Two significant changes affecting pay equity are on the horizon for Massachusetts employers. The first is a new Massachusetts law, An Act to Establish Pay Equity (the “Act”), effective July 1, 2018. The Act rewrites section 105A of G. L. c.149 (“section 105A”), which prohibits discrimination based on an employee’s sex in the payment of wages. The second change is issuance of a revised Employer Information Report (“EEO-1”), effective March 31, 2018. The EEO-1 is a form that that private employers and federal contractors must file annually with the U.S. Equal Employment Opportunity Commission (“EEOC”) that provides company employment data by job category, race/ethnicity, and gender. The EEOC uses the data to examine employment patterns and assist its enforcement of anti-discrimination laws. Counsel can take a number of steps to prepare clients for the changes embodied in the Act and the revised EEO-1.
I. An Act to Establish Pay Equity
A. Basic Provisions.
Section 105A(c) as revised by the Act contains three basic requirements: (i) employers may not inquire about an applicant’s salary or benefits history before extending an employment offer that contains compensation terms; (ii) employers may not prohibit employees from talking to their co-workers about wages or benefits; and (iii) employers must pay women based on competitive market rates and not salary history. Those changes are premised on the theory that using salary history disadvantages those who have been the victim of past pay discrimination.
Section 105A(b) inserted by the Act provides an exception to the equal pay requirement if there is a legitimate business reason to pay a man more than a woman (e.g., a bona fide seniority system; a bona fide merit system; a bona fide system that measures productivity; geographic location; education, training or experience; or travel). Employers still should consider reviewing their pay systems for gender bias to ensure that exceptions, if applied, are not discriminatory.
Under new section 105A(d), an affirmative defense to claims of pay inequality is available to employers who perform a good faith self-evaluation of their pay practices that is reasonable in detail and scope at least once every three years. The employer must also be able to demonstrate reasonable progress in addressing any disparity identified during a self-evaluation. Corrective action may not, however, include lowering one individual’s salary to correct an identified disparity.
As with most employment statutes, the Act prohibits retaliation against a person who has engaged in a protected activity. Accordingly, employers must protect from retaliation employees who file complaints or participate in an investigation or litigation. Many practitioners believe that retaliation is the easiest form of discrimination to prove because it can often be demonstrated through timing. Retaliation can be established through a “but/for” test to determine whether an adverse action took place under the Act within a close temporal proximity to the protected activity.
B. Steps Clients Should Take.
Lawyers should encourage clients to begin compliance efforts by performing a self-audit to identify any instances of pay disparity. Depending on the results, clients may then revise their policies, processes, and written materials and online applications, and conduct appropriate training prior to the Act’s effective date.
Self-audits require a careful review of compensation structures to identify pay disparities between positions that are similar in title or function and which involve “comparable work.” An analysis of pay practices should be conducted even if there is no evidence of overt gender bias, because pay structures can unwittingly become misaligned over time.
Clients may need assistance to determine whether any disparity is unlawful, or the product of a legitimate business exception that is objective and reasonable. If a disparity is unlawful, corrective action must be taken promptly. If a legitimate reason for the disparity exists, it should be carefully vetted. A disparity based on merit or productivity should be validated using reliable metrics, and the findings should be carefully documented. An analysis of the business exceptions can not only be used to demonstrate compliance with the Act, but may provide an opportunity to identify and address other potential issues, such as other forms of employment discrimination.
The next challenge for lawyers and clients is determining appropriate corrective actions for pay disparities that do not qualify for legitimate business exceptions. Corrective actions must also demonstrate reasonable progress in eliminating pay inequities, including mechanisms to ensure that disparities do not arise in the future. Solid documentation of corrective action plans and progress in eliminating pay disparity is critical to demonstrating compliance with the Act.
In addition to conducting a self-audit and implementing corrective actions, employers should take prompt steps to review and revise other employment practices such as the recruitment of new employees. Employers can remove requests for salary information from on-line and written applications and instruct recruiters and hiring managers not to request salary information from applicants or during reference checks.
