Proving Compensation Discrimination

One of the difficulties in developing a sound compensation system is to measure both the value to the company and the value to the market.  Every compensation system I have defended has tried to do both, though, as a recent Seventh Circuit decision (Randall v. Rolls-Royce, March 30, 2011), shows, the two goals don't always co-exist all that comfortably.  

The exempt employee compensation system for Rolls-Royce's manufacturing plant in Indianapolis balanced both goals, as the court described:

Rolls-Royce determines the compensation of its employees (all its employees, but this case concerns just those exempt from the minimum-wage and maximum-hours provisions of the Fair Labor Standards Act) in two steps. The first is to establish a broad pay range for each class of employees whom it deems of equal value to the  company. We’ll call these broad ranges “compensation categories.” The class is spread over five of these  categories. The second step, which is based on Rolls-Royce’s recognition that it must meet competition from other employers for the employees it wants to hire or retain, is to create within each broad range a narrower range based on prevailing market wages for each of the jobs in question—“prevailing market wages” meaning wages offered by competing employers. Because of these ranges within ranges, the class that the plaintiffs want certified sprawls over twenty different compensation grades, including supervisory and nonsupervisory positions and encompassing starting salaries ranging from $40,050 to $190,750.

Rolls-Royce’s expert showed that any seeming sex-based disparity in base pay (that existed before this system was adopted) disappeared once "differences in the jobs performed by male and female employees in each compensation category are corrected for." Plaintiff's expert, however, failed to adjust for differences in the jobs occupied by male and female employees. 

It's OK, in other words, to have broad "compensation categories" and still make market-based distinctions for the specific jobs that fall within those categories.

Preparing for Fair Pay Legislation - Part 9A

In my prior post, I emphasized the need to only group similar situated employees together. I should have mentioned another reason for this.

When defending a compensation discrimination claim, one of the initial battles that must be fought is over who are the proper comparators to the employee. In Ledbetter v. Goodyear Tire & Rubber Co., 127 S. Ct. 2162 (2007), for example, the district court upheld the jury's verdict of discrimination saying that the jury could have based its decision on Ledbetter's comparison to the highest paid of four managers (one other was, of course, Ledbetter).

Understand that the battle is not over who is the proper comparator but who are the proper comparators. If there is more than one comparator, the court should not permit the employee to make a comparison to only the highest paid or a higher paid employees. There is ample precedent for this in discrimination decisions:

"A plaintiff who wants a court to infer discrimination from the employer's treatment of comparable cases has to analyze a goodly sample.” Kuhn v. Ball State Univ., 78 F.3d 330, 332 (7th Cir. 1996). Another court of appeals refused to permit a plaintiff to rely upon a single comparator in an Age Discrimination in Employment Act case explaining that courts cannot view a comparison to a single member of a protected class in a vacuum. Simpson v. Kay Jewelers, 142 F.3d 639, 645-47 (3d Cir. 1998). And in Bush v. Commonwealth Edison Co., 990 F.2d 928, 931 (7th Cir. 1993), the Seventh Circuit opined that "a black plaintiff cannot establish racial discrimination by singling out one white person who was treated more favorably when there were other white persons who were treated less favorably than other black persons.”

To get to the point, when employers group similarly situated employees together "on the same page" that makes it much easier for a revewing agency or court to agree that the comparison to the group not to just the highest paid individual is the appropriate comparison.

Preparing for Fair Pay Legislation - Part 9

This is the fourth part of guidance on how employers can better protect themselves from compensation discrimination claims.

#5 – Group employees into similarly situated job groups

The very first instruction the EEOC states in the Compensation Discrimination Compliance Manual is “Investigators should identify similarly situated employees both inside and outside the charging party's protected class.”

Therefore, in setting salaries or salary increases, if comparisons are made between or among employees (as they almost always are), the employee groupings should be unambiguously defined and the grouping should be limited to employees who are similarly situated.
Avoid the expediency of lumping employees into one or two ill-defined categories in which the employees do not perform the same or similar work.

