Equity Is No Longer
Pay discrimination, or “pay equity,” is increasingly an area of concern for employers. While government contractors have had to focus on this issue for some years, due to increased scrutiny on pay by the Office of Federal Contract Compliance Programs (“OFCCP”), recent legislative and regulatory developments suggest that this is an area where all employers should focus their attention. Moreover, pay discrimination claims are highly susceptible to class action treatment, and the plaintiffs’ bar will be far more sophisticated than OFCCP in developing methodologies of proof. This article examines recent legislative and regulatory pay equity initiatives, explains and critiques the OFCCP’s so-called “median analysis,” and provides some practical advice for employers on preparing for and avoiding pay discrimination claims.
Legislative and Regulatory Initiatives. The Clinton Administration has made pay equity a key focus with both legislative and regulatory initiatives. Proposed federal legislation, including the Paycheck Fairness Act and the Fair Pay Act, would provide an additional basis for pay discrimination claims, increases available damages, codifies pay discrimination class actions and expands current retaliation provisions. Although unlikely to be passed this year, Vice-President Gore’s commitment to pay equity makes it a likely issue in this year’s election. Additionally, the AFL-CIO is pursuing comparable legislation in more than twenty states, and sees pay equity as a powerful theme in organizing campaigns targeted at companies with high percentages of female employees.
On the regulatory front, with a total of $14.7 million in FY 2001 targeted to the Equal Employment Opportunity Commission (“EEOC”) and the OFCCP for training and technical assistance, the Administration’s goal is to “expand opportunities in the workplace for women and end wage discrimination once and for all.” In April 1999, the Department of Labor (“DOL”) and the EEOC agreed to a Memorandum of Understanding (“MOU”) to enhance enforcement of laws prohibiting compensation discrimination. The MOU provides that the EEOC and the OFCCP will train the DOL’s Wage and Hour Division (“WHD”) investigators to recognize potential compensation discrimination. Unlike the OFCCP and the EEOC, the WHD is not limited to compliance reviews, complaints or charges before obtaining access to an employer’s records. With the OFCCP conducting the training, it is likely that the WHD will follow the OFCCP’s flawed median analysis (discussed below) to identify potential compensation discrimination. Where the WHD discerns potential compensation discrimination, it will provide that information to the OFCCP. If the OFCCP determines the employer is not a federal contractor but may be covered by the Equal Pay Act (“EPA”) or Title VII, the OFCCP will forward the information to the EEOC. Otherwise, OFCCP will use the information from WHD when it schedules a compliance evaluation. The OFCCP’s investigative authority is broader than EEOC’s and can gain access to records when it schedules compliance evaluations, without the need for a discrimination complaint or a subpoena.
OFCCP Activity. In the last few years, the OFCCP has targeted pay discrimination as a primary focus in its compliance evaluation program, and has been able to obtain large settlements when it has observed pay disparities. OFCCP garnered more than $10 million in pay-related settlements between May and September 1999. The more notable settlements in 1999 included: The Boeing Company, $4.5 million; Texaco, $3.1 million; Computer Science Corporation, $734,000; PNC Bank Corporation, $375,000; Duke Energy Corporation, $770,000; and Roche Diagnostics Corporation, $155,000. The OFCCP recently expanded its strategy to pursue pay disparities. The Office of Management and Budget (“OMB”) has approved a modification to the OFCCP’s standard letter scheduling a full compliance review, allowing the agency to obtain summary compensation data from contractors at the desk audit stage of a compliance evaluation. Individualized compensation data will still have to be provided during the on-site phase of the review. In addition, in April 2000 the OFCCP sent mandatory pay surveys to some 7,000 contractors, and proposed new regulations that would require upwards of 120,000 contractor establishments to return the survey on an every other year basis. It is anticipated that the OFCCP will use the survey data to assist in the selection of contractors for review, and that OFCCP will share the information with EEOC. The proposed regulations promulgated by OFCCP on May 4, 2000, include numerous other provisions consistent with the agency’s pay equity initiatives, including but not limited to, (1) allowing OFCCP the ability to conduct company-wide compensation reviews, (2) mandating the identification and monitoring of compensation problem areas in a contractor’s affirmative action plans, and (3) requiring the contractor to maintain and provide upon request documents reflecting the identification and monitoring of problem areas. Those documents could easily become discoverable by private plaintiffs in litigation alleging pay discrimination.
All of this activity means that all employers, not only government contractors, need to be concerned with not only pay equity issues, but with the OFCCP’s flawed pay analysis.
Legal Standards for Finding Pay Discrimination. A claim of pay discrimination may be alleged under either the Equal Pay Act (“EPA”) or Title VII. The EPA prohibits sex-based discrimination in compensation for work performed in equal jobs. To constitute equal work, the compared jobs must require equal skill, effort and responsibility, and be performed under similar working conditions. Courts have expanded the notion of “equal work” to include “substantially equal work.” In contrast, Title VII prohibits pay discrimination based on race, color, sex, religion and national origin. To constitute discrimination under Title VII, the jobs do not need to be equal or substantially equal. The plaintiff merely needs to prove that her job is similar to that of higher paid males. But under Title VII, the plaintiff also has the burden to prove that the employer acted with discriminatory intent. Once the plaintiff meets her burden under either the EPA or Title VII, the burden shifts to the employer to justify the wage disparity by (1) merit system; (2) seniority system; (3) system based on production quality or quantity; or (4) any factor other than sex. Most courts have held that any factor other than sex must be bona fide and business-related.
