Steps For Conducting A Successful Pay Equity Audit

While laws prohibiting pay discrimination have been around for decades, recent legislative and regulatory changes, along with other trends, have propelled pay equity into the spotlight. This renewed focus on pay equity creates new challenges — and opportunities — for compliance-minded employers that not only strive to achieve fair pay practices in their workplaces, but also seek to minimize the risk of pay equity claims.

One way for employers to face these issues head-on is to conduct pay audits. While the focus and depth of a pay audit may vary, such an audit has two overarching goals: First, to determine whether pay disparities exist that cannot be explained by legitimate, relevant factors, and second, to identify weaknesses or defects in the employer’s compensation policies, procedures, and practices that may contribute to such disparities. Employers that wish to be proactive with their pay practices may want to consider the following issues when designing and conducting their pay equity audits.

Attorney-Client Privilege

Before embarking on a pay equity audit, it is critical that the employer address the question of whether the audit will be privileged. In most cases, it will make sense to have the pay audit conducted under privilege. An audit that is conducted without the protection of the attorney-client privilege may be subject to disclosure, either during a government agency investigation or during discovery in litigation.

Since an employer typically does not know, going into the audit, what the results will be, the conservative approach is to take appropriate steps to protect the audit and its results to the greatest extent possible. Moreover, having the attorney-client privilege attach from the outset will provide the employer with the freedom and flexibility to communicate regarding the relevant issues and solutions without fear that those communications will need to be disclosed at a later date.

Identifying Unexplained Pay Disparities

At its core, a pay equity audit involves analyzing an employer’s pay data to determine whether there are disparities. A typical analysis compares the average pay of men to the average pay of women (or other protected groups) within relevant job classifications to determine whether statistically significant disparities exist. An audit can also involve an analysis of an individual employee’s pay compared to others in a relevant job classification.

Compare Apples to Apples

Note the use of the term “relevant job classifications.” Much focus has been given to the statistic that shows how, on average, women earn 79 cents for every dollar men make. However, for pay audits to be truly helpful, employers must make sure they focus on comparing employees in similar jobs — as defined by the applicable law. Under the federal Equal Pay Act, for example, this means comparing employees who perform jobs that require equal skill, effort and responsibility and are performed within the same establishment under similar working conditions.

Under some of the new state pay equity laws, the appropriate comparators may be defined differently. For example, under the recent California Fair Pay Act amendments, employers need to compare employees who perform “substantially similar” work when viewed as a composite of skill, effort and responsibility. Job titles alone are not often determinative. Employers thus need to make sure that the appropriate comparators are included in the analysis, irrespective of formal job titles.

Account for Factors That Contribute to Pay

Ideally, the statistical analysis of pay will incorporate factors that are relevant to pay decisions. These factors may depend on industry, company and job. Common factors include: date of hire, time in position, salary grade, educational background, experience, and performance. The more data regarding the factors relevant to pay that an employer can include, the more robust and helpful the statistical analysis will be.

Once completed, the analysis will provide the employer with a picture of how the compensation of men and women (or other protected groups) compare. In many cases, but not all, there likely will be some disparities (in favor of either the nonprotected or protected groups), and some of these may be statistically significant. In layman’s terms, if the disparity is statistically significant, it means that the factors that have been included in the analysis do not account for the difference and the difference is not likely to be the result of random chance.

Conduct a Deeper Dive

If the analysis reveals statistically significant pay disparities within certain jobs, employers will want to more closely examine the affected groups to identify whether other relevant factors explain the pay differences. These factors can be objective and quantifiable, or subjective and intangible, and are usually unique to the particular incumbent, job or business. For instance, compensation for some jobs is based on the quantity or quality of achievements, such as sales revenues, patents filed, degrees achieved or publications made. Differences also may legitimately be attributed to market data or difficulties in filling the position that required paying a higher salary.

Reviewing Compensation Policies, Procedures and Practices

Often, pay disparities are not the result of intentional discrimination per se, but due to weaknesses in employer policies and practices. Once an employer has completed the statistical analysis, it should also review whether it needs to make any modifications to existing compensation policies, procedures and practices, which can help prevent unexplained disparities from continuing to occur. Failure to take this step could create an ongoing risk of future pay disparities developing — precisely what the employer was seeking to avoid by conducting the pay audit in the first place.

Some issues to consider may include the following:

• Are there written guidelines or policies that define the legitimate business factors that may be considered when making pay decisions?
• Are decision makers held accountable for complying with applicable policies and guidelines with respect to compensation?
• Are there sufficient boundaries on decision-maker discretion so that decision makers do not have unfettered power to make decisions?
• Do the policies require evidence to support the factors that are used to make pay decisions, such as written performance evaluations or objective data to support market factors?
• Is there sufficient documentation to record the reasons for pay decisions, including where those decisions may deviate (legitimately) from expectations?

Job Descriptions and Performance Evaluations

Employers may also consider reviewing their job descriptions and performance evaluation processes as corollaries to an audit. Job descriptions can provide the foundation for demonstrating that certain jobs are comparable or should be differentiated for compensation purposes. As with a job title, a job description will not, alone, prove the point as to whether jobs are “equal” or not. But poorly drafted job descriptions could adversely affect employers’ in defending themselves when confronted with pay equity claims.

Similarly, flawed performance reviews and evaluation processes may affect the legitimacy of pay decisions (and other employment decisions) that are tied to those results. Managers, in particular, may need to be reminded of and trained on the importance of accurately documenting performance issues and achievements.

Conclusion

With the renewed focus on pay equity — whether across gender, race or other protected lines — employers can expect increased scrutiny of their pay decisions. Conducting an effective pay audit will not only help ensure legal compliance, but will provide useful insight into the effectiveness of existing compensation practices.

Authored by Liz S. Washko and Lara C. de Leon
Compliments of Ogletree Deakins Nash Smoak & Stewart – a member of the EACCNY