Three Tips for Effective Pay Equity Audits

Especially for growing businesses, claims of pay inequities could do substantial economic and reputational harm. If structured with risk management in mind, pay equity audits are instrumental in reducing long-term legal and reputational costs. Under relevant federal laws, employers’ efforts to remediate pay disparities may limit liability based on bad faith or intentional violations. In certain states, safe harbor protection is available for employers that take affirmative steps to reduce or eliminate pay inequities.

As your legal risk management partner, we offer you the following three tips for effective pay equity audits…

Tip #1: Narrowly tailor your audit approach.

Before conducting a pay equity audit, employers should carefully identify the purpose of the audit and then narrowly tailor the audit strategy to meet the intended purpose. For example, if your company’s goal is limited to investigating potential liability exposure, the audit should be limited to a foundational investigation of any potential pay disparities. On the other hand, if your company’s purpose is to analyze the “why” of pay disparities, an effective audit would need to include compensation policies, methods of recruiting, and starting salary policies and practices. By limiting your audit approach, your company will avoid creating liability by discovering information that you are not presently intending to address.

Tip #2: Plan a communications strategy.

Most employers never intend to discriminate against employees. That said, audits often uncover disparities that employers never anticipated, either because of management or policy changes or unique circumstances. If your internal communications are not protected, the audit report and relevant documents are likely discoverable. With an appropriate communications strategy, the attorney-client privilege offers added protections against unintended disclosures that create liability exposure. Any communication to employees (outside of the management circle) about the underlying data and results risks waiving the attorney-client privilege. Even if an audit shows that the employer is fully compliant, plaintiffs’ attorneys may attempt to challenge the results by taking an alternative approach to analyzing the underlying data.

Tip #3: Develop a plan to remediate disparities.

If you discover disparities in the audit process, your company should respond in accordance with a remediation plan. In developing a remediation plan, consider how timing may play a role in limiting liability, such as timing remediation efforts with typical pay increases, keeping in mind that employers may not reduce higher-paid employees’ compensation to remedy disparities. A company’s remediation strategy may include policy and operational changes, such reconsidering pay-based interview questions, increasing education and training, and developing and implementing pay equity policies, including starting salary policies. (Please note that some states and localities prohibit salary history questions for all applicants.)

BONUS TIP: Consider all forms of compensation to prevent false results.

To avoid a “false positive” or a “false negative,” a pay equity audit should include all relevant forms of compensation. For example, many startup companies offer stock options to employees, especially their foundational cohort, which are considered a material part of their compensation structure. Other forms of compensation to consider include overtime pay, commission, bonuses, stock options, other incentive-driven compensation, and employee benefits (i.e., paid time off, insurances, and retirement plans).

If you have any questions about the above, please contact Hall Benefits Law. We would love to hear from you, and the HBL team looks forward to serving as your legal risk management partner!

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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