Business impacts of changing pay equity laws

Recently, I was tasked with giving a lecture to local university business students on current challenges in the Human Resources industry. I selected the topic of pay equity because it’s a topic that encompasses the issues of discrimination, respect, diversity, employee value, cost of doing business, process, technology, and the difficulty of implementing and adhering to employment law.

In a few days, people around the world are celebrating Equal Pay Day. So, I’ll share with you what I shared with those business students on why women are still not being paid equally, what US states are doing about it, and why business owners should care.

How did we get here?

We’ve all heard the slogan “Equal Pay for Equal Work” but the Equal Pay Act of 1963 that established the premise for equal work set some fairly narrow conditions for women to actually be paid the same.

President John F Kennedy signs the Equal Pay Act of 1963 on June 10, 1963. Photograph by Abbie Rowe.

The first is that the work had to be done in the same physical establishment. That’s great if you are working in a factory, but in today’s knowledge economy most people’s “peer” employee exists in other state or even another country.

Second, it set five main factors to determine what “substantially equal” work was: Skill, Effort, Responsibility, Working Conditions, and Establishment.

Lastly, all of the burden of proof was placed on the employee to bring evidence of the claim to the EEOC or in a court suit. Remember, in the 1960s and even up until recently employers have been allowed to have internal policies prohibiting people from discussing and disclosing their pay. As recently as 2010, 50% of US workers stated they were prohibited or strongly discouraged from discussing pay at work.

So if you don’t know what someone else makes how do you know you are being unfairly paid?

Title VII of the Civil Rights Act of 1964 expanded some protections. First it added broader “discrimination” protections in employment, not just in compensation but in things like advancement (promotions), opportunities for training and it’s where most of our protections against sexual harassment come from. While it broadened the definition of “substantially equal” work to “similarly situated” (to address when there was not another person in the same job to compare against) and removed the physical establishment requirement, it did not change the burden of proof being on the employee. Demonstrating a systemic pattern of discrimination can be even harder than a single pay incident. What it did do however was impact job-segregation based on sex… although the tech sector still has a way to go in that area.

It’s precisely because of these problems together with recent research that reveals that women are anchored lower in salary when they first enter the workforce and that they are less likely to negotiate that has prompted states to take action.

What’s changing in pay equity laws?

There are five broad categories and the implementation of each category varies by state.

Pay transparency – this limits employers from being able to enact employment policies that prevent employees from discussing pay. It also prevents employers from any kind of retaliation against people who do, not just in their compensation but also advancement and access to developmental activities.

Prohibits requesting salary history at application – generally this means the old application systems that required you to enter exactly what you made at each of your last jobs need to remove that little salary box. But the broader issue of how you discuss what you want to make verses what the company is willing to pay is still a little fuzzy and varies by state.

Some states allow room for employer to “engage in discussion” about pay expectations. This would generally allow you to keep the box on the application called “Desired salary” and allow recruiters to have some level of discussion especially if the employee voluntarily discloses their past salary or pay expectations in advance. But states like Oregon prevent any discussion at all prior to delivering the initial offer to the candidate.

What’s scary is that a recent Payscale study revealed that:

…a woman who was asked about her salary history and refused to disclose was actually offered 1.8% less than a woman who was asked and did disclose. Meanwhile, if a man refused to disclose when asked about salary history, he received an offer that was 1.2% higher than a man who did.

Enforcement – new state laws now provide employees (or potential employees) with options to levy complaints about an employer with the state Labor Department or appointed local commission rather than the EEOC or filing a lawsuit. This means a company can now be subject to additional fines and civil penalties at the state level. While many of these fines are somewhere in the $1000-$10,000 range, New York City’s law allows fines up to $250,000 for willful and malicious pay practices in addition to back pay and damages to the victim. These damages can also include emotional stress.

