Pay equity 101

An introduction to pay equity laws, enforcement, and recommended action steps 

Pay equity 101

An introduction to pay equity laws, enforcement, and recommended action steps 

An introduction to pay equity

What is pay equity?

“Pay equity” is an umbrella term that includes issues related to the fairness of compensation paid by employers to their employees for performing comparable work, without regard to gender or race/ethnicity or other categories protected by law (such as national origin or sexual orientation).

Pay equity includes fairness both in terms of base pay and in total compensation, including bonuses, overtime, employee benefits, and opportunities for advancement.

Pay equity does not mean that all employees are paid the same. Generally, pay equity focuses on ensuring employees performing comparable work are receiving comparable compensation and that any differences in pay can be explained by legitimate job-related factors, such as: 

  • Skills, effort, responsibility, experience, education, etc.
  • Quality or quantity of production
  • Location (depending on jurisdiction/locality)

Pay equity is strongly interconnected with issues surrounding diversity, equity, inclusion, and access (DEI&A). It is also concerned with rectifying past injustices with respect to unequal pay. Pay equity is influenced by laws, policies, regulations, and internal practices around the world.

Pay equity is also strongly interconnected with the “social” element of environmental, social, and governance (ESG) criteria. Investors, employees, and other key stakeholders are assessing organizations’ commitments to advance these criteria. While organizations may say they are focusing on social criteria such as diversity and inclusion, pay equity is a way for organizations to prove their commitment

Now in 2022, pay equity is taking center stage as the Biden administration and several federal agencies, such as the Equal Employment Opportunity Commission (EEOC) and Office of Federal Contract Compliance Programs (OFCCP) introduce DEI&A focused initiatives.

Learn more about pay equity

A brief history of pay equity laws

Pay equity is not a new concept. In 1938, Congress enacted the Fair Labor Standards Act (FLSA), which ensures workplace protections such as the minimum wage and “time-and-a-half” overtime pay.

Later, in 1945, Congress made history by introducing the Women’s Equal Pay Act. While that bill did not become law, it sought to prohibit employers from paying women less than men for work of “comparable quality and quantity” on the basis of sex.

It wasn’t until 1963, that Congress passed the famous Equal Pay Act. It was described at the time of its passage as “the first step towards an adjustment of balance in pay for women.”

The Equal Pay Act requires that men and women be given equal pay for equal work in the same establishment.

Employers have four justifications they can claim under the Equal Pay Act to justify apparent pay disparities:

  • A seniority-based pay system based on an employee’s tenure with an employer
  • A merit-based pay system based on employee performance set by criteria established by the employer
  • A pay system which measures earnings by quantity or quality of production
  • A pay differential based on a factor other than sex (in some states, like California, it is increasingly harder to rely on this defense)

A related federal law that helps in mandating equal pay for equal work is Title VII of the Civil Rights Act of 1964, which likewise prohibits pay discrimination on the basis of sex but also includes the bases of race, color, religion, or national origin. Title VII has since been amended to add disability as another protected category. Several lawsuits have since come forth interpreting these protections differently. The case Bostock v. Clayton County, Georgia for example, interpereted sex under Title VII to include critera such as sexual identity and sexual orientation.

The U.S. Supreme Court ruled on June 15, 2020 in Bostock v. Clayton County, Georgia that Title VII of the Civil Rights Act of 1964’s prohibition on sex discrimination in employment includes a prohibition of employment discrimination based on LGBTQ status. This outcome signaled a major change for members of the LGBTQ community and has since prompted the proposal of new laws, like the Equality Act, to make the distinction clear.

Pay equity and congress

Congress has offered proposed changes to the federal Equal Pay Act to help close the gender wage gap, most recently a national strategy to achieve gender and racial equity. President Biden and Congress published the first-ever actionable plan for closing gender and race/ethnicity gaps.

