5 Tips for Conducting Effective Pay Audits

The US Department of Labor (the DOL) revealed that in 2020, women’s annual earnings were 82.3% of men’s. The DOL reported that women of color fared worse than ‘average’ and the gap is even larger for the average Asian American and Pacific Islander, Black, Native American and Latina woman. Unfortunately, the pandemic has likely stalled any pay equity progress. Women have left the workforce in droves throughout the pandemic. Between layoffs and the lack of childcare, women’s labor force participation has dropped to the same level it was in April 1987 – 55.8%. 

We need to do better. 

That’s why we’re sharing 5 tips for conducting effective pay audits. Pay audits are a powerful tool against pay disparities – and while they aren’t going to single-handedly solve the pay gap problem, it’s a strong start for US companies. 

Tip 1: Start Your Pay Audit by Outlining Your Goals.

Your company should outline goals that make its purpose in decreasing the disparity in wages apparent. Are you interested in decreasing potential legal liability, creating a culture of equity, meeting shareholder demands, or all of the above? 

Whatever your drivers, outline precise goals that you hope to achieve by undertaking the pay audit. This gives the audit focus and direction, empowering you to address the foundational issues you’re ready to tackle. 

Tip 2: Examine Your Pay Practices.

With your corporate goals in mind, you should next take a look at your current and historical pay practices. To do so, you will need to ensure that job titles and job descriptions, including responsibilities, accountabilities, and education/skills requirements, are up to date.

From there, consider:

• What ‘compensation’ do you offer your employees? Is it just in the form of wages or do you also offer equity, stock options, benefits, bonuses, equipment and/or company vehicles, or anything else? 
• What factors are considered when determining compensation?
• Who has discretion to set wages, and how much discretion do they have?
• Who has discretion to allocate other forms of compensation, and how much discretion do they have? 

Finally, you will need to collect and analyze data about your current and past employees. The analysis is a labor-intensive and complicated process that is typically outsourced to an outside consulting firm with the relevant expertise, so we won’t (and can’t) elaborate further on that in this blog post. However, you can help the process run more smoothly and more efficiently by providing the consulting firm with the following information about your current and past employees: 

• Job title.
• Department.
• Job grade/level.
• Hire date. 
• Details of protected characteristics, including gender, race, age, and sexual orientation, where these are available. 
• Job location. 
• Hours worked. 
• Base wage/salary. 
• Overtime pay. 
• Bonuses and other compensation. 
• Performance scores (if any). 
• Level of education (if any).
• Years of relevant experience (if any). 

* A quick note: you should take steps to limit potential legal risk stemming from the pay audit. You should consider developing a strategy that ensures the audit results are protected by attorney-client privilege, to avoid having to produce the audit results in the event of a pay discrimination claim. To maintain this privilege, the audit should involve your attorneys and access to the results should be limited to select managerial team members. 

Tip 3: Pay Equal Wages for ‘Substantially Similar’ Work. 

Under California law, ‘substantially similar work’ means: 

“work that is mostly similar in skill, effort, responsibility, and performed under similar working conditions. Skill refers to the experience, ability, education, and training required to perform the job. Effort refers to the amount of physical or mental exertion needed to perform the job. Responsibility refers to the degree of accountability or duties required in performing the job. ‘Working conditions’ has been interpreted to mean the physical surroundings (temperature, fumes, ventilation) and hazards.”

Your company should establish processes to determine when employees are involved in substantially similar work.  It is the substance of the work that matters, simply providing workers with a different job title does not offer protection from a claim that workers are being paid differently for ‘substantially similar work’. 

Once you have established which employees are engaging in substantially similar work, you need to determine whether there is a justifiable difference in pay rates or take steps to remediate that difference. 

Tip 4: Create Criteria for Justifiable Differences in Pay Rates.

Developing criteria or processes for justifying differences in pay rates can help to minimize the amount of discretion decision makers have. In turn, this limits the risk that comes with gender-based pay discrepancies or discrepancies based on any other protected characteristics.

In California, the following factors can lead to justifiable differences in pay for substantially similar work: 

• seniority;
• merit;
• a system that measures production; and/or
• a “bona fide factor other than sex, race, or ethnicity.”

Examples of a “bona fide factor other than sex, race, or ethnicity” include: education; training; and experience.

You can read more about the California Equal Pay Act here.

Your criteria should contemplate how seniority, merit, productivity, or other “bona fide factors other than sex, race, or ethnicity” impact pay rates within your workplace. You should endeavor to place a dollar figure or wage range on each of these factors, to limit the discretion of those responsible for setting wages so as to reduce the likelihood and/or incidence of pay disparity. It can be helpful to look at industry standards at this point. 

Tip 5: Implement a Remediation Strategy that Manages Risk and Your Reputation While Addressing Pay Discrepancies. 

Once you have details of current pay practices that do not align with your criteria for justifying wages, you should take steps to move employees to appropriate wage rates. It is important to bear in mind that federal law prohibits employers from reducing the wages of an employee to equalize pay.

You should consider establishing a timeline to address pay discrepancies.  For instance, if you have an annual performance review process during which compensation is typically discussed, this would be a convenient time to offer pay increases.   

Finally, your remediation strategy should be future-focused. While addressing current pay disparities is part of the process, you should also take steps to reduce the likelihood and incidence of any unjustifiable pay gaps in the future. Training, workplace policies and processes, awareness, and managerial buy-in are all key to long-term reduction of the pay gap. 

For additional related tips, you should read our earlier blog post about equitable practices for setting starting salaries. Alternatively, you can reach out to us in the comment section of the social media post sharing this article – or at info@cgl-llp.com. 

Equally, if you have a topic you’d like for us to cover, let us know! 

Finally, if you need assistance managing legal risk resulting from your pay practices, reach out. We’re here to help. 

• 5 Tip Friday
• Employment Law