Why? The Equal Pay Act looks to whether the compared employees are performing “equal work;” Title VII examines whether the plaintiff’s job is “similarly situated” to the jobs worked by the comparators. Employers who “compare” the salaries of employee “A” with employee “B” will have a more difficult time proving that they were not really working in comparable jobs. If you must group dissimilar jobs (say, for purposes of dividing up a finite pot of money), make sure the paperwork unambiguously states the reason for the grouping.

Group employees by the job being performed – not by the characteristics of the employee who holds the job. Beck-Wilson v. Principi, 441 F.3d 353, 363 (6th Cir. 2006) (“the comparison at the prima facie stage is of the jobs and not the employees”). An employee who has worked for 10 years may rightly deserve (all other things being equal) to be paid more than an employee who has worked 5 years, but if they perform the same or similar job, they should be included in the same comparison group. The relative experience, of course, may be used to justify any salary disparity.

When investigating or prosecuting a claim of compensation discrimination, the EEOC (or OFCCP as the case may be) can and will "revise" an employer’s pay categories in order to compare employees who are performing the same or similar work. The EEOC instructs its investigators:

The investigator should determine the similarity of jobs by ascertaining whether the jobs generally involve similar tasks, require similar skill, effort, and responsibility, working conditions, and are similarly complex or difficult. The actual content of the jobs must be similar enough that one would expect those who hold the jobs to be paid at the same rate or level. Job titles and formal job descriptions are helpful in making this determination, but because jobs involving similar work may have different titles and descriptions, these things are not controlling. Similarly, the fact that employees work in different departments or other organizational units may be relevant, but is not controlling.
* * *
Factors other than job content also may be important in identifying similarly situated comparators. For example, minimum objective qualifications, such as a specialized license or certification should be taken into account. Persons in jobs requiring certain minimum objective qualifications should not be grouped together with persons in jobs that do not require those qualifications, even though the jobs otherwise are similar. Although minimum objective qualifications should be taken into account in defining the pool of similarly situated employees, employees' relative qualifications should not be considered at this stage.

Preparing for Fair Pay Legislation - Part 7

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.

Preparing for Fair Pay Legislation - Part 6

I have expressed my doubts as to whether or not the Lilly Ledbetter Fair Pay Act of 2009 is going to bring about a rush of new compensation discrimination litigation. (Ironically, despite the jokes, many lawyers have a serious problem understanding money calculations, even those which don't require much more than simple addition and multiplication.)

But I said I would offer some guidance on how employers can better protect themselves from compensation discrimination so I should follow though on this promise. It will come in handy if Congress ever passes the Paycheck Fairness legislation.

Establish and Follow a Written Compensation Policy

No law or court case says an employer must have a written policy on any subject, including compensation. In fact, courts have held the absence of a written policy is not itself evidence of discrimination. Brownlow v. Edgecomb Metals Co., 867 F.2d 960, 964 (6th Cir. 1989). The same court, in the same context (a reduction in force) also held the lack of an "objective plan" along with evidence of slipshod practices can be evidence that the employer's motive is not free from bias. So, on the belief that a written plan is better than no plan, the first step in avoiding compensation discrimination liability is to have a written compensation plan. Blair v. Henry Filters. One of the principal reasons every employer should have a written compensation policy that accurately reflect its practices is because under the Equal Pay Act, the employer must prove that pay differences among employees performing "equal" work are legitimate. Employer don't need to needlessly complicate litigation by causes doubts about the factors that play a role in setting or increasing pay.

Honestly, any employer that sets or increase pay has a compensation “policy” or “practice.” Some employers believe putting a policy about compensation in writing too “restrictive” and eliminates “flexibility.” Not surprisingly, as I mentioned above, courts tend to regard this explanation as an excuse for concealing discrimination. In reality, the problem is not caused by the purported “lack of flexibility” of a written policy but in the fact that many employers have compensation policies that simply do not reflect their actual compensation practices.

There is no “sample” or “one size fits all” compensation policy. Every employer’s compensation goals are different. Nevertheless, there are several “musts” that should be included in every compensation policy:

• Carefully incorporate every factor you will use in making a compensation decision.
• Evaluate every word in the policy to ensure it correctly and fully states your compensation policy. Beck-Wilson v. Principi, 441 F.3d 353, 367 (6th Cir. 2006) (holding a jury had to decide an Equal Pay Act claim because Agency's own handbook refuted its explanation of why it had two different pay scales).
• Have only one document that states your compensation policy; that helps you be consistent.
• The policy should distinguish between factors that “will” affect compensation decisions (e.g. performance, for one) and those that may play a role under certain conditions (e.g. bonuses or extra compensation due to company business performance).
• Do do not restate the same compensation concepts or factors in different ways. Again, consistency.
  