The strategy comes as part of Executive Order 14020, which created a White House Gender Policy Council that was tasked with developing said strategy. Included in the strategy are 10 interconnected priorities for achieving gender and race/ethnicity equity. The priorities are as follows:

  • Improving economic security and accelerating economic growth
  • Eliminating gender-based violence
  • Protecting, improving, and expanding access to healthcare, including sexual and reproductive healthcare
  • Ensuring equal opportunity and equity in education
  • Promoting gender equity, fairness in justice, and immigration systems
  • Advancing human rights and gender equality under the law
  • Elevating gender equality in security and humanitarian relief
  • Promoting gender equity in mitigating and responding to climate change
  • Closing gender gaps in science, technology, engineering, and mathematics (STEM) fields
  • Advancing full participation in democracy, representation, and leadership

These efforts align with yet another Executive Order signed into law by Biden, order no. 13985, which states that “the Federal Government should pursue a comprehensive approach to advancing equity for all, including people of color and others who have been historically underserved, marginalized, and adversely affected by persistent poverty and inequality.”

Other initiatives, such as the Paycheck Fairness Act, continue to turn up as a path forward for closing gender and racial pay gaps. If passed, the Paycheck Fairness Act would make several significant changes to current law, including:

  • Narrowing the ability of an employer to justify pay disparities based on a factor other than sex as a defense in court
  • Strengthening non-retaliation provisions for employees that disclose information about wages in certain circumstances
  • Mandating collection of compensation data by the EEOC, disaggregated by sex, race, and national origin
  • Prohibiting employers from relying on wage history in the determination of wages
  • Adding enhanced penalties for violations

While this legislative initiative has not yet passed into law, it provides perspective on what pay equity may look like in the U.S. in the future. While the Paycheck Fairness Act is currently on hold, given the current political climate and administration, it could very well surface again in 2022.

Pay equity and the United States

Recently, state and local governments have become more assertive in expanding the parameters of the federal Equal Pay Act.

Starting in 2017, 42 states and many more local governments have passed or proposed new legislation to push employers towards providing equal pay for all of their workers. These new laws encompass objectives such as the following:

  • Push equal pay requirements beyond federal law
  • Ban the use of salary history to determine pay for new hires
  • Prohibit hiring discrimination against applicants with criminal records ("ban the box")

These state and local laws are adding new complexity to complying with equal pay regulations and heighten the potential liability of organizations not providing their workers with equal pay.

California, Illinois, Colorado, Massachusetts, New Jersey,  New York, Oregon, and Washington are among some of the states to pass laws building on the foundation of the federal EPA and require equal pay between men, women and other protected classes, such as minorities and people with disabilities.

In addition, a total of 21 states, including the District of Columbia, and Puerto Rico have passed salary history bans. Salary history bans prevent employers from inquiring into prospective employees’ previous compensation earnings for determining new pay. Relying on pay history for determining pay is proven to perpetuate wage gaps, as new data finds wage inequality across gender and race ethnicity begins at the start of one’s professional career. 

Now in 2022, pay equity laws are coming into play around the world on a regular basis. Access the Pay Equity Definitive Guide to get a handle on the emerging pay equity laws and their requirements for employers.

Download: Pay Equity Definitive Guide

Pay equity around the world

Pay equity is not only taking center stage in the U.S., it’s also a huge focus around the world. Countries such as the United Kingdom, Canada, Ireland, and France all require, to some degree, pay data reporting from applicable employers. The notion behind pay data reporting is that it helps government bodies enforce pay equity. By requiring employers to submit, formatted snapshots of their workforce’s compensation data, in combination with gender and race/ethnicity information, agencies can identify potential pay inequalities. 

In many of these countries, pay data reporting is only one part of overarching pay equity laws. In Canada for example, employers must also develop a pay equity plan with the purpose of identifying and resolving gender wage gaps. The country’s Pay Equity Act went into effect August 31, 2021, and provides employers three years to implement their plans. Failure to comply with the law could amount to penalties as high as $50,000.

Australia too has already passed legislation aimed at combating gender pay discrimination. On March 31, 2021, Australia’s Gender Equality Bill went into effect and it requires organizations with 50 or more employees to prove they’re “actively pursuing” gender equality. Employers that don’t comply could be subject to penalties. 

Larger regions of the world are also taking action to ensure pay equity. The entire European Union, for instance, recently proposed requirements relating to pay transparency. While the Union has had pay equity laws around long before the recent movement, the pay transparency law would require employers with 250 or more employees to publicly report on the gender pay gap, disclose salary ranges to job applicants, give employees the right to request colleagues performing similar work pay information, and prohibits the use of pay history inquiries. If passed, the pay transparency law would apply to employers in 27 different countries.

