Q&A: Navigating Pay Equity With Legal on Your Side

January 30, 2024

Ensuring pay equity across employee demographics has become increasingly important for competitive employers. Unfortunately, the journey to achieving pay equity can raise new compliance issues…particularly when an organization discovers their pay practices aren't perfect. To execute a successful pay equity strategy, leaders must ensure that all stakeholders in an organization are informed, aligned and invested in the strategy and its outcomes.

In this Q&A, Littler shareholders Denise Visconti and Trish Martin discuss why addressing pay equity is so important, how employers can break down organizational silos to work collaboratively on pay equity, and the most common challenges employers may encounter along the way.

Q: It seems that everyone is talking about pay with greater transparency. While this helps drive pay equity forward, it's important to understand that there are legal sensitivities and nuances to pay equity that are critical to the success of a pay equity strategy. With this in mind, why is it so important that we, HR and legal stakeholders, are coming together in this way today?

Denise Visconti: It's so important to come together right now because there are so many new laws coming online, most of which have liability associated with them. There are a lot of states that are talking about and enacting measures designed to improve pay equity, and there are a lot of employees talking about pay equity. So, it really feels like critical mass in terms of the conversation, and it's critical to get it right. It takes a conversation with HR, legal and other parts of the organization to make sure that everybody is on the same page so the organization can really move forward.

Q: What have you seen as the biggest hurdles when it comes to both legal and HR teams coming together to address pay equity?

Trish Martin: Sometimes the left hand doesn't know what the right hand is doing. Often, HR, or in some cases Total Rewards, completes a pay equity analysis without involving legal at all until they discover they have issues. Then, they contact us as they're trying to figure out how to fix those issues, sometimes without the budget to do so immediately. The problem with that from a lawyer's perspective is that, by not involving legal, the audit is not protected by attorney-client privilege.

In the US, we have the federal Equal Pay Act. Normally, the statute of limitations (or time by which to file a claim) for an Equal Pay Act claim is two years. However, if you knowingly or intentionally violate the law, the statute of limitations is extended to three years. If an organization completes a pay equity audit that is not protected by attorney-client privilege, and it can't afford - or simply chooses not - to fix any issues it discovers during an audit immediately, it is put in a worse position than it would have been had it not completed an audit in the first place. But, the risk of not doing an audit can leave an organization vulnerable, since it would not even know if it has any pay differences that could create liability. It goes much more smoothly if HR and legal proactively partner from the beginning.

Denise Visconti: Also, a lot of organizations are seeking to use pay equity as a competitive advantage to attract and retain talent, as a lot of current and prospective employees can be attracted to organizations who pay their employees fairly. That's really admirable, but organizations must be sure they actually are paying people fairly, and they're doing it in a smart and collaborative way so legal can ensure that the risks are identified and acted on. For example, often, by doing an audit, legal or HR might discover policies, practices or procedures that need to be modified or changed because they actually are creating or leading to inequities within the organization. Ensuring legal and HR are working together therefore is key. Ensuring Total Rewards is involved is also important, especially if there are budgetary needs that are required to achieve equitable pay within the organization.

Q: You've both mentioned various stakeholders, including heads of Total Rewards, heads of HR and then of course internal counsel. Earlier this year, Gapsquare by XpertHR conducted a study in partnership with Executive Networks, asking over 1000 respondents across the US and UK who they think should own pay equity work. Of HR leaders, 30 percent said the CEO, 26 percent said the heads of diversity, equity and inclusion, 25 percent said the CHRO, only 10 percent said the head of Total Rewards and 8 percent said the head of legal. Does this split across stakeholders surprise you?

Trish Martin: I am not surprised there is disagreement about that because when we do audits for clients, a lot of times, it's not quite clear who owns the project and who is responsible for it.

However, it is surprising to me that talent acquisition often is not involved because companies typically get in trouble with pay equity at the time of hire. Internally, there is a lot of concern about the performance review process or the merit cycle and the fairness of these processes. However, when we do audits, we often find organizations are running into the most trouble with pay equity because of how initial pay is set. If the organization sets a new employee's initial pay wrong because it is not looking at comparators who are in the same position, it is almost impossible to recover from that.

Starting pay is up to talent acquisition. So, even if talent acquisition is not brought in on formal pay equity analyses, organizations need to have buy-in from them to ensure they're aligned on the compensation philosophy and how starting pay should be set.

Q: With so many stakeholders with their hands in the pot, and so many complexities to manage, it can be difficult to know where to start. When you sit down with a client on the first day, where do you recommend an organization starts, and how do you begin untangling these complexities?

Trish Martin: When we work with our client or when a client is doing a pay equity audit, the first step is to determine what needs to be analyzed. To do this, we talk about their job architecture and how their hierarchy is structured so we can figure out who the organization thinks is similarly situated such that they ought to be getting paid the same. We'll also talk about what their compensation philosophy is. Included in that is, when they're setting starting pay, finding out what goes into that decision.