• Include a non-discrimination statement.
• Allow for exceptions, e.g., red-circling. 29 C.F.R. § 1620.26 (“red-circle rate” can be a valid “factor other than sex.”).
• Allow for pay decreases, the possibility of no pay increase, or deductions from compensation under certain circumstances “except where prohibited by law” (i.e., you may not lower a male’s pay to pay a female “equal” pay and you may not withhold from an employee’s compensation if it would take the hourly pay rate below the minimum wage).
• As a result of Ledbetter, employers should permanently retain any records that affect or play any role in setting compensation.
• Include the following type of language: “Neither this nor any other policy constitutes a contract of employment for a definite term. This policy may be modified at any time by [Employer].” (Note that this last point is written for Tennessee employers. Employers in other states should use language relevant to their at will rules.)

These are, of course, merely consideration for the policy. I hestiate to say much more than the categories of topics that should be in a policy because every employer should tailor the practices to their needs and legal obligations. What matters for some employers won't matter a whit for others.

The next post will focus on the importance of consistency and neutrality in setting or increasing salaries.

Preparing for Fair Pay Legislation - Part 5

Compensation discrimination claims are no different than any other employment decision. The problem is that this is a doubled-edge sword. An employer need not treat a compensation decision any differently than it treats any other employment decision – conversely, however, an employer that does not treat compensation decisions with the care it treats other employment decisions is needlessly exposing itself to liability.

No federal or Tennessee law imposes any obligation on an employer other than the obligation to not discriminate against an employee because of the employee’s race, sex, national origin, religion, creed, age or disability. So, the very term "fair pay" is misleading. Fair pay isn't required (nor it is an absolute defense), what is required is non-discrimination.

The fundamental complication that compensation discrimination claims raise – a concern not present in any other aspect of the employment relationship – is caused by the sheer number of compensation decisions made each year. Most employers make compensation decisions at least annually with respect to almost every employee. By comparison, some employers are fortunate enough to make only an “occasional” (comparatively speaking) termination or promotion decision.

Think of it this way. How many employees do you know who believe they deserve to earn a higher salary? Now, how many employees do you know who, in your mind, are overpaid? These are the number of potential compensation discrimination claims you could, in theory, face on an annual basis.

When we talk in terms of “compensation discrimination” most employers think about the Equal Pay Act (EPA), 29 U.S.C. § 206(d). This statute, incorporated into the Fair Labor Standards Act, was passed in 1963, a year before Congress passed the Civil Rights Act that includes Title VII, 42 U.S.C. § 2000e-2.

In the decades since these statutes were passed, courts have continued to dispute the interplay between Title VII and the EPA. E.g., Korte v. Diemer, 909 F.2d 954, 957 (6th Cir. 1990) (jury verdict on EPA claim required finding for plaintiff on Title VII claim); contra Fallon v. State of Illinois, 882 F.2d 1206, 1213-18 (7th Cir. 1989) (requiring employee to establish discriminatory intent through the traditional Title VII allocation of proof even if the employee could prove an EPA claim). Some courts (including the Sixth Circuit) generally treat the two statutes as being essentially identical. Other courts have recognized that there are important differences between the two statutes but it is still not clear how these differences will affect employers.

The most notable distinction between the EPA and Title VII is that the EPA only prohibits sex-based discrimination while Title VII prohibits discrimination because of race, sex, religion or national origin. Of course, the prohibitions in the Age Discrimination in Employment Act (ADEA), 29 U.S.C. § 636, and the Americans with Disabilities Act (ADA), 42 U.S.C. § 12101, would also cover discriminatory compensation claims under their respective prohibitions.

