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Are You Paying Employees Equitably?

Some recent headlines regarding Google’s pay practices have caught my attention.  In September, a group of its female former employees filed a lawsuit alleging that they were placed into lower paid positions compared to their male counterparts and were not provided the same promotional opportunities.  Earlier this year, the Department of Labor filed a lawsuit against Google, alleging that it engaged in systemic pay discrimination.  On top of that, the New York Times published an analysis of Google’s compensation practices.

Not every employer is going to attract this type of attention for its pay practices.  However, employers must not assume that compensation bias is a risk only of very large companies.  Rather, all employers, large and small, which have employees in California must diligently comply with California’s Fair Pay Act.  After all, it is a lot easier to make compensation adjustments on your own compared to being forced to do so by a court, jury or government agency.

California Fair Pay Act Requirements

Previous Workplace Wave articles covered the California Fair Pay Act (California Labor Code §1197.5), which expanded the Equal Pay Act in January 2016 and again in January 2017.  The current law prohibits employers from paying employees of one gender, race or ethnicity less for “substantially similar” work, when viewed as a composite of skill, effort, and responsibility. Employers must establish that gender, race or ethnicity-based wage differentials are based on one or more factors, including a seniority system, a merit system, a system that measures earnings by quantity or quality of production or a bona fide factor other than sex, race or ethnicity, such as education, training, or experience.

In order to establish such a “bona fide factor,” the employer must demonstrate that the factor is not based on or derived from a sex, race or ethnicity-based differential in compensation, that it is job related with respect to the position in question, and that it is consistent with business necessity. “Business necessity” is defined as an “overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve.” The employer must demonstrate that each factor relied upon was applied reasonably and accounts for the entire differential. However, this defense will not apply if the employee demonstrates that an alternative business practice exists that would serve the same business purpose without producing the wage differential.

Beginning in 2017, California employers have been prohibited from defending a pay differential solely with evidence that the employee’s rate of pay was based on the employee’s prior employment.  Many employers have paid new employees whatever they were making at their prior employment, which can lead to pay differentials between new hires and incumbents in the same (or substantially similar) positions. Aside from the potential morale issues when this comes to light (as it inevitably does), this can constitute the perpetuation of discriminatory wage disparity between men and women and between employees of different races.  Thus, the Legislature responded by forcing employers to take other objective factors into account when making compensation decisions.

What Actions Should We Take to Comply?

Conduct a comprehensive audit and be prepared to make changes.  Although each audit will necessarily be unique to the employer, it will typically start with a review of the current pay rates by employee by position as well as an evaluation of jobs that are “substantially similar.”   A thorough review of job descriptions will assist with the latter.

As differentials are identified, research the rationale and methodology used (if any), then analyze whether it will meet the law’s standards.  Determine if wage adjustments will be made and devise an employee communication strategy.

Ensure that audits of pay practices, and more importantly, the written results will be covered by privilege.  Having legal counsel involved early on in the planning stages is helpful in establishing the attorney-client privilege.  If compensation professionals will be analyzing and reporting on the data, they should coordinate with legal counsel.

On a going forward basis, set up your plan for establishing an equitable compensation program.  Consider the objective bases that will be used and who will be responsible for ensuring compliance.  The size of the company will likely dictate how elaborate the checks and balances need to be.

Be prepared that an analysis of jobs in terms of the compensation structure may trigger questions as to whether jobs have been appropriately classified as overtime exempt.  Although employers may wish to address one item at a time, it is important to address overtime exemption issues in a timely manner.

Make sure that managers are aware of the law against prohibiting employees from discussing or disclosing their pay.  California law makes it unlawful for employers to prohibit employees from disclosing their own pay, discussing the pay of others, inquiring about another employee’s wages, or aiding or encouraging other employees to exercise their rights under this law. However, the Act does not require an employee to disclose wages if asked.

What About Employees Who Do Not Work in California?

Many companies with employees in various locations have set up different salary structures based on geographic differences to account for the vastly different costs of living in different parts of the country. Differentials based solely on geography would likely pass muster under California law, e.g., if a male employee in California were paid more than his female counterpart in Montana solely based on the geographic market rate difference.

While California’s Fair Pay Act standards do not apply to employees in other states, employers are well served by auditing the pay of employees in all locations and ensuring that differentials are supported by objective evidence.

What is our Obligation Regarding Promotions?

Ensure that promotional opportunities are equitably available and that promotional decisions will stand up to scrutiny.  Whether such opportunities are equitable can be more subtle and even thornier than compensation decisions and compliance with the Fair Pay Act.  The legal risks include employment discrimination claims with emotional distress damages, among other remedies.

Will there be New Laws in California on this Topic?

Be aware that a pending California bill (that awaits either the Governor’s signature or veto), AB 168, will prohibit employers from asking applicants about their prior salary.  The Governor vetoed a similar bill last year.

Look for a future Workplace Wave article on all of the important California employment legislation following the finalization of the various pending bills.

For additional perspectives on this topic from a successful executive placement firm and trusted colleague, Jennifer Colosi, here is a link to an article (to which I contributed):  http://www.colosiassociates.com/blog/2017/2/28/the-california-equal-pay-act-all-companies-beware

For more information or assistance with employment law compliance matters, please contact Ms. Topliff at topliff@joblaw.com.

Mary L. Topliff, Esq. ©2017 Mary L. Topliff. For more information, contact Mary at topliff@joblaw.com. This article may not be copied or reproduced without the express permission of Mary L. Topliff.