By MICHAEL BURNISTON, the leader of Mercer's human capital business for the firm's U.S. region, and BRIAN LEVINE, Ph.D., a principal in Mercer's human capital business and the firm's lead advisor to clients on matters pertaining to pay equity
As if employers don't have enough to worry about in these unprecedented economic times, they are suddenly exposed to new risks arising from pay discrimination claims. The Lilly Ledbetter Fair Pay Act--the first bill signed into law by President Barack Obama--and such looming legislation as the Paycheck Fairness Act, which is expected to be enacted later this year, mean that companies that haven't already done so should move to proactively assess pay equity and implement any appropriate policy changes and pay adjustments.
A crucial consequence of the Ledbetter Act--which essentially eliminates the deadline for incumbent employees to file charges of pay discrimination based on race, color, religion, sex, national origin, age or disability--is that it could force employers to defend pay decisions made years, even decades, ago.
Named for a plant supervisor who sued her employer for alleged pay discrimination, the Ledbetter Act restarts the 180-day time period (300 days in some states) for filing a charge of discrimination each time an employee receives wages, benefits or compensation negatively affected by an employer's allegedly discriminatory decision or practice, regardless of when that decision or practice occurred. If discrimination is found, each plaintiff is entitled to up to two years back pay. Compensatory and punitive damages also may be awarded in some circumstances.
Meanwhile, the pending Paycheck Fairness Act would dramatically increase potential awards for Equal Pay Act (EPA) claims by allowing for uncapped compensatory and punitive damages in addition to the EPA's current remedies of back pay and liquidated damages.
Among other provisions, this additional act would make it even more difficult for employers to defend against discrimination claims by eliminating the requirement for claimants to provide anecdotal evidence of discrimination and forcing employers to substantiate legitimate drivers of pay differences. It would also increase the size of class actions by requiring potential plaintiffs to "opt out" of claims, replacing a prior "opt in" standard.
Indeed, in March it was reported that discrimination claims filed with the Equal Employment Opportunity Commission (EEOC) had jumped 15 percent--from 82,792 in 2007 to 95,402 in 2008, the highest level since the agency opened in 1965. As the current economic crisis continues, the agency predicts that claims by workers who believe they were discriminated against because of age, race, religion, gender or other reasons could surpass 100,000 in the current fiscal year.
These new realities raise the stakes for employers with respect to various business risks, prime among them litigation risks, which translate into financial risks. Well before the Ledbetter Act, the Office of Federal Contract Compliance Programs (OFCCP), which enforces affirmative action requirements for federal contactors in the United States, made compensation assessments a top priority, adopting regression analysis as its new evaluation standard to increase its effectiveness in seeking out remedies. The agency generated a record $67.5 million in financial remedies in 2008, a 30 percent increase over 2007.
Further, both the OFCCP and EEOC have moved to prioritize investigations of systemic risk, which are more likely to lead to class actions. The EEOC generated more than $135 million in 2007--the most recent year available--from settlements related to gender-based discrimination cases alone. Government resources to ensure pay fairness have already increased substantially under Obama. In addition to these governmental actions, pay discrimination lawsuits have resulted in hundreds of millions of dollars in settlements in recent years. The inherent liabilities for employers are especially worrisome at this time of global financial turbulence.
But there are more than purely financial risks in running afoul of these laws. For one thing, corporate and product reputation, especially of high-visibility brands, can be threatened and quickly affected by public reports of workforce unfairness. Bad press can cost a company customers--never a good thing, but especially dangerous at a time such as this, when revenues are threatened by the economic downturn and heightened consumer sensitivity.
There are also the inadvertent consequences of making necessary workforce decisions in today's recessionary economy, when layoffs, pay freezes and moves to increase variable pay can compromise pay equity if such equity is not explicitly considered. Pay inequity also can threaten the ability of companies to attract and retain increasingly scarce, diverse talent.
Perhaps the greatest challenge facing employers under the Ledbetter Act is the prospect of having to defend compensation and other employment decisions made so far in the past that documentation, witnesses and even relevant decision-makers may no longer be available.
Other provisions of Ledbetter, however, also create challenges--and risks--for employers. For example, the law expands the pool of potential plaintiffs beyond current and former employees to include "affected" parties (arguably employees' family members and beneficiaries).
It also opens benefits programs to litigation threats due to claims that reduced benefits levels--pension benefits, for example--were based on discriminatory pay actions made years, even decades, earlier. In addition, the law specifically states that it applies to a discriminatory compensation decision "or other practice." Consequently, the law's reach, ultimately, may extend broadly to cover all manner of workforce practices provided that they can be tied in some way to compensation.
While it's hard to predict how courts will judge the merits of such actions, or how far back into the past they may reach, the potential tsunami of litigation requires that employers do everything they can to mitigate the risks. That means, on a basic level, spending today's limited compensation dollars wisely by: assessing the match between actual pay practices and compensation philosophy, highlighting any cases where pay is out of alignment, and making pay adjustments to limit the ability of employees to credibly raise claims on the basis of actions taken in the distant past.
In light of these risks, pay equity needs to be on the 2009 agenda of every organization. And assessing pay equity should be consistent with legal standards of evaluation--in this case, regression analysis.
In 2006, the OFCCP declared regression analysis to be the new standard of statistical assessment for its compensation reviews, moving federal contactors to use that approach to effectively insulate themselves from audit risk.
Regression analysis is, in fact, the definitive defense accepted by the courts; in moving to follow the OFCCP's lead, organizations can more effectively address increasing litigation risk as well. The agency's emphasis on "systemic discrimination" cases also is likely to continue, covering more employees and creating situations that are more likely to lead to class-action suits.
Thus, Mercer recommends that employers conduct regression analyses to find business areas with potential issues and, within those areas, specific employees for whom pay changes might be required. Specific cases for pay changes then should be investigated and acted upon, as appropriate. To ensure optimal protection in the face of the Ledbetter Act, efforts should be made to level the field on pay, year after year, to make potentially discriminatory past decisions irrelevant. Such analyses can also serve to check rewards-system performance at the aggregate level to ensure that the company is spending its limited compensation dollars as needed to drive company performance objectives.
To further minimize risk, employers need to: implement quantifiable guidelines for compensation decisions; carefully review and document the basis for pay and promotion decisions to ensure objective support; and train managers and supervisors to clearly define and communicate employee roles, objectives and performance criteria. Employers also should review and potentially revise their document retention policies in order to ensure records supporting past workforce decisions are preserved and readily accessible. The Ledbetter Fair Pay Act and related pending legislation provide the burning platform for many organizations to move ahead and invigorate their compensation practices and processes. But longstanding arguments for action, accentuated by the current economic crisis, continue to make a strong case.
Indeed, proactive pay equity assessments are like insurance: You can pay a little now--in terms of dollars and effort--or risk paying a lot more later.
June 1, 2009
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