The second important distinction is in how the statutes allocate who has to prove whether an employee’s pay is or is not discriminatory. An employee in an EPA case must establish that the employee received lower wages than paid to the opposite sex for equal work on jobs requiring substantially equal skill, effort, and responsibility. See Buntin v. Breathitt Cty. Bd. of Educ., 134 F.3d 796, 799 (6th Cir. 1998) “Whether the work of two employees is substantially equal ‘must be resolved by an overall comparison of the work, not its individual segments.’”

If so, the employer must then prove that the differential is caused by: (1) A seniority system; (2) a merit system; (3) a system that measures earnings by quantity or quality of production; or (3) a differential based on a factor other than sex.

As mentioned previously, the last defense (any other factor other than sex) has generated considerable controversy among the courts and is the current target of a proposed amendment ( a prior post discussed one of the principal effects of HR 11/12 and S.182). The Sixth Circuit adheres to the proposition that the fourth defense “does not include literally any other factor, but a factor that, at a minimum, was adopted for a legitimate business reason.” Beck-Wilson v. Principi, 441 F.3d 353, 365 (6th Cir. 2006). While some courts also impose this requirement, other courts do not. See Wernsing v. Ill. Dept. of Human Servs., 427 F.3d 466 (7th Cir. 2005).

In contrast, under Title VII and all other federal statutes, the employee must prove either (1) that the employer’s illegal motive was the reason for the discriminatory compensation (the traditional “disparate treatment” method) or (2) that a neutral policy had the result of causing discriminatory compensation and that the policy was cannot be justified by a legitimate business reason (the traditional “disparate impact” method).

Under federal law, a disparate impact is found only after the employee has proven a neutral practice causes a disparity between classes of employees that is not justified by legitimate business necessity. Bacon v. Honda of America Mfg., Inc., 370 F.3d 565, 576 (6th Cir. 2004). Once a disparity has been shown to exist, a violation may be proven with evidence that an “alternative employment practice” would have eliminated or resulted in less of a disparity. Compare 42 U.S.C. § 2000e-2(a)(1) (disparate treatment) with 42 U.S.C. § 2000e-2(k) (disparate impact).

This blog is necessarily general. For more specific guidance, employers and their counsel should consult the two sources from the EEOC and the Office of Federal Contract Compliance Programs (or “OFCCP”) have each published guidelines addressing compensation discrimination. The EEOC’s “compliance manual” and the OFCCP’s “interpretive standards.” Each agency states how it will analyze compensation discrimination charges. And while not everything the agencies say on the subject is entirely accurate, it is always helpful to know the agencies' position(s).

Future posts, interspersed around other issues, will address the ways employers can maximize their chances of prevailing in compensation discrimination litigation.

Preparing for Fair Pay Legistation - Part 3A

The House has released its schedule for the week - sort of.

Today, at 5 pm, the House Rules Committee meets in an emergency session to set the rules for passage and debate of S.181, the Lilly Ledbetter Fair Pay Act of 2009. If you want to know more about the workings of the Committee on Rules, here is a description.

The House Majority Leader then expects to take up S.181 as early as Tuesday though the precise schedule is not state at this point.

Preparing for Fair Pay Legislation - Part 3

As this has made the national news and all the labor reports, I won't dwell again on the effect of S.181. I will simply amplify a few points some I made previously. S.181, officially titled the Lily Ledbetter Fair Pay Act of 2009 passed without amendments. That means several things.

Title II of HR 11, which would have changed the Equal Pay Act and dramtically affected pay setting decisions, was not voted on by the Senate. It wasn't even considered. (Don't assume that is the final word on this, however.) Before S.181 can be presented to the President (who has said he will sign it), the House must vote and approve S.181. Look for that to happen next week.

The Senate vote was pretty much along party lines with all Democrats present (Clinton having resigned without an appointed successor, Franken not being certified and Kennedy not being present) voting for and most Republicans, except for Hutchison, Snow and Murkoswski, voting against passage. Both Tennessee senators voted against passage.

I have already addressed the impact of S.181 (at least as it appeared in Title I of HR 11). It gives employees (not just females) the right to sue for discriminatory pay no matter when the actual pay setting decision was made. So long as one discriminatory pay setting decision was made that continues to affect an employee's compensation within the 300 day (as it is in Tennessee) limitation period for filing a charge, that pay setting decision can be challenged. As I said in a prior post, the employee's back pay recovery is limited to two years prior to the charge. But in theory (and the reality, as in Ledbetter's lawsuit) employers could be faced with defending pay decisions that are quite old and long since forgotten.