While the emerging pay equity legislation sweeping the U.S. and around the world is good for the fight for equal pay, employers may find the patchwork of regulatory requirements difficult to fulfill. If your organization has operations around the U.S. or abroad, and you need assistance meeting the various pay equity requirements, contact us to learn about our pay data reporting services.

Who is affected by pay equity?

Pay equity affects all working people and their families as well as the greater economy. It is commonly understood that pay discrimination not only affects women, but members of racial and ethnic groups, among other backgrounds.

Pay equity also affects employers who have to comply with federal, state, and local pay equity regulations. Some of the potential risks for employers associated with disregarding pay equity laws include: 

  • Regulatory audits and penalties
  • Lawsuits (individual and class-action)
  • OFCCP enforcement and audits that may lead to lost government contracts
  • Compliance challenges for multistate operations as more states and local jurisdictions pass pay equity laws with accompanying penalties for non-compliance
  • Employee dissatisfaction, leading to lower productivity and higher turnover
  • Adverse effect on talent acquisition and retention
  • Poor public relations and brand image

Pay equity enforcement

As discussed above, enforcement of pay equity varies greatly across the U.S. and around the world.

On a federal level in the U.S., the OFCCP, a part of the U.S. Department of Labor, is responsible for ensuring that employers that engage in business with the federal government comply with the laws and regulations requiring nondiscrimination, such as Executive Order (EO) 11246. EO 11246 requires various equal employment practices of government contractors with at least $10,000 in government contracts. 

These businesses must periodically self-audit their pay practices to address disparities based on race or national origin and gender. If selected for a compliance evaluation by the OFCCP, contractors must provide compensation information to the government.

Part of the OFCCP’s oversight mission is to ensure that federal government contractors and subcontractors comply with the legal requirement to take affirmative action and not discriminate on the basis of race, color, sex, sexual orientation, gender identity, religion, national origin, disability, or status as a protected veteran. In addition, contractors and subcontractors are prohibited from discharging or otherwise discriminating against applicants or employees who inquire about, discuss or disclose their compensation or that of others, subject to certain limitations.

OFCCP requirements for employers can include: 

  • Preparation of Affirmative Action Programs (AAPs)
  • Retention, documentation, and analysis of applicant, hire, promotion, termination, and compensation data
  • Preservation of all personnel or employment records; time frame depending on size of workforce
  • Inclusion of equal employment opportunity statement in job advertisements
  • Posting of anti-discrimination and pay transparency notices
  • Permitting access to compensation data to OFCCP for the purpose of conducting compliance evaluations and complaint investigations

The U.S. EEOC is responsible for enforcing federal laws that make it illegal to discriminate against a job applicant or an employee because of the person's race, color, religion, sex (including pregnancy, gender identity, and sexual orientation), national origin, age, disability, or genetic information. It is also illegal to discriminate against a person because the person complained about discrimination, filed a charge of discrimination, or participated in an employment discrimination investigation or lawsuit.

Most employers with at least 15 employees are covered by equal and civil rights laws, such as the Civil Rights Act of 1964, but other laws apply to virtually all employers, such as the Equal Pay Act of 1963. 

The EEOC performs two core functions:

  • Collecting equal employment data from employers throughout the U.S. via annual EEO-1 reporting, which collects employment data from employers throughout the U.S.
  • Investigating equal employment complaints that are reported to the EEOC by employees

Beyond the activities of the EEOC, individual states and local governments also have agencies that enforce state and local pay equity laws. California for instance, just started issuing non-compliance notices to employers that didn’t meet the annual SB 973 pay data reporting requirements.

It's clear pay equity can have serious, costly implications for employers, but more importantly it can drastically impact your brand, perception, and even business performance. Organizations that prioritize workplace equity are higher performers, and prospective employees, investors, and other key stakeholders demand that employees demonstrate their commitment to fostering this type of work environment with action.

Pay equity is a world-wide initiative, and it’s being demanded. Not answering the call will harm all aspects of your business, new research conducted by Harvard Business Review finds.

