In 2009, Congress passed the Lilly Ledbetter Act, which provides that employees can now challenge decades-old compensation decisions, since the potential “impact” of the challenged decision continues with each new payroll cycle. As long as the employee remains employed, the statute of limitations for compensation challenges has no time limit—since it starts over with each new paycheck.
As a practical matter, this means that employers may be required to recreate historical context that long ago disappeared with fading memories and manager attrition. Imagine, for example, trying to identify and produce evidence to justify and fully explain compensation decisions from the 1980s (or even from the early 2000s), and you begin to get a sense of the nightmare scenarios employers confront when responding to compensation claims under the Ledbetter Act.
Even though it has been over a year and a half since the highly publicized enactment of the Lilly Ledbetter Fair Pay Act, many employers have not taken the time or made it a priority to audit their pay practices. This inaction could prove quite costly, however, given the number of claims alleging pay discrimination have reached all-time highs. The government is also aggressively attempting to pass more stringent legislation which would narrow the defenses an employer can use to demonstrate that a difference in compensation is not based on gender. Given the heightened risk of claims and the current legislative environment, now is a good time to conduct a preventative pay audit.
Although there is not a set formula for conducting a compensation audit, best practices generally dictates that an organization examines the following on at least an annual basis:
Under Outside Attorney Direction: If at all possible, it is advisable to perform the pay audit with outside counsel. Specifically, your counsel should explain how to conduct a compensation pay audit and carry out an assessment of litigation risk and compliance with Equal Employment Opportunity (“EEO”) laws. Your counsel can also provide your organization with a road map of the information to examine. Communications seeking information for the audit or in any way related to the audit should be marked “Attorney-Client Privileged” and counsel should always be copied. After the audit, regardless of whether pay disparity is indicated, top management and human resources should hold a meeting with counsel present to examine the findings. Having counsel involved increases the confidentiality of the information gathered during the audit.
Proper Statistical Methodology: Preventative compensation audits are designed to ensure fairness in pay rates among similarly situated individuals. These audits also allow an organization to determine its susceptibility to a claim of an organization-wide pattern of compensation discrimination, which may bring action from the Equal Employment Opportunity Commission (“EEOC”), private litigants in an individual or class capacity, and the Office of Federal Contract Compliance Programs (“OFCCP), if the organization is a federal contractor or subcontractor.
At a minimum, the average salaries of individuals with the same job title should be calculated for the group as a whole; for non-minorities; for minorities; for females; for males; and for any disabled individuals. These averages should then be compared and if there are noticeable compensation differences (i.e., five percent or more deviation) between employees with the same job title there should be further examination to determine if non-discriminatory variables such as the length of employment, cost of living variables associated with the geographic location where work is performed, experience, education, and starting salary explain the differences. If so, these variables should be noted. If not, the organization needs to determine whether an individual is performing work different than the others with the same job title and/or whether there is a statistically significant compensation difference among protected and unprotected groups. A change of job title and/or an adjustment in pay for some individuals may be warranted.
If an organization is a federal contractor or the initial pay audit described above indicates a number of potential pay equity issues, the organization should strongly consider retaining a statistician or purchasing specifically designed software to conduct more in-depth and sophisticated compensation analysis.