(DISCLAIMER: I'm not a lawyer, but I'm deep into pay issues and wanted to share my understanding gained from seminars and articles. Consult a labor attorney for advice on your particular situation.)
The new law requires equal pay for employees who perform substantially similar work, regardless of sex, race or ethnicity. “Substantially similar work” is work requiring substantially similar “skill, effort and responsibility.” See our February 1st post link to a summary of this law.
On the surface, it doesn’t seem like anything changed. Didn’t our laws always prohibit discrimination?
Yes and then no, or not in the same way or same rigor.
Now, the employer has the burden to provide a legitimate (i.e. necessary for the business), nondiscriminatory rationale for wage differentials. If the employer does so, then the employee must show that an alternative business practice exists that would serve the same business purpose without producing the wage gap.
The law also changed how companies need to look at comparing employees and the duties being performed. The change to “substantially similar” duties is much broader than “equal” duties. The bottom line is that defenses to pay discrimination complaints have narrowed.
Large companies often have more than one employee performing similar work for which pay can be compared. Small companies don’t have many people performing similar work. How does this law affect them?
Summary for Employers
- Consider how to adequately document compensation decisions for new hires.
It can’t be based on what the employee earned before coming to the role. (Some states even prohibit asking about prior comp, although California is not yet one of them). Focus on internal equity – employees' pay relative to each other in your company (not relative to the external market). I’m not aware of a definition of adequate documentation for this purpose.
- Remove any prohibitions of talking about pay.
Employees can’t be prohibited from talking about pay. However, if someone asks human resources about another person’s pay, human resources isn’t obligated to disclose.
- Decide if you should conduct an internal review of current employees.
A logical time to conduct an internal review is when performance is reviewed or whenever comp changes are determined. Performance strengths and weaknesses legitimately support variations in pay between employees. If the company has moved to continuous evaluation feedback without much documentation, then creating some notes could make sense for this purpose. You would certainly need to for underperformance situations.
How would a small tech company do this? My opinion is that engineering likely has more than one person performing a similar role. Start there.
A staffing firm? The core group of employees carrying out the purpose of the company is the recruiting team. Start there.
- Have a plan for staying on top of compensation.
Mary Topliff, an employment law attorney who regularly advises employers on compliance issues, recommends that employers set up a schedule so that compensation is regularly reviewed. This will enable the employer to examine the data at different points in time. Job duties and business demands will undoubtedly evolve, not to mention that employees will have been hired and promoted at different junctures. This also allows for necessary adjustments to be made.
Like many regulations, someone gets an idea there’s a problem to be fixed, then puts a rule in place. A rule that ideologically sounds great but lacks practical application. It’s not clear to me if the purpose of eliminating alleged pay discrepancies could be achieved.
Make no mistake. Colosi Associates advocates equal pay for similar work. Compensation advisement is a significant benefit of working with us. Our advisement is primarily focused around comparisons to external market compensation. But, it is highly tailored to that particular client company’s situation and what must be accomplished for success in the role.
Most of the roles we hire (CFO, VP HR, VP Finance) have only one person in the role. There are, however, others in the company with the same title level (e.g. VP). It’s about the similarity of the work rather than title. (We’ll see how that unfolds in the courts.)
Our firm’s client's highest priority is to hire and retain "A" Players to achieve business goals. That means making sure the offer of W-2 wages along with all other components will be exceptional relative to the market and that solid internal company equity exists. That philosophy appears to extend to all roles our clients hire, not just Finance or HR.
Employers Have to Be Defensive
According to Mary Topliff, employers should be prepared to justify wage differentials of employees who are in the same jobs as well as those in "substantially similar" jobs (which is, of course, the hard part). If there is no clear justification that is based on objective measures, such as experience level, or a seniority or merit system, then employers would be well-served by making adjustments in pay on a proactive basis.
It’s Not a Market Test
The external market informs pay on new hires and can be helpful to companies when they make pay adjustments to make sure they retain the best.