Pay equity reporting requirements

Pay equity reporting requirements differ around the world. The goal, however, of said reporting, is the same, to ensure workers are being compensated fairly. On a local level, states like California and Illinois require employers to annually submit employee pay data for the purposes, among others, of identifying pay discrimination on the basis of gender and race/ethnicity.

On the federal level, there is currently the The EEO-1 Report, formally referred to as the Employer Information Report EEO-1. At the time of writing, the report only contains employment data to be categorized by race/ethnicity, gender, and job category. It is filed annually by employers with more than 100 employees and federal contractors with more than 50 employees and at least $50,000 in federal contracts. The EEOC shares the information presented in the report with the OFCCP.

The EEO-1 Report must be filed by employers by March 31 of each year. Employment data must be gathered from one pay period in October, November, or December of the current report year. Due to COVID-19, the deadlines for the 2019 and 2020 tax years, however, were extended to October 25, 2021. For example, EEO-1 Reports filed in 2019 must use data gathered in the fourth quarter of 2018.

The OFCCP, under Directive 2018-05, has set guidelines for federal contractors’ audits of pay discriminations. The agency recently announced that it would be leveraging EEO-1 Component 2 employee compensation data for pay equity enforcement, which signals that the requirement may soon return for employers. 

Former EEOC Commissioner and acting chair, Victoria A. Lipnic recently commented on both federal agencies' priority to enforce pay equity, saying specifically that “employers will be required to submit pay data to the federal government in the future.”

In addition to federal reporting requirements, individual states are passing aggressive pay equity legislation that far exceed the federal standards of the federal Equal Pay Act.

The value of taking a proactive approach

For employers that have goals to demonstrate fairness in pay, support more diverse and inclusive workplaces; elevate their reputations among clients, investors, employees, and the public; and minimize the risk of litigation, a pay equity audit is vital.

A number of federal and state regulators encourage employers to conduct equal pay audits. The OFCCP has established guidelines for federal contractors to conduct pay equity self-audits and then correct any issues that are found before they lead to violations.

Several states, like Rhode Island and Colorado, incentivize organizations to conduct self-audits by offering safe harbor protections in the event of an equal pay claim. For instance, in Massachusetts a provision has been codified in state law that encourages organizations to voluntarily conduct a pay equity audit. The law provides that “an employer… who, within the previous three years and prior to the commencement of the action, has both completed a self-evaluation of its pay practices in good faith and can demonstrate that reasonable progress has been made towards eliminating wage differentials based on gender for comparable work… shall have an affirmative defense to liability…” It is important to note, however, that these state safe harbors do not act as defenses to claims brought under federal law, nor under other non-pay-equity-related state law claims.

A pay equity audit identifies pay differences between employees that cannot be explained due to job-related factors. It is a multi-disciplinary effort that requires extensive domain knowledge and expertise in labor law across various jurisdictions, such as econometrics, statistics and statistical modeling, workforce data management, and knowledge of regulatory audit processes by agencies such as the OFCCP and EEOC. 

This type of audit not only identifies problems, but also provides actionable solutions. It gives employers an opportunity to ensure fairness in pay and prevent workplace discrimination. It also allows employers to minimize risk by identifying and remediating discrepancies, providing the employers with greater standing to defend against claims of discrimination.

The findings from the audit can be privileged. The term “privilege” relates to attorney-client communications and attorney work product. The audit itself can be conducted under attorney oversight to maximize protection from mandatory disclosure, such as in discovery in a lawsuit. The purpose of the privilege is not to hide or cover up any wrongdoing; rather, it is intended to allow the attorney overseeing the matter to facilitate candid discussions with clients about findings.

According to a report by Harvard Business Review Analytic Services, 90% of U.S. employers are planning, considering, or already performing internal pay equity audits.

Ultimately, pay equity has far-reaching impacts on workforces, including significant ramifications on legal compliance, financial profitability, quality of workplace, and optimization of human resources.  

At Trusaic, we’re committed to helping build better workplaces, so you can build a better business. By combining clean, accurate data with comprehensive annual and monthly analytic reporting and regulatory expertise, we help companies achieve Pay Equity, every step of the way.

To learn about what leading organizations are doing to achieve DEI goals like pay equity, download the research report we sponsored, Creating a Culture of Diversity, Equity, and Inclusion, conducted by Harvard Business Review.

