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November 2016

Employer Analysis of Pay Data is a Critical Risk Avoidance Tool

You are entering the fourth quarter, which for those on the calendar year, is a critical time.  The “final push” is underway to achieve maximum profitability and results.  At the same time, employee performance is reviewed; salaries are evaluated; and bonuses are determined.  Each of these actions can and should be analyzed to ensure that performance evaluation ratings, salaries, and bonuses are being awarded to employees on an equitable, non-discriminatory, and lawful basis.  You may not be aware, but this is particularly important now, given the state of the market and the recent uptick in litigation over these matters.  Faced with these potential risks, the prudent move is to conduct an analysis of the performance ratings, salaries and bonuses.  Doing so is a safeguard against possible government agency audits, as well as serves as a proactive measure if you are faced with a lawsuit. 

Move Forward with an Analysis

Before conducting your analysis, you first need to determine which areas of your organization need to be studied.  This will include categories such as lines of businesses, departments, job groups, locations, etc…   Next, begin collecting information regarding your company’s pay and performance evaluation practices. This will include background information on the pay systems that are used, the evaluation and compensation procedures in place, the management and retention of compensation data, and other similar information.  This also entails looking at your pay practices, from both a business and legal perspective, analyzing your pay, and determining whether you believe there are disparities involving market equity or internal equity or legal issues that can be analyzed under the Equal Pay Act, Title VII, or the applicable state law. 

Lastly, to optimize your compensation practices, you should also decide what type of compensation needs to be studied.  The compensation review will include hourly wages, annual wages, incentives, overtime, variable pay, and total compensation. The grouping of employees into various sectors, like those who perform similar work, those who occupy positions which have similar levels of responsibility, and those who occupy positions which require similar training, certifications and skill levels, is also necessary.

For most employers, an important step in the analysis will be building and implementing a statistical model to analyze compensation data for each position and among cohorts of similarly situated employees to ensure that these employees are paid fairly. Be prepared to anticipate and address any potential vulnerabilities in advance of any regulatory or employee challenge.

Cloak the Analysis in the Attorney-Client Privilege

Before embarking on these types of analyses, it is critical that the employer address the question of whether the analysis will be privileged. Since an employer starting the analysis, is likely unaware of what the results will be, the conservative approach is to take appropriate steps to protect the analysis and its results to the greatest extent possible.  In most cases, it will make sense to have the pay analysis conducted under privilege. An analysis that is conducted without the protection of the attorney-client privilege may be subject to disclosure, either during a government agency investigation or discovery in litigation.

Conducting an analysis is an important way to monitor equal pay issues and ensure that potential problems are not slipping through the cracks long before they become the subject of a regulator's interest or even a full-blown lawsuit. However, companies must ensure that a lawyer is involved in the process so that any analysis the company undertakes can be kept confidential.  Without ensuring the appropriate steps to assert the privilege, companies can create unnecessary risk in an attempt to be proactive.  Moreover, having the attorney-client privilege from the outset will provide the employer with the freedom and flexibility to communicate regarding the relevant issues and solutions without fear that those communications will be disclosed at a later date.

Fix Unexplained Disparities

A pay equity analysis involves analyzing an employer’s statistical pay data to determine whether there are disparities. A typical analysis compares the average pay of men to the average pay of women (or other protected groups) within relevant job classifications to determine whether significant disparities exist. An analysis can also involve an analysis of an individual employee’s pay compared to others in a relevant job classification.

Often pay disparities are not the result of intentional discrimination per se, but due to weaknesses in employer policies and practices. Once an employer has completed the statistical analysis, it should also review whether it needs to make any modifications to existing compensation policies, procedures and practices, which can help prevent unexplained disparities from continuing to occur. Failure to take this step could create an ongoing risk of future pay disparities developing — precisely what the employer was seeking to avoid by conducting the pay analysis in the first instance.

If a privileged audit turns up pay disparities that simply cannot be explained between men and women or workers with other protected characteristics, then the employer must be prepared to address those results.  However, before proceeding to remedy compensation, businesses should also critically review the results to determine if there are legitimate legal and business factors causing the differences in pay.  The statistical analysis helps identify the issue, but does not conclude the analysis. 

Ultimately, for those pay disparities that simply cannot be explained, even when more than one statistical model is employed to analyze the data and other factors are taken into account, employers may wish to make adjustments to workers' compensation to make sure that the company does not end up getting slapped with a lawsuit.

Employment Law

Employment Law