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 or other categories protected by law (such as national origin or sexual orientation).

It 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 those 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.

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A brief history of pay equity laws

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.

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.

In 1963, Congress passed the 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 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. 

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 LGBT status. Many court watchers anticipate that this decision will impact the interpretation of other statutes from education to health care.

Pay equity and congress

Congress has offered proposed changes to the federal Equal Pay Act to help close the gender wage gap, such as the Paycheck Fairness Act. The PFA, if passed, 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.

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. As the Paycheck Fairness Act, a federal bill aimed at ameliorating critical shortfalls of the Equal Pay Act, is currently languishing in Congress, some states are leading the pay equity compliance movement toward achieving equal compensation.

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.

New Jersey, California, Massachusetts, New York, Oregon, and Washington are among the states that have passed laws building on the foundation of the federal EPA to encourage equal pay between men, women and other protected classes, such as minorities and people with disabilities. However, this has created a patchwork of regulatory requirements and penalties, thereby challenging employers with facilities in multiple states to stay compliant.

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

The Office of Federal Contract Compliance Programs (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. Equal Employment Opportunity Commission (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.

Pay equity costs

For employers, the monetary penalties for pay inequity can be expensive. The EEOC secured approximately $505 million and other relief for more than 67,860 victims of workplace discrimination for the fiscal year 2018. The OFCCP has obtained more than $143 million in monetary relief for employees and job seekers who were discriminated against between 2008–2018. Both the EEOC and the OFCCP continue to enforce and litigate pay discrimination cases. 

Penalties also can add up if violating state and municipal pay equity laws. For instance, in New York City, violations jump from up to $125,000 for unknowingly violating the salary inquiry ban to $250,000 for knowingly continuing to do so. 

Many companies faced with equal pay lawsuits, including Uber, Google and Nike, have found themselves settling these cases for tens of millions of dollars and facing damage to their corporate reputations.

Pay equity reporting requirements

The EEO-1 Report, formally referred to as the Employer Information Report EEO-1, 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 Office of Federal Contract Compliance Programs (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. 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.

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 pay equity auditing

For employers who hope 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 can be 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 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 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 issues. 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 recent 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.

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