More importantly, the bill specifies that it "takes effect" on May 28, 2007, the day before the Supreme Court issued the Ledbetter decision and applies to claims pending on that date. (In Ledbetter's case (or any other person whose lawsuit was legally final) should she try to reopen it, that move raises very interesting constitutional problems.)

I should also mention one other point about S.181. It permits an employee to challege any "other practice" that causes discriminatory pay. In addition to the actual pay setting decision, if a performance appraisal has an effect on pay setting, the ratings on the appraisal could be challenged as well. The important point is that the phrase "other practice" doesn't actually mean any "other practice" can be challenged. In urging the Senate to reject an amendment that would strip the "other practice" language from S.181, Senator Mikulski (the floor sponsor of S.181) explained: "The bill specifically says that it is addressing ‘‘discrimination in compensation.’’ That limiting language means that it already only covers such claims—nothing more, nothing less."

I still intend to addres what employers can do, in light of S.181 (assuming it passes) and even if Title II of HR 11 were to pass, to help protect themselves from compensation discrimination claims (stale or otherwise). I will close this post, however, by quoting the no doubt, well-meant, but utterly naive statement by Senator Mikulski made in urging the Senate to reject an amendment by Senator Hutchison. "I say to the private and nonprofit sector: If you don’t want to be sued, don’t discriminate. That is the best way to go. If you don’t want to be sued, don’t discriminate."

If only it were so easy.

Preparing for Fair Pay – Part 2

This is the second part of a discussion about expected changes in the compensation discrimination laws. The first post addressed how Congress will likely change the statute of limitations under Title VII for compensation discrimination claims. This post will focus on proposed changes to the Equal Pay Act. Unlike the statute of limitations legislation, these changes are not part of the Senate bill that is expected to be voted on this Wednesday (Jan. 21, 2009). It is part of the bill the House passed and sent to the Senate. Obviously, the final vote and conference, we won't know what, if anything, will be passed.

For these reasons, I will refer only to the House bill (HR 11).Part II of HR 11 would change the Equal Pay Act ("EPA"), a 45 year-old statute which regulates sex-discrimination in compensation. The Equal Pay Act was passed in 1963, a year before the Civil Rights Act of 1964 (which included what we now call "Title VII"). Because there was no then-existing provision, the EPA was added to and became part of the Fair Labor Standards Act ("FLSA") and the damages available for violations of the FLSA (lost backpay and liquidated damages) have been adopted to redress EPA violations.

To understand the changes HR 11 would make, understand how the law current works as it applies to Tennessee employers (so bear with me while I quote passages from court decisions). Under the EPA, an employee must demonstrate that an employer pays "different wages to employees of opposite sexes 'for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions.'" EEOC v. Romeo Cmty. Schs., 976 F.2d 985, 987 (6th Cir. 1992). The job functions of two individuals need not be identical to be considered "equal work," Beck-Wilson v. Principi, 441 F.3d 353, 359 (6th Cir. 2006), there need only be a "substantial equality of skill, effort, responsibility, and working conditions." Odomes v. Nucare, Inc., 653 F.2d 246, 250 (6th Cir. 1981)).

If an employee proves equal jobs and a pay difference (more on that in a later post), the employer must prove that the difference is justified by one of four affirmative defenses: (1) a seniority system; (2) a merit system; (3) a system that measures earnings by quantity or quality of production; or (4) any factor other than sex. The focus of the pending legislation is on the fourth defense so we can ignore the first three, for now. As the Sixth Circuit interprets it, the final defense "does not include literally any other factor, but a factor that, at a minimum, was adopted for a legitimate business reason." EEOC v. J.C. Penney Co., Inc., 843 F.2d 249, 253 (6th Cir. 1988). Much could be written about how the "legitimate business reason" came to be a requirement, but since one court has addressed this, I won't go into it further.