Burden of proof shifts to the Employer – Whereas with the claims to the EEOC the claimant has to bring evidence, with state Labor Department or commissions charged with investigations, the proof now falls to the employer to justify pay practices. Employers need to show how their current pay and performance methodology demonstrates that pay did not need to be equal based on the main allowances for pay disparity in the EPA: seniority, merit, quality or quantity of work, or a factor other than sex. If you don’t have your pay methodology documented and defensible, you better start now. Massachusetts and Oregon even provide “safe harbor” sections of their legislation limiting damages that an employer may need to pay if they document and study pay inequity and can prove that they are addressing it proactively.

Records Retention & Reporting – Many of the new laws extend the period of time that employers need to keep applicant and employee pay and performance data on file (Notably, California’s updates extend the time from 2 to 3 years). This is important for HR Operations teams because you need to ensure all of the information in your ATS and HRIS systems (or any other system tracking performance) adheres to a retention policy. It also means your managers have no excuse to not upload or complete their team performance assessments.

During the Obama administration legislation was passed that would require, beginning in March 2018, employers who are federal contractors to file a revised EEO-1 form adding pay data to their current Affirmative Action Program (AAP) reporting. The EEOC however was not funded by the current administration to execute this initiative, as it would take additional manpower. So this federal step is on hold. The wake of this, states like New York & New Mexico have taken action for state contractors that still require them to file pay data reports.

[Note: A good summary of all the current state legislation was published recently by the American Bar Association.]

What does it mean for business?

In a nutshell, increased cost and increased risk.

Process & Training – Businesses will need look holistically at their internal processes throughout the HR function from recruitment all the way to how they train managers to conduct performance evaluations. But what I think is most important is that business executives in the C-suite internalize these issues so they can make a determination for how employment policy may need to change across the entire company.

It’s impossible to have different hiring processes for each state. Your managers will also never remember the differences in state law when they are hiring or managing employees around the country. You may infact need to adopt the most restrictive legislation as your minimum standard so that you can develop simple policy and process changes and training for the company.

If you are in IT or Finance your ears should be perking up too. You should be thinking about:

  • the cost of these new training programs
  • evaluating your HR software to see if it has the capabilities to support process changes or if you’ll need a more expensive tool, and
  • how to have the additional software and staff needed to merge data from your HR tools to provide required reporting or study the issue in advance to have an affirmative defense.

What I think this means is that, over the next several years, you’ll see HR departments building out their workforce analytics functions with more developers and data scientists who don’t come from HR backgrounds to be able to serve this need.

If you are in Finance or the C-suite, you better be ready to fund these programs or if not, be ready to defend law suits and pay damages.

Need to evaluate the cost of doing business early – As globalization has become part of normal everyday business operations, executives and sales teams have forgot about the simple cost of doing business in different jurisdictions in other US states. It’s easy to pop up a new location in a WeWork facility or employ a workforce remotely, but have you really investigated all the local employment laws that would require you to change employment policies or processes, or expose you to legal risk? Heck, are the executives making the decision even aware of the rules if you are selling to municipalities or state government agencies?

Internal Communication – now more than ever, having a clear pay and performance methodology that can be understood and that sets salary ranges and job families for each department is paramount. Employers are too afraid to discuss this with their employees, thinking they will argue for raises or promotions more, which they can’t afford. If your job family structure is done so that the thresholds for advancements are clear, if your organization actually provides a level playing field and funds opportunities for development, and if you have a system to measure when people have met the bar to be promoted, it provides clarity and consistency for your employees, not ammunition.

The number one issue in employee disengagement is fear. An unstable environment where you don’t know how you will be measured makes you question why you should invest yourself in working towards the organization’s goals. It also breeds resentment that your employees will take out on your customers.

“…employees seek a company culture that is secure and one in which employees feel as though they are looked after – a culture that becomes even more important during times of change.”

Ken Oehler, PhD and Global Culture and Engagement Practice Leader, Aon Hewitt

Be honest and be transparent. And if you don’t have the policies in place, get it together and communicate it to managers and employees. Plan to start 2019 off with your people knowing they have a clear career path and have an agreed upon pay and performance method implemented on the right software.

With new states passing legislation weekly, the clock’s ticking….

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