Compliance 101: Removing Salary History from the Compensation Equation

A recent federal court ruling and a spate of new state and local laws related to the Equal Pay Act (EPA) have called into question a compensation practice previously considered standard by many employers: considering salary history as a part of determining pay.

The EPA prohibits the payment of different wages to men and women who do work that requires equal skill, effort and responsibility under similar working conditions and allows for discrepancies only in the following cases: seniority-based pay, merit-based pay, production-based pay or any factor other than gender-based pay.

The “any other factor” rule has been used loosely to apply to myriad factors, including experience, education, willingness to work for lower wages and, most commonly, salary history.

This common practice was turned upside down when the U.S. 9th Circuit Court of Appeals ruled to limit “any factor other than sex” to legitimate, job-related factors, such as experience, education and ability. The court further ruled that salary history and an opportunity to save money are not only not an acceptable reason for pay differences under the Equal Pay Act (EPA), but that using salary history may actually enable and perpetuate gender-based pay discrimination.

While this court’s ruling only impacts employers in 8 western states, by setting a precedent, this may impact future decisions across the country. In addition to this court finding, many states and cities have already taken action in this area by making it illegal for employers to ask about salary history or factor that into any compensation offer or raise. Some large companies, like Amazon, have also decided to get ahead of the curve.

So, where do you start?

The first step in the process is simple, stop asking about salary history in the interview process. Although it is still legal to ask this question in most states, having this information is very likely to impact the offer made to a new employee. Even if the answer has no impact on the offer, the mere asking of the question implies that the employer intended to do something with the information, thereby opening the door for a discrimination claim.

The simplest answer to this is to reframe the question from inquiring about salary history to asking the candidate to provide a desired salary range.

Look beyond hiring decisions

Aside from avoiding the discussion of salary history, each company must evaluate -and be prepared to articulate and defend- its compensation practices and policies across the board, by taking the following actions:

  • Analyze job descriptions and organizational structures – It is important to have tightly defined and accurate job descriptions with carefully noted differences in roles and duties.
  • Audit pay scales to investigate possible current inconsistencies or wage disparities – Take a close look at what each of your employees earns and be able to justify any variances.
  • Examine merit, promotional or seniority-based salary increase policies to ensure fairness – The greater the subjectivity, the greater the possible liability. Examine, articulate and codify how they reward performance on an ongoing basis.
  • Establish a clearly defined pay structure by position – This should outline pay ranges for each role and set of responsibilities and provide a rationale for this range, as well as provide factors for any variances.
  • Budget for needed increases – Salaries and benefits are the most expensive line item for most companies. You must anticipate and budget for possible salary increases regardless of the cost.
  • Don’t use the economy as an excuse – The economic differences between salaries based on hire date present a real issue for many employers and these disparities compound over time. Although potentially costly, it is critical to bridge the gap or risk possible legal action.
  • Bring in reinforcements – Consider hiring an outside auditor to analyze salaries and recent compensation decisions to ensure equity.
  • Adopt a checks-and-balances system to protect against possible discriminatory pay decisions – Making policies are clear and providing visibility and accountability across all areas will dramatically decrease the likelihood of future problems or challenges.
  • Communicate carefully – Any differences in pay will require notification and communication to impacted parties, but, given the delicate nature of the information, it’s critical to balance the need to inform those affected with the potential to cause undue concern or backlash within the broader organization.
  • Provide training – Complying with the new interpretation of the Equal Pay Act will certainly require training for managers and department leaders but also for senior management and HR professionals.
  • Be proactive – Whatever you find, it’s important to act on it immediately. While it might be tempting to delay adopting salary increases or painful discussions or to wait until an employee raises an issue, failure to act will almost certainly result in much more damage.

 

A wave of change is upon us, requiring new pay policies. Employers who proactively make the strategic business decision to strive for greater fairness in the workplace will increase their company’s reputation and employee engagement and retention of key talent, while reducing the risk of discrimination claims, all of which have an indisputable positive impact on both its top and bottom lines.

While it can be tempting to maintain the status quo or to attempt to minimize the short-term difficulty addressing these issues can present, waiting is not an option.

If faced with specific issues or challenges, you can always reach out to or speak with a qualified labor attorney, but there are also many excellent government resources to help with this process, in particular the EEOC (Equal Employment Opportunity Commission) website https://www.eeoc.gov.

 

Quality Business Solutions is actively working with many employers on EPA-Related issues. For more information, on how we can help, please visit the HR Management Services page on our website at http://qualitybsolutions.net/services/hr-management/ or contact Lynn Baker, HR Specialist, directly at lbaker@qualitybsolutions.net or 864-610-2670.