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It’s becoming clear that pay transparency is not a passing trend. Pay transparency is the practice of an employer openly communicating pay-related information through established methods to current and prospective employees. In 2021, Colorado was the first jurisdiction to enact pay transparency laws. Since then, more states and localities have enacted such laws; by the start of 2023, a fifth of all U.S. workers were covered under pay transparency laws. The nationwide normalization of pay transparency is leading employers to prioritize pay equity. Additionally, the recent dramatic increase in equal pay litigation, sometimes resulting in multimillion-dollar settlements, has more employers addressing pay equity issues.
Despite this increased focus, many employers may not know where to begin when implementing pay equity measures. For most employers, utilizing pay equity audits is the likely answer. These audits can be a powerful tool for employers to evaluate and ensure they comply with federal, state and local pay equity laws.
This article provides a broad overview of pay equity and discusses the importance of pay equity audits.
What Is Pay Equity?
Pay equity is the practice of compensating employees the same when they perform the same or similar job duties while accounting for factors such as experience, job performance and tenure. This practice takes into account all forms of compensation, such as salary, overtime pay, bonuses, stock options, profit sharing and bonus plans, life insurance, vacation and holiday pay, cleaning or gasoline allowances, hotel accommodations, reimbursement for travel expenses and other benefits.
Employees’ right to be free from discrimination in their compensation is protected under several federal laws, including the Equal Pay Act of 1963 (EPA), Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967 and the Americans with Disabilities Act of 1990. For example, the EPA requires that men and women be given equal pay for equal work in the same establishment. The jobs need not be identical, but they must be substantially similar. It is job content, not job titles, that determines whether jobs are substantially similar. Specifically, the EPA provides that employers may not pay unequal wages to men and women who perform jobs that require substantially equal skill, effort and responsibility and that are performed under similar working conditions within the same establishment.
Why Is Pay Equity Important?
Ensuring employees are paid equitably can help increase organizational efficiency, productivity and profitability. Employers who prioritize pay equity may experience the following benefits:
- Improved workforce productivity and morale
- Increased organizational commitment
- Reduced employee turnover
- Increased attraction of key talent
- Decreased risks of discrimination or pay inequity lawsuits
- Greater compliance with equal pay laws and regulations
What Is a Pay Equity Audit?
A pay equity audit is the process of analyzing compensation data of employees doing similar work within an organization. It can be an effective tool for providing employers with information to identify pay disparities among workers. Performing pay equity audits can help employers determine if any pay discrepancies are based on legitimate, nondiscriminatory reasons, such as seniority or education. If pay discrepancies cannot be explained by nondiscriminatory reasons, the audit allows employers to correct them.
The purpose of pay equity audits goes beyond just identifying whether pay disparities exist but helps explain why they exist. This can include reviewing specific pay decisions and policies. Such audits can help employers evaluate and improve their compensation practices, address pay gaps and limit potential legal risks. In some states, conducting a self-audit of pay practices can protect employers against legal claims based on pay inequities.
Benefits of Pay Equity Audits
Pay equity audits can help organizations identify and correct pay discrepancies, reducing potential legal risks. They can also increase employee morale and productivity. Ensuring employees are paid equitably for their work helps strengthen an organization’s culture. Employee morale, turnover and retention rates, and performance often improve when workers feel valued. Paying employees the same when they perform the same or similar jobs is a key component of helping workers feel valued, which can lead to generally more committed and productive employees. In turn, this helps drive organizational productivity and profitability.
Additionally, pay equity audits can help employers develop better workplace policies and procedures related to compensation. This can include establishing consistent starting pay ranges, factors for merit increases and promotions, as well as other incentives. Audit results can also inform an employer’s training efforts to ensure fair pay decisions are made throughout the organization.
Risks of Pay Equity Audits
While an organization’s intentions behind conducting pay equity audits are often noble—determining whether pay disparities are lawful and, if not, correcting them—audit results can be extremely damaging if disclosed. Inadvertent disclosure of audit results or analysis can harm an organization’s reputation and expose it to lawsuits or other legal action.
To protect against these potential risks, many employers utilize the attorney-client privilege or work product doctrine when conducting pay equity audits. Employers can do this by engaging legal counsel to initiate and lead the audit. Employers can also determine how best to communicate pay equity audit results to their employees and incorporate those results into organizational pay practices.
Conducting pay equity audits can be an effective way to ensure employees are paid equitably for the work they do. However, these audits are often only the first step for addressing pay equity issues in the workplace.
For more workplace resources, contact RISQ Consulting today.