The OFCCP’s Flawed Median Analysis. The OFCCP’s compensation investigation methods do not conform to the legal standards applicable to a pay discrimination claim. The OFCCP investigates under the assumption that if different jobs are in the same pay grade or level in the compensation system developed and maintained by the employer, then the jobs are of equivalent value to the company, even if the jobs in the pay grade bear no relationship to each other. Accordingly, the OFCCP conducts a group median analysis by calculating the median salary and the median of some “time-in” variable (such as time with the company or time-in-grade) of the women and men or minorities and non-minorities in the pay grade. The OFCCP then compares the results and looks for patterns that would indicate discrimination. If seventy percent of the observations are adverse to the protected group (i.e. the protected group has greater median time-in, but less median pay) the agency concludes that a pattern and practice of pay discrimination exists. The agency has considered a salary differences as small as $10 per week as an adverse result. There are also examples of the OFCCP finding an adverse result when there is a single male and a single female populating a salary grade.
Perhaps the most significant flaw in the OFCCP’s analysis is that it fails to compare employees who are similarly situated or who have substantially equal jobs as required under Title VII and the EPA. Further, the OFCCP’s analysis does not require a showing of intent to discriminate as required under Title VII. Additionally, not only does it fail to take into account the four affirmative defenses available under Title VII and the EPA, the OFCCP refuses to consider that any factor other than sex could have caused a pay differential. Finally, there is no statistical significance to the OFCCP’s median analysis. No court has ever relied on statistical evidence other than a multiple regression analysis, which may explain why the OFCCP has never attempted to enforce a finding of discrimination based on a median analysis. Notwithstanding these flaws, the OFCCP has used the median analysis to negotiate large settlements from contractors.
Practical Advice for Employers: Preparing for and Avoiding Pay Equity Claims. Employers typically lose pay discrimination cases because: (a) they do not follow their articulated pay policy; (b) they misclassify employees by grouping dissimilar jobs in the same classification and/or pay grade, (c) management articulates an illegal factor as a reason for the pay decision, (d) management has no job-related reason for the pay disparity, (e) management uses inconsistent explanations to explain pay differentials, (f) jurors find a recurring pattern of paying women or minorities less than Caucasian males, or (g) employees are not informed at the time of the decision of the rationale given by the employer in court.
Employers can prepare for, and hopefully avoid, pay discrimination claims by taking the following affirmative steps:
1. Pay policy: Evaluate every word in the pay policy to ensure it accurately states the policy of the company. The employer should have only one document that sets forth the pay policy; do not restate it in different ways.
2. Setting starting and promotional pay rates: In setting pay for an employee, use all of the factors that the pay policy says determine pay. The employer should have consistent standards for setting starting pay for internal and external hires, and for classifying new hires into an appropriate responsibility level. An employer should evaluate whether incumbents should be adjusted if comparable new hires are being paid more. Likewise, promotional raises should be set using consistent standards and should be based upon the person’s new peer group comparators.
3. Annual Raises: Pay raise decisions should be based on a consistent, articulated set of factors. Employees who similarly perform with similar rate range penetration should receive similar raises. Benchmarks should be set so that no one passes certain points in the pay range without satisfying certain skill, competency and experience thresholds.
4. Rationale for pay decisions: Management and HR should articulate the reasoning for each pay decision as most suits are brought by employees who did not receive a logical explanation for pay decisions. Be able to distinguish your performance management philosophy from your salary management philosophy.
5. Self-audit of pay structure: An employer should conduct a self-audit of its pay structure under attorney-client privilege.
6. Use of median analysis: The pay structure first should be analyzed using the OFCCP’s flawed median analysis as all employers now may be subject to the analysis. It is important to “know what your enemy knows.” Consider conducting a test to determine if the median difference is statistically significant.
7. Use of regression analyses: Even if the median analysis does not reveal any disparities, an employer with multiple facilities also should analyze its pay structure with a simple regression analysis. An employer does not want to set a precedent at one of its facilities that a median analysis is appropriate simply because the median analysis does not reveal any disparities at the particular location. Further down the road, the median analysis may reveal disparities at another facility and an employer will be hard pressed to argue that the median analysis was appropriate at one of its facilities but not at another. The regression analysis should first be conducted by pay grade to determine whether job-related factors explain any disparities that might arise in a grade based median analysis.
8. Possible regression factors: The job factors used in the regression analysis should accurately reflect the factors used in compensation decisions. Factors that lawfully may explain disparities include: company seniority; years in classification; years of relevant experience in the company; years of relevant experience inside and outside the company; education; special skills; job duties; performance ratings; performance quality; productivity; promotion history; continuity of employment; market value of a job; other licenses and certifications; negotiated differences in starting pay; and (the most debatable factors) pay at last place of employment and starting pay with the company. If starting pay is utilized as a regression variable, the method by which starting pay is set also should be analyzed for potential adverse impact.
9. Employees should be grouped into similarly situated job groups: If the regression by pay grade does not explain a disparity, an employer may conduct a regression analysis for job groups of similarly situated employees (employees having similar duties, skills and responsibilities). If significant disparity continues to exist, an employer should consider whether it is appropriate to examine pay decisions for a given job classification by decision maker or organizational unit.
© 2000 Paul, Hastings, Janofsky & Walker LLP