Once we find out the things that are driving pay, we want to know what data the client has that can be easily extracted from their HR system. It is really common for clients to say that when they are setting starting pay, they want to be at some percent of the market and then adjust pay up or down based on years of relevant experience. However, it is very rare for clients to document years of relevant experience in their HR system in any way that can be extracted.

Finally, an organization should also think about what components of pay it offers that need to be reviewed. There is obviously base pay for all organizations, but some organizations have commissions. If commissions are paid, the organization needs to determine, for example, whether employees have negotiated one-off deals that are not aligned to the normal commission plan.

Q: We often hear of organizations that say they pay for performance and that performance is the biggest decision maker in the organization. How often are you hearing that? What is your response to that?

Denise Visconti: Pretty much every organization that we talk to - or the vast majority - says it pays for performance and wants to pay its superstars more. But very rarely does that turn out to actually be true once we do the analysis. Typically, it's not true for at least two reasons.

One reason is that some clients say they pay for performance, but then the budget process interferes with that goal. For example, an organization may have a three percent merit budget. The organization pays its superstars half a percent more, but it doesn't want to leave underperformers out completely. So, underperformers get something as well. This really takes away from any budget the organization has left over for the superstars and drives everybody to the middle. This then gets exacerbated over time and ultimately gets to the point where pay for performance really doesn't make all that much of a difference between what low performers and superstars make.

The other interesting thing is that clients constantly say they pay for performance, but they don't have any performance scores reflected in their data. Without performance data, an organization has the dilemma of saying it pays for performance, when in fact, there is nothing to suggest they are objectively measuring people's performance.

What we're really seeing is, in addition to starting pay, other factors besides performance are really driving pay decisions.

Q: Pay transparency is evolving in the US, with more than 15 jurisdictions introducing legislation around pay transparency, and more specifically, salary ranges. We've also seen quite a significant backlash. We've seen headlines about companies, frankly, just getting it wrong, providing ranges that are too broad to be meaningful. For example, we've seen one salary range from zero to $2,000,000. What are your tips for best practice when it comes to pay transparency?

Denise Visconti: The number one thing that an organization really needs to do is get its arm around what the requirements are in the jurisdictions in which it has employees. And slightly differently, what the requirements are in the jurisdictions in which it is recruiting or posting jobs, because those can be a bit different. These laws are also changing constantly, so organizations need to think about a strategy for making sure they remain in compliance.

Organizations also need to be aware that when they post a position that can be performed remotely, what that really means is they have to comply with the transparency and posting requirements in every single jurisdiction.  They also may need to comply with requests from employees for their pay ranges and pay information everywhere.

From the practical HR perspective, an organization needs to decide how it will manage requests from employees living in states with no transparency requirements. Even in cases where it's not required to give that information, providing it to some employees while denying requests to others may have a negative impact on the organization.

Finally, and not surprisingly, transparency leads to pay equity conversations. Once employees know what other employees are making, or the range of what others are making in their same position, they're going to ask questions. This is particularly the case if they make less than the range that's being posted. From an employee relations perspective, before posting, organizations should consider the types of questions that they will receive from current employees and be prepared to answer them.

Q: Continuing on this topic of public reporting, we see environmental, social and governance (ESG) factors playing a significant role in public reporting of pay equity data. Companies are going above and beyond what's legally required to be disclosed. On average, 60 percent of all leaders agree that ESG is a driver for pay transparency practices. What should teams be thinking about as they put together sustainability reports or impact reports, or contribute to those indices that are collecting information around pay?

Trish Martin: There is so much attention on this because putting pressure on organizations to report their pay shames them into doing better, which is good, and the feminist in me loves this. However, the lawyer in me does not like posting a adjusted pay gap for two reasons. First, it probably waives the attorney-client privilege. Unless an organization's pay equity audit was perfect - which, I've done hundreds and I've never seen one - it exposes your organization to risk.

Second, it's inviting litigation. For example, an organization may have an adjusted pay gap of one percent. One percent of payroll seems pretty good from a European Union perspective, but it's still a lot of money. That's very attractive to a plaintiff's lawyer, especially when you think about in the US, where states have statutes of limitations as long as six years and triple damages. Triple damages for six years amounts to the damages being 18 times the annual pay difference.

So, there is a tension between those two things. It is a business decision whether or not to disclose a pay equity number, and this decision needs to be made understanding what the risks are of making that disclosure.

Q: What we can underscore here is that this is nuanced work. And in this work, legal and HR are on the same team. As a final question, what is your takeaway of how we can come together to do the right thing for employees, for pay equity and for our organization?

Trish Martin: Don't be afraid to start, and lawyers are your friends. Don't assume that by going to in-house counsel, they're going to be a roadblock. They are normal human beings who want to make sure people are paid fairly, so don't be afraid to reach out and get the work going.

Denise Visconti: If you're thinking about launching a pay equity audit and an overall effort to work toward equitable pay, partner with other key stakeholders early before you go down that path to make sure everybody is on board and you can all travel the road together.