Download: Trusaic and HBR Research Report

How to conduct a pay equity analysis

Conducting a pay equity analysis is critical for eliminating gaps in employee compensation. The process is not a one and done action, but rather involves ongoing, active monitoring. Below we have broken down how to conduct a pay equity audit in 10 simple steps.

STEP 1: Ensure data integrity 

To begin a pay equity audit, an extraction, transformation, and loading (ETL) process should be executed. During this process, the data must be aggregated and then reviewed for potential data quality issues. Data integrity criteria to account for include completeness, consistency, validity, and anomaly detection. Data accuracy is arguably the most important step in pay equity auditing. Pay equity audits yield compensation recommendations and if the data used in the analysis is flawed, employers could be creating more pay inequalities while overlooking the real pay disparities. 

STEP 2: Evaluate pay analysis groups

You must construct groups of employees performing similar work to make pay comparisons. Segment your workforce in preparation for the statistical analysis. 

STEP 3: Measure legitimate pay differences

Pay differences can exist for bona fide factors, e.g. legitimate business reasons. This step involves identifying statistically significant pay differences within your employee groupings. By conducting a regression analysis on each pay group you can determine whether apparent gender and race pay gaps exist for reasons beyond said business factors, such as differences of skill, effort, and responsibility.

STEP 4: Quantify risk

After accounting for legitimate business factors, the next step is to identify any remaining pay disparities across gender and race/ethnicity. These pay differences are potential pay discrimination liabilities. The pay equity audit should allow you to view these potential liabilities from multiple perspectives. For example, in terms of their statistical significance, their implications for overall annual compensation at the workforce level, the individual employee level, and at a variety of steps in between.

STEP 5: Validate findings

Validate the regression findings. There are at least five dimensions through which a pay equity audit should assess the accuracy of any pay disparities found. A primary tool here is making cohort comparisons. These compare much smaller groups of employees, while focusing on just a couple of legitimate business factors that those employees have in common. For example, a cohort comparison could measure an average gender pay difference among employees in the same job level and department. By performing a large number of such comparisons, one can get a sense of how well supported the regression-based pay disparity findings are. 

STEP 6: Investigate root causes

Now it’s time to identify the source of pay disparities. Are there commonalities among those most affected by the pay disparity? How do disparities vary across time, location, and organizational level? By answering these questions, the pay equity audit assists you in identifying causes, not just symptoms.

STEP 7: Develop remediation strategies 

In addition to quantifying pay discrimination risks, the pay equity audit should allow you to examine alternative strategies for addressing risks in terms of their relative costs and effectiveness. 

STEP 8: Monitor progress

If pay disparities by gender and/or race are identified, the proper pay equity audit will allow you to monitor those pay differences over time. If compensation adjustments have been made, ongoing monitoring can help you track progress. There is nothing more frustrating than making compensation adjustments to address pay disparity only to find that it has reappeared a year or two later. Ongoing monitoring reduces the likelihood of such surprises; as well as identify changes in your workforce that can affect gender and race pay disparities.

STEP 9: Preserve legal privilege protections

The predominant approach to proactive pay equity auditing is to consider the audit as a component of legal advice. It is prudent to ask internal or external counsel for advice regarding litigious and regulatory risks raised by the trends identified. But to be meaningful, that legal advice needs to be grounded in the specific compensation decisions an employer is considering making. 

A pay equity audit that is directed by your counsel provides the analytic and quantitative foundations for that legal advice. Conducting a counsel-directed pay equity audit for the purposes of receiving legal advice means that the findings of the pay equity audit can be legally protected. A pay equity audit should be able to maintain the privilege protocols that are agreed to by you and your legal counsel. 

STEP 10: Ongoing monitoring

Pay equity auditing is not a one-and-done process. It must occur on a regular basis. When the routine is ingrained into the company business functions, the results will net progress over time. Making the commitment to achieve pay equity and getting it right requires recognizing the importance of data quality. And that requires ongoing monitoring of the information fueling your pay equity audits.

For more information on conducting a proactive pay equity audit, download the white paper Designing a Successful Pay Equity Policy for Your Organization.

 Download: Designing a Pay Equity Policy

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