several key trends in pay equity warrant close monitoring by employers.
Impact of Pandemic
While the overall gender pay gap did not widen in the pandemic, women experienced greater job losses which may have impacted pay equity between men and women in some sectors. In addition, Morningstar recently reported that during the pandemic female C-suite executive pay compared to male counterparts fell to a nine-year low and women would have to wait until 2060 to approach parity at the current rate of progress.
Pay equity has traditionally focused on areas where men make more than women. However, evaluating racial and ethnic pay differences have become more important with recent social justice movements.
For example, Kaiser Permanente recently resolved a class action where Black workers alleged, among other claims, that basing merit pay on salary ranges exacerbated racial pay gaps.
Further, in-depth analysis and statistical tools used by employers may show unexpected results. In some cases, an internal study may find that women actually receive higher pay than men in some segments of the employee population, but not others.
In addition, many employers are no longer restricting gender reporting to male and female. Rather, employers are allowing employees to use a wide range of designations to report their gender identity. This presents a need to employ more innovative approaches for attorneys and statistical experts to gather data and conduct analyses.
Aggressive Government Enforcement
State legislatures and the federal government continue to move aggressively to investigate pay equity compliance and enforce pay equity laws. Federal government agencies are engaging in unprecedented coordination to investigate and litigate cases related to pay equity.
For example, the Office of Federal Contract Compliance Programs (OFCCP) changed its directive for federal contractors to expand how it investigates and analyzes compensation discrimination.
In some instances, the coordination may include alliances with class action plaintiffs’ lawyers against a single employer. OFCCP again leads the pack by arguing in administrative proceedings that it has a common interest privilege with plaintiffs’ lawyers and agency officials have recently stated that the common interest privilege may extend beyond litigation to compliance audits.
Changing Labor Market
The tight labor market has affected pay equity. Many employer self-audits uncover practices that foster wage compression, where more tenured workers may earn less than newcomers.
It is even more important to evaluate how starting salary and retention pay decisions affect pay for the entire organization because of increasing pressure for employers to offer higher starting pay to attract new employees in the current tight labor market.
Greater Pressure to Disclose
In addition to laws enforcing pay transparency principles, internal and external employee advocates are seeking more information about pay. Many organizations have taken a proactive stance toward releasing pay data publicly.
Leading technology companies, for example, often disclose information such as pay gaps and publish goals and timetables for other diversity and inclusion activities.
At the same time, employers should conduct audits under attorney-client privilege to have data-driven conversations with experienced counsel about the legal risks the results may present and the remediation of any disparities that may exist.
Resolving this tension between openness and established privileges has become a challenge for many organizations.
Moving forward, all signs point to the growing importance of pay equity for employers. It remains a core of evolving ESG requirements and stakeholders such as governments and employees are seeking additional transparency. And large fines and lawsuits await the unwary.
Employers who conduct in-depth and rigorous self-audits best prepare themselves to meet these challenges.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Chris Wilkinson is a senior counsel at Perkins Coie in Washington, D.C., in the firm’s Labor & Employment practice. He formerly served as associate solicitor for civil rights at the Department of Labor.
Cary Elliott (Ph.D.) is a director at Resolution Economics LLC, an economics and statistics consulting firm with offices in Los Angeles, Chicago, Washington, D.C., and New York. He has worked as a senior economist in the executive and legislative branches of the federal government.