The beef Congress has with the fourth defense is that the way some courts (including the one linked to above) have interpreted it. These courts hold that the "'factors other than sex' need not be business-related or even related to the particular position in question" (at least according to what was said in legislative history from a prior Congress). This factor should, the same legislative history says, "be job-related, not derived or based upon a sex-based differential, and consistent with business necessity." The evil identified in the legislative history is when some court decisions interpret "any other factor other than sex" as letting employers base starting salaries on "market forces." That is bad, Congress concludes, because the "market" historically underpays females.

Market forces, the criticized decisions say, legally justifies a pay difference such as when employers hire a person into a job paying that person $X.XX whereas it paid (at some point) a person of the opposite sex $Y.YY (Y being less than X in this example). This perpetuates lower pay for females, concludes Congress, because: "While market forces may be a legitimate basis for determining pay, market forces tainted with sex discrimination are not."

So, to change the effect of these decisions, the legislation passed by the house would redefine the "any other factor other than sex" to apply "only if the employer demonstrates that such factor: (i) is not based upon or derived from a sex-based differential in compensation; (ii) is job-related with respect to the position in question; and (iii) is consistent with business necessity. Such defense shall not apply where the employee demonstrates that an alternative employment practice exists that would serve the same business purpose without producing such differential and that the employer has refused to adopt such alternative practice."

This change would not only adopt the "legitimate business reason" already imposed on Tennessee employers by the Sixth Circuit, it would require employers to go further and show the factor is "consistent with business necessity." This is very different from the "legitimate non-discriminatory business reason" employers are used to in the typical discrimination claim. It refers to a "business necessity" apparently meaning to have this phrase interpreted as it is used Title VII. To be sure, the legislative history from the prior Congress' thought "business necessity" meant that the practice (or factor) bears "a significant relationship to a business objective of the employer." The phrase, however, is not defined in the statute (or proposed statute) and the Supreme Court has not consistently defined the term (saying it meant "related to job performance" in one case and that it must be "necessary to safe and efficient job performance" in another).

So, far from simply adopting the Sixth Circuit standard, the pending bill would force employers to re-evaluate every factor used in pay setting or pay increase decisions. To give an example of the kind of concerns this would raise, look at a decision criticized by the legislative history. There, the employer paid males higher wages because they worked in the more profitable men's clothing department. The court held this legitimate, a decision criticized because "the products sold by the women were of lesser quality and cost less than the goods sold in the men's department." So, any factor, even a neutral one, that can be identified as causing – even in part - a sex-based pay difference will need to be examined to ensure it will not lead to EPA liability. Several suggestions on how to do this will be addressed in later posts.

The EPA is sort of a statute lost in the weeds of other, more "popular" discrimination statutes. To some, the EPA serves a different purpose from Title VII because the EPA does not require a showing of discriminatory intent. In practice, however (at least around here), courts make no meaningful distinctions between Title VII and EPA claims and Title VII already prohibits "unintentional" discrimination (disparate impact). Given that Title VII already prohibits sex-based disparate impacts including those affecting compensation, a legitimate argument could be made that the EPA even as amended merely duplicates existing statutes and should be repealed to eliminate confusion for both employees and employers. That would be, of course, politically inopportune to say the least so don't count on it happening.

The next post will focus on other changes HR 11 would make to EPA claims. Those changes are designed to make EPA claims much more financially attractive to those who want to bring a lawsuit over perceived pay differences.

Preparing for Fair Pay Legislation - Part 1

With Congress on the brink of passing legislation that would make significant changing to the Equal Pay Act and Title VII's Compensation Discrimination case law, I thought it would help to post several blogs explaining the changes and how Tennessee employers can be prepared for the changes that seem likely. Of course, until legislation is finally enacted, this is tentative.

Most of Congress wants to change two aspects of compensation discrimination law. First, they want to overturn the perceived effect of Ledbetter v Goodyear Tire & Rubber Co. Inc. which had held an employee's claim was filed too late because she could not (and made no effort to) show that a discriminatory decision was made within the limitations period. Second, Congress would amend the Equal Pay Act to change what an employer must show to prove a factor other that sex was the reason for a pay difference. This bill would also increase the damages and penalties an employee would receive if pay discrimination is proven.

I could write much on how Congress perceives inequities. There are significant faults in the rationale members of Congress and the supporters of this legislation give as the necessity for these bills (especially the part that would change the effect of Ledbetter). This is not really the place for having an extended discussion of those faults.