Your justification for a new hire’s comp can’t be “it was advised by a recruiter.” The law doesn’t say pay market. It’s about internal to-the-company pay equity, across a particular company’s locations.
Talking About Pay
Make sure you don’t have a policy that prohibits or admonishes anyone for talking about pay. More and more people openly talk about pay anyway. Especially the millennials. A plethora of on-line resources are available.
Wondering if there is an obligation for HR to disclose pay to anyone who asks? I learned that there is no obligation. An employee can ask, but it doesn’t have to be disclosed by the company.
Large vs Small Companies or Roles Where There is Only One Person in the Role
So far, presentations and articles I’ve seen address compliance for large companies, where it’s likely there is more than one person in a similar position. More employees performing similar duties lends itself to “banding”. Think about a grocery store chain like Whole Foods. Lots of people doing similar jobs.
The vast majority of businesses are small business. Bands and grades don’t appear to apply. So what do those firms do to comply? And how would this apply to generally more senior roles where there is only one person in the role?
My understanding is that companies just need to focus on groups of employees performing similar duties. See my examples of a tech company and a staffing company. Time will tell how this plays out.
Do Companies Need to Do a Pay Audit/Review for Current Employees
One national employment law firm brought a good point that if a company performs an internal pay audit of current employees without the assistance of outside counsel, the results would not be privileged in court. So do you have a catch 22 if an attorney is not used i.e. when the company finds an issue and adjusts, is that an admission of discrimination and can employees bring an action? It’s uncertain.
Don’t Base Pay for New Employees on Past Compensation
The thinking is that women in particular haven’t been good negotiators, so if a new employer bases her pay on a prior role, it just perpetuates underpayment.
This brings up the question of whether a hiring manager should/can ask candidates about prior pay. Our firm finds that prior compensation history is quite well aligned with that candidate's skills compared to other professionals of similar skills. From our experience, the market fairly prices. I would argue that the increase in comp information sharing over time has enabled this, just like stock market pricing discrepancies that would produce buying and selling opportunities have greatly diminished.
A couple of states have passed laws that prohibit asking candidates about past compensation. At the moment, California is not one of those states. We need to understand at the first phone call whether our client can create an exceptional opportunity for which the professional will leave her/his role. No one wants to waste time. We can’t wait until the offer stage to see if the candidate’s highest priorities are in the range of what the company can offer.
Pervasive Pay Inequities or Just Outliers?
Although the law aims to ensure internal pay equity, I thought I’d comment on market outliers. I don’t have additional information about the law’s potential impact or consideration of pay between companies.
Yes, there are candidates who initially look like pay “outliers” when looking at market comparisons between companies. When I dig in, though, most of the “outlier” reasons make sense to me, and I advise our clients on this.
For example, a male VP Finance/CFO was earning a base of upper $200’s plus bonus and equity. For the size and direction of the company, his comp was an outlier, above market. He was hired by a CEO he had worked with before. That CEO placed a value on the risk reduction that comes from working with someone before. (Not gender related). The candidate said that he knew his comp was above market and he was open to adjustment (down) for his next role.
A second example is a male who appeared to be underpaid in his Director level job. However, he worked in the consumer industry, which pays less than tech. Also, his current parent company wasn’t based in the Bay Area. His pay reflected bands the company used that likely didn’t factor in cost of living very well or Bay Area supply and demand for talent. His pay wasn’t the result of any discrimination.
Companies will need to use their best judgment in making sure employees are paid equally “for substantially similar work” within their companies. Case law will inform eventually. Several large Bay Area companies including Oracle and Google were recently in the news with actions against them.
Small companies are not immune. A small tech company CFO shared with me the months of distraction endured from an inquiry brought by the EEOC regarding equal pay. The reasons for pay differences were legitimate, but the distraction of proving it was time consuming.
New rules can at first seem overwhelming. My thought is to use your common sense. Talk to Colosi Associates anytime about compensation by contacting us at email@example.com.
For labor law inquiries and further information about the Equal Pay Act, contact Mary L Topliff, Esq., firstname.lastname@example.org, 415-398-9597.