Guest Columnist: Equal Pay -- What Small Businesses Need to Know

Date: December 11, 2016

NFIB Pennsylvania thanks Andrew Levy, an attorney and member of the Labor and Employment group at McNees, Wallace & Nurick LLC for this column.

You have probably heard that women are paid less than men in the United States. According to the Bureau of Labor Statistics, the median annual earnings of women who work full time is less than 80 percent of the median earnings of full-time male workers. Most would agree that this pay gap is largely attributable to nondiscriminatory factors, such as education, experience, industry or occupation. It is difficult to identify the extent to which intentional discrimination or implicit bias contributes. However, a pay gap does exist, and there have been significant legal developments at both the federal and state level aimed at closing it.

Existing Federal Laws

The Equal Pay Act of 1963 prohibits gender-based pay discrimination. The Equal Pay Act provides, in pertinent part: 

No employer … shall discriminate … between employees on the basis of sex by paying wages to employees in such establishment at a rate less than the rate at which he pays wages to employees of the opposite sex in such establishment for equal work on jobs the performance of which requires equal skill, effort and responsibility, and which are performed under similar working conditions, except where such payment is made pursuant to (i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production, or; (iv) a differential based on any other factor other than sex. 29 U.S.C. §206(d)(1). 

One year after the passage of the Equal Pay Act, the United States Congress passed Title VII of the Civil Rights Act of 1964 which prohibits discrimination in the “terms and conditions of employment” (including compensation) on the basis of gender, race, religion and national origin.

In order to prove a claim under the Equal Pay Act, a plaintiff must establish: (i) the employer pays different wages to men and women at the same establishment; (ii) the employees perform equal work on jobs requiring equal skill, effort and responsibility; and (iii) the jobs are performed under similar working conditions. 

Once such a showing is made, the burden of persuasion then shifts to the employer to prove that the disparity is justified by one of the following four affirmative defenses: (i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by the quantity or quality of production; or (iv) a differential based upon any factor other than sex.

The legal standards and available remedies under Title VII are somewhat different from the Equal Pay Act, but both laws have provided recourse to federal courts for victims of pay discrimination for over 50 years and the gender pay gap has narrowed by approximately 50 percent during that time period. Nevertheless, a significant pay gap still exists and intentional or implicit discrimination is seen by many as part of the problem. 

According to the American Bar Association, the Equal Pay Act has proven ineffective in eradicating gender-based wage discrimination, in part, because “courts have adopted a narrow definition of what constitutes a work establishment and some courts have permitted employers to pay unequal wages to men and women based on factors that are not job related.”[1] The Obama administration and many equal pay advocates have also pointed to the need for greater pay transparency, and have criticized court decisions which allow employers to rely upon prior salary history when setting compensation for new employees, as this practice can perpetuate historical discrimination. Each of these perceived shortcomings has been addressed in recent federal executive action and/or state legislation. 

Recent Legal Developments to Strengthen Equal Pay Laws

The Obama administration has taken several significant steps to further its equal pay initiative: 

  • The Office of Federal Contract Compliance Programs (OFCCP) has broadened the standard by which it analyzes pay discrimination by federal government contractors and has more aggressively pursued pay discrimination enforcement.
  • Executive Order 13665 and implementing regulations prohibit federal government contractors from discriminating against employees or applicants for discussing or communicating pay information. There is an exception for human resources, payroll, and other employees who have confidential access to the compensation information of other employees as part of their job duties.
  • The National Labor Relations Board has more broadly enforced its position that employers infringe upon employee rights under Section 7 of the National Labor Relations Act by requiring confidentiality of pay information, or otherwise prohibiting nonsupervisory employees from discussing pay and other terms and conditions of employment. 
  • On September 29, 2016, the EEOC issued final regulations requiring all employers with more than 100 employees to report compensation information and hours worked as part of the annual EEO-1 Report. This significant new compensation data collection initiative will require employers to submit compensation data by gender and race/ethnicity with the 2017 EEO-1 Report, which will be due by March 31, 2018. Businesses that report information indicating significant pay disparities within the EEO-1 job categories will be more likely targets of enforcement activity by the EEOC or OFCCP.