The better and more interesting discussion would be whether the changes Congress seems poised to make will help in solving the problems they have identified. Study after study, as reported in the media and the Internet, proclaim that women are paid less than men for the same work. (So says a GAO Report from 2004 - reporting from 1983 to 2000, women earned 21 percent less, a figure the GAO said was diminishing. The worst "studies" are those, such as one reported last year in Crane's which draws conclusions based upon whether people perceive themselves to be underpaid.) Broadly defined statistics that cover multiple jobs in different companies are unreliable in forecasting whether individual employers permit pay disparities. Since I have no empirical basis for disputing that (and am not so naive as to think that all pay disparities everywhere have been eradicated), I take it as a given for purposes of the present discussion.

Pending now are two bills (HR 11 and S.181). HR 11 passed the House on January 9, 2009. It consists of two parts (each part responds to one of the concerns listed previously).

Part I would change the outcome in Ledbetter and let employees sue for pay discrimination (if the difference is caused by sex, race, age, disability, national origin or religion) for as long as the disparity in pay continues. Backpay would, however, be capped at two years prior to the filing of the charge (a cap that currently exists). So, where Ledbetter held a discriminatory pay decision made decades earlier could not be a timely discriminatory act, the intent of this legislation would be to let the lower paid employee sue and recover for a few years of the disparity so long as the improperly motivated pay disparity continues to exist. The employee could also recover other damages as already allowed by Title VII and the ADA (but the ADEA does not authorize compensatory or punitive damages).

The Senate will probably vote on its bill (S.181) as early as Wednesday, January 21, 2009, though several Republican senators (including both from Tennessee) have sponsored an amendment which, to my thinking, could be worse, as it would create uncertainty as to when the time for filing a charge (on any action, not just compensation claims) starts and eliminate the existing requirement that employees must act diligently in determining whether they have been discriminated against. Right now, S.181, only addresses the effect of the Ledbetter decision.

How would these changes affect Tennessee employers? Depending on what is passed, they might not notice much of a change at all. A few years ago, the Tennessee Supreme Court held employees could sue for present and past damages so long as the employee can show they are presently being paid less than their peers and the reason for the difference is prohibited (the THRA, of course, prohibits much the same things as Title VII, the ADEA and ADA). Tennessee law thus, in this way, goes further than what Congress would authorize.

How can an employer protect themselves from suits over decisions made years earlier? One change was sanctioned by a 2004 Sixth Circuit decision which held that employers and employees may contract for shorter (or longer) time periods in which to sue than allowed by law. An employer that does this, should observe several precautions designed to increase the chance the clause will hold up in court:

• Have the employee sign the document or application in which the limitation exists. The Sixth Circuit decision and other similar decisions are based upon principles of contract law, and the failure of the employee to sign may result in a missing element of a contract -- mutuality or mutual assent (that is, a signature showing agreement to the terms).
  
• Make sure the time period to which the limitation has been reduced is reasonable. It is strongly suggested that any reduced limitations period not be less than six months in the employment context.
  
• Do not attempt to limit an employee’s right to file suit against the company, file a charge of discrimination with any federal or state agency, or to limit the type of actions that an employee may bring. Prospective waivers of substantive rights are not only frowned upon they are invalid. Worse still, you could end up being sued by the EEOC which takes the position that Title VII (ADEA, ADA etc.) is violated if an employer merely presents an employee with a contract that limits the employee's ability to participate in commission proceedings, though on this last point, it lost the lawsuit because the employee never signed and the employer never enforced the document in question.

These are not the only changes an employer can (and should) make. Limiting the time for suit only goes so far. In coming posts, I will address other practices an employer can adopt that would help identify and eliminate unexplainable pay disparities that might lead to a lawsuit.

For procedural reasons, even if the Senate adopts S.181, as it presently exists, the differences with HR.11 would have to be resolved before any bill could be presented to the President. Those differences (right now) are primarily how the "Fair Pay Act" (Part II of HR.11) would amend the Equal Pay Act. In the next post, I'll focus on those changes, though if Congress adopts one of the Republican Amendments, I would necessarily devote the post to explaining more about that.