Lawyers should also advise their clients to review all employee materials (e.g., handbooks and manuals, offer letters, etc.) to eliminate language that might discourage employees from talking about pay or benefits with co-workers. Furthermore, these changes should be communicated to employees, and any required notices must be posted when they become available. Documenting such efforts also helps demonstrate good-faith compliance with the Act.
Training employees involved in the onboarding process about what they can and cannot ask during interviews is another critical compliance step. Such training can be coordinated with periodic equal employment opportunity and best practices training, and should be carefully documented.
Lawyers should also be aware that proposed corporate changes, such as a merger or acquisition, may warrant additional review in light of the Act. Suppose, for example, that when pay scales are reviewed prior to a merger, it becomes apparent that men at Company A are paid $100,000 a year, and for the comparable job, women at Company B are paid $60,000. The parties involved in the merger must decide if the merger still makes sense taking into consideration corrective actions that may be necessary to eliminate pay disparities. How, for example, will such corrective measures impact the potential profitability of the merger?
By encouraging clients to implement these changes now, lawyers can help ensure that clients are fully aware of the Act and fully compliant before the Act goes into effect.
II. Changes to the EEO-1
A. Summary of Revisions.
The revisions to the EEO-1 are designed to capture detailed data about employees and wages that will enable the EEOC to improve its analysis of, and address, pay disparities based on discrimination against members of protected classes. For example, the revised EEO-1 differentiates ten job categories and seven categories of “race/ethnicity.” Employers might consider using some of the analytical methods recommended above to examine employment practices with respect to protected classes.
The reporting requirements of the revised EEO-1 are extensive. Effective March 31, 2018, employers with 100 or more employees will need to provide summary pay data, including the total number of annual hours that full- and part-time employees work, in each of the twelve pay bands listed for each EEO-1 job category. Employers must also report the aggregate hours worked by all employees in each pay band. For 2018 filings, the 100-employee threshold is met if the employer has 100 or more full- or part-time employees during any pay period between October 1 and December 31, 2017.
Summary pay data required on the revised EEO-1 include the Form W-2 Box 1 earnings for all employees identified in the selected pay period, including employees who no longer work for the company at year’s end. Summary pay data do not include income earned at the end of 2017 but paid in 2018. Employees’ hours counted during a pay period must be reported as an aggregate value for each job category and pay band (i.e., the total hours worked during that year by all employees reported in that job category and pay band). For non-exempt employees, employers must count the actual hours worked. Exempt employees are credited with 40 hours per week for full-time employees or 20 hours per week for part-time employees. Exempt employees’ hours are multiplied by the number of weeks that they were employed during the year.
The filing deadline for the Form EEO-1 has changed from September 30th to March 31st. This change makes it possible to coordinate such mandated reporting with year-end income reporting.
B. Steps Clients Should Take.
Clients required to file the revised EEO-1 form should begin developing processes to collect the required data. Implementing such processes will require careful coordination between the human resources department, the human resource information system, and the payroll department (or payroll vendor). Such processes should be tested well ahead of the compliance date to ensure that information is captured accurately.
Lawyers should promptly begin to assist clients with analysis of the data that will be submitted on the revised EEO-1. Delaying that analysis could limit an employer’s ability to develop, implement, and document necessary corrective actions.
Employers can use 2016 Form W-2’s to create a mock EEO-1. Lawyers and their clients can then review the mock EEO-1 just as the EEOC would: to identify pay disparities that may lead to an investigation and possibly litigation. To the extent the data suggests that a pay disparity exists, employers can compile evidence to demonstrate the legitimate reason(s) for the pay differential. Such evidence may include records of a seniority system, merit pay, or productivity-based compensation.
Employers should also consider applying some of the steps recommended above for compliance with the Act to an analysis of all protected classes identified on the revised EEO-1. Such an analysis may reveal the need to create new company policies, modify existing policies, provide training to management, and create programs to help develop job skills for employees in protected classes.
By encouraging employer clients to take the steps described in this article now, counsel can help ensure that potential issues of pay inequality are identified and corrected prior to the effective date of the changes implemented by the Act and the revised EEO-1. Such steps may also enable employers to identify and remediate other potential claims of discrimination before they become problematic.
David G. Gabor is a partner with The Wagner Law Group, PC. His practice focuses on employment law and human resources matters.