The legal landscape has shifted even more dramatically in the states. The California Fair Pay Act was passed in 2015, and state legislatures in New York, Maryland and Massachusetts have since passed similar strong pay equity legislation. While the details differ in each state, these laws generally:

  • Expand the set of comparators when determining if discriminatory pay variances exist by (i) eliminating the requirement that a pay variance exist between workers at the same “establishment” and replacing it with some form of geographic proximity, and (ii) replacing the concept of equal pay for equal work with broader concepts such as “substantially similar work” or “comparable work.”
  • Limit the factors upon which employers can rely to justify pay discrepancies. The new state laws have replaced an employer’s ability to justify pay discrepancies with “any factor other than sex” with a much more stringent requirement of job related factors (education, training, experience) that must be supported by business necessity. For example, if an employer claims that a pay discrepancy is based upon education or training, the employer will be required to show that the specific education or training is actually required to be successful in the job.
  • Prohibit employer rules that restrict employees from discussing pay.
  • The Massachusetts Act to Establish Pay Equity (effective January 1, 2018) will specifically prohibit salary history inquires during the hiring process. In California, Maryland and New York it would be very difficult to justify a pay discrepancy based upon prior salary history.

Employers with operations in California, New York, Maryland and/or Massachusetts must take steps to ensure compliance with these more stringent state laws.

Proactive Steps

It remains to be seen whether President-elect Trump will continue the Obama administration’s aggressive push for pay equity. However, the increased focus on equal pay and the trends toward greater pay transparency, broader comparison of employees, and more limited defenses for employers trying to justify pay discrepancies, are likely here to stay. 

Employers should consider the following actions to ensure pay equity and legal compliance:

  • Consider elimination of salary history inquiries during the hiring process. This is required in Massachusetts effective January 1, 2018. 
  • Conduct a privileged compensation analysis to determine whether any gender-based pay discrepancies exist and, if so, whether those discrepancies can be explained by lawful factors. Even those employers outside of California, New York, Maryland and Massachusetts should consider a standard by which any gender-based pay disparity should be supported by factors that are job related and consistent with business necessity. If pay disparities exist and cannot be explained by legitimate factors, consider pay increases to address the disparity over time. Some allowance is made for employers exercising good faith to eliminate gender-based pay discrepancies. For example, the Massachusetts law provides an employer who completes a self-evaluation in good faith with a defense to pay discrimination claims, if the employer can demonstrate “that reasonable progress has been made toward eliminating wage differentials based on gender for comparable work.”
  • Ensure that confidentiality policies and other work rules do not prohibit employees from discussing pay. As noted above, rules requiring personnel with access to compensation data in connection with their job duties to maintain confidentiality are permissible.
  • Unless the revised EEO-1 Report for 2017 is halted by Congress or the Trump administration, employers should examine data systems to ensure that they will be able to efficiently gather the information needed to complete the form in March of 2018. Employers should also ensure that their placement of positions into the ten EEO-1 job categories is appropriate. For some employers, it may be advisable to run a trial analysis of the EEO-1 compensation data using 2016 W-2 earnings.

Employers who wish to stay ahead of the curve and out of the courtroom will take a proactive approach to pay equity in coming years.

[1] The Paycheck Fairness Act. (2016, October 11). Retrieved from http://www.americanbar.org/advocacy/governmental_legislative_work/priorities_policy/discrimination/the-paycheck-fairness-act.html 

Andrew L. Levy is a member of the Labor and Employment group at McNees, Wallace & Nurick LLC. He can be reached at [email protected].

Related Content: NFIB in My State | Labor | Pennsylvania

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