This is the second part of guidance on how employers can better protect themselves from compensation discrimination claims.
#2 – Consistently Base Compensation Decisions On Non-Discriminatory Factors
First, it is easy enough to articulate that an employer should be consistent in applying its compensation policy. In practice it is not quite so simple.
If you are ever investigated by the EEOC over a compensation discrimination charge, the EEOC will first establish the appropriate comparison group (more on this later) and then look to see if a disparity exists within the group. If a disparity exists, the EEOC then asks whether the employer can “satisfactorily explain” the disparity. For the most part, the employer’s obligation to explain a prima facie disparity is not materially different than it is in any other type of discrimination lawsuit.
Because employers usually make pay decisions for each employee annually, there is a lot more fodder for an investigator to find an inconsistency than in the “routine” termination claim. Thus, in evaluating whether its salaries are defensible, an employer should review the explanations for all salaries to see whether it consistently explains all disparities.
Don’t, in other words, rely on an explanation that would not hold water if applied to other (non-protected class) employees.
In a variation on the consistency theme, the EEOC advises its investigators that “[t]he employer's explanation should account for the entire compensation disparity.” That is, the EEOC will examine whether the employer’s explanation for a disparity adequately justifies the amount of the disparity. To do this, the EEOC looks at whether the employer has consistently applied the stated reason for the disparity in setting other employees’ salaries.
For example, if the employer relies on educational background as the reason for a particular salary disparity, do the salaries of other similarly situated (non-protected class) employees reflect similar disparities that can be attributed to educational levels?
Unfortunately, the EEOC and OFCCP tend to regard compensation decisions as being divisible into separately identifiable factors. In the “real world,” however, many factors go into setting an employee’s salary. Short of a rigid, seniority based pay scale, few if any compensation systems can be cleanly dissected into component parts. (This is why courts have recognized that perfect consistency is itself suspicious and that courts must examine overall patterns instead of relying on isolated inconsistencies. Kuhn v. Ball State Univ., 78 F.3d 330, 332 (7th Cir. 1996)).
Second, many employers fail to appreciate that a commonly used compensation practice has been held to be discriminatory on the theory that it proliferates a past discriminatory pay practice.
Some courts (including the Sixth Circuit) believe that federal law prohibits an employer from paying an employee a starting salary based on the employee’s prior salary. Courts that adhere to this belief reason as follows:
• Premise: Studies have shown that women earn less than men from private employment.
• Conclusion: All market wages (including prior salaries) must be discriminatory and therefore must be ignored when setting starting salaries.
• Practical Consequence: Employers are forbidden to set starting salaries based on competitive markets because prior salaries reflect economic competition.
As I previously noted, some courts, Wernsing v. Ill. Dept. of Human Servs., 427 F.3d 466 (7th Cir. 2005), believe this reasoning is a flawed interpretation of the Equal Pay Act (and Title VII). Rather, the problem is that it assumes a female employee’s salary with her previous employer was lower than it should have been because of discriminatory market conditions. That may or may not have been true but the point is that no other discrimination theory permits an employee to prove discrimination based upon assumption about the past practices of an employee’s previous employer.
Whatever doubts there are about the continued viability of the “starting salary” theory of discrimination, employers are best advised to not become the “test case” which seeks to overrule an outdated and ill-conceived legal theory. In practice, therefore, an employer should not simply establish a starting salary based on what the employee was earning in a previous job.
A corollary principle occurs when an employer hires a male employee at a salary greater than that paid to its existing female employees. If this occurs, an employer should (1) make sure the basis for the pay differential is defensible and, if not, (2) consider increasing the compensation of the existing employees. (Remember that you cannot decrease compensation in order to comply with the EPA.)
For example, in Balmer v. HCA, Inc., 423 F.3d 606, 613 (6th Cir. 2005), the decision to pay a newly hired male a higher salary than paid to existing female employees was justified by evidence that the male “asked for a higher salary than Plaintiff, had a higher salary history than Plaintiff, and most importantly, the ultimate decision maker at HCI determined that [the male] had greater relevant industry experience than Plaintiff.”
In EEOC v. Aetna Ins. Co., 616 F.2d 719 (4th Cir.1980), the Fourth Circuit held that Aetna's decision to pay a newly hired male insurance underwriter more than existing female underwriters “was attributable to the existence of two distinct salary programs” and “was explained by [his] experience and background, two considerations which were not sex-linked.”
There is nothing inherently discriminatory with an employer relying upon market surveys to set pay scales. If an employer uses market surveys it must use them consistently among the protected classes. Employees, the EEOC, and the OFCCP can, for example, prove a pay scale is discriminatory because it was “depressed because of intentional sex discrimination, consisting of setting the wage scale for female guards, but not for male guards, at a level lower than its own survey of outside markets and the worth of the jobs warranted.” County of Washington v. Gunther, 452 U.S. 161, 166 (1981).
This rule applies not only to comparable jobs but across the board. That is, if you base compensation on “market surveys” for some jobs, either use “market surveys” for all jobs or make sure that the jobs which are below market are not those predominantly occupied by females or any other protected class.
For an unusual spin on this point consider the decision in Arrington v. Cobb County, 139 F.3d 865, 870 (11th Cir. 1998), where the court permitted an employee to assert an EPA claim based upon the fact that the employer paid her male successor a higher salary than she had earned when she performed substantially equal work.
Next up, using all the factors in your compensation policy.
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