Dear Littler: My employer is preparing for our annual review of staff compensation. My boss heard there have been a lot of changes in the law about equal pay that might affect our evaluations. He’s asked me to look into what new issues we might need to consider. What developments in employment law will be relevant as we set compensation for next year? We are primarily in New Jersey but operate in multiple states, if that makes a difference.

                                                                                    – Naïve in Newark

Dear Naïve in Newark,

From your question, it sounds like you and your colleagues are planning ahead and gathering information your employer will need to make appropriate, lawful compensation decisions. You may feel that you have a lot to learn, but you are already on the right track!

As you know, setting compensation can be a difficult task, even in years with little change in the law. The challenge is exacerbated by the influx of laws—primarily at the state and local level—that aim to minimize unjustified pay disparities among different types of workers. While equal pay laws serve the noble goal of providing equal pay to employees performing comparable work, multi-state employers are nonetheless obligated to understand and follow a formidable patchwork of legal regulations across the country. And, as your boss heard, there has been a deluge of pay equity laws adopted in the last year or so, some of which significantly changed the landscape for evaluating compensation.¹ To answer your question, I will highlight some of these new laws and also propose that your employer consider conducting a fair pay audit to assist with its compliance efforts.

Equal Pay Amendments in New Jersey

If you are not already aware, Naïve, you should know that your home state of New Jersey amended its equal pay statute earlier this year.² Employers looking at their 2019 compensation levels in the Garden State should pay special attention to the enhanced protections of the law, which took effect on July 1, 2018.

Under the amended statute, employees are entitled to an equal rate of pay (including benefits) for “substantially similar” work. This standard is broader than prior iterations and intended to be more employee-friendly. The determination that work is “substantially similar” will be based upon a composite of factors: “skill, effort, and responsibility.”

Notably, the amendment clarifies that comparisons “shall be based on wage rates in all of an employer’s operations or facilities.” This addition might expand the pool of employees you will have to consider when assessing who is engaged in substantially similar work. For example, if your employer has a receptionist in Hackensack, and a receptionist with substantially similar duties down in Vineland, they may be comparators, depending on the circumstances, even if they work at different facilities.³

New Jersey also stretched the footprint of its equal pay protections. In many states, and as with the federal Equal Pay Act, the law requires employers to pay men and women equal wages for similar work. With the 2018 amendments, however, New Jersey now prohibits pay discrimination on the basis of “race, creed, color, national origin, nationality, ancestry, age, marital status, civil union status, domestic partnership status, affectional or sexual orientation, genetic information, pregnancy, sex, gender identity or expression, disability or atypical hereditary cellular or blood trait,” or military service. In other words, even if the receptionists in Hackensack and Vineland are both the same sex, your employer still may need to evaluate their pay rates if either falls into another protected category. New Jersey joined a handful of other jurisdictions that have taken similar steps, such as Oregon, California, and Maryland.

Of course, there are exceptions to the requirement that employees be paid at the same rate for substantially similar work. In New Jersey, a differential in rate of pay will be lawful if the employer can demonstrate that it results from: (1) a seniority system; (2) a merit system; or (3) one or more bona fide, legitimate factors. Such legitimate factors include, but are not limited to, training, education, experience, or quality or quantity of production. Reliance on such factors may justify a pay disparity, so long as each of the following elements is met:

1. The factor(s) in question are not characteristics of protected class members and do not perpetuate a differential that is based upon characteristics of protected class members.
2. Each of the factors is applied reasonably.
3. One or more of the factors account for the entire differential.
4. The factors are job-related to the position in question and based upon legitimate business necessity.
5. There are no alternative business practices that would serve the same business purpose without producing the disparity.

If an employer discovers a pay disparity that requires attention, it cannot simply reduce other employees’ compensation to comply with the statute. Per the amendments, an aggrieved employee can recover back pay going as far back as six years, and—if an employer is found guilty of an unfair pay practice—the court (or the state Division of Civil Rights) must award treble damages. In addition to the equal pay provisions, the new law also prohibits employers from restricting employees’ ability to discuss their wages. In light of these changes, employers should assess their pay-related practices as soon, and as thoroughly, as possible.

Other Comprehensive Equal Pay Developments

New Jersey is not alone in its renewed efforts to beef up equal pay regulations. Your query does not identify all of your employer’s locations, but I will flag some relatively recent developments in a couple of other states to give you a sense of what’s going on.⁴

Washington. The State of Washington adopted the Equal Pay Opportunity Act (EPOA), which became effective on June 7, 2018, and applies to all employers in the state.⁵ The EPOA bans unequal pay between “similarly employed” employees. Individuals are similarly employed if: (1) they work for the same employer; (2) the performance of the job requires similar skill, effort, and responsibility; and (3) the jobs are performed under similar working conditions. The statute specifies that job titles are not determinative when drawing comparisons. The EPOA includes exceptions—similar to those found in the New Jersey law—and clarifies that an employee’s previous wage history does not justify a pay disparity.

Interestingly, the EPOA also prohibits employers from limiting or depriving employees of “career advancement opportunities” on the basis of gender. While the statutory exceptions may apply, the act does not define “career advancement opportunities.” When Maryland updated its equal pay law in 2016, it enacted a similar provision. The Maryland version precludes employers from “providing less favorable employment opportunities”—in addition to disparate wages—to employees based on sex or gender identity.⁶ 

Finally, the EPOA includes both wage transparency and antiretaliation elements. Employers may not prohibit employees from disclosing or discussing their wages, with narrow exceptions. Nor may employers retaliate against workers who ask about, compare, or discuss employee wages, or who ask for an explanation about wages or the lack of advancement.

Massachusetts. On the opposite coast, the Massachusetts Act to Establish Pay Equity (AEPE) took effect on July 1, 2018, and makes it illegal to pay employees compensation at a lower rate than the rate paid to employees of a different gender for comparable work.⁷ As in Washington, “comparable work” is not limited to employees who have the same job title.

The AEPE includes both salary history and wage transparency provisions. As for the salary history ban, the law states that employers may not: (1) screen job applicants based on their wages; (2) request or require an applicant to disclose prior wages or salary history; or (3) seek the salary history of any candidate from any current or former employer, unless the candidate provides express written consent, and an offer of employment—including proposed compensation—has been made. Retaliation against employees who oppose an action or practice banned by the AEPE is also unlawful.

The Massachusetts law is noteworthy because it offers an affirmative defense to an employer that can prove it “completed a self-evaluation of its pay practices in good faith” and “that reasonable progress has been made towards eliminating wage differentials based on gender for comparable work.” Employers are not required to conduct self-evaluations, although they clearly can be helpful. Earlier this year, the Massachusetts Attorney General published an Overview and Frequently Asked Questions, which addresses numerous topics and provides in-depth guidance on the self-evaluation process.⁸

State laws vary widely on these topics. Moreover, certain cities and municipalities have also passed legislation regulating equal pay and related topics. Employers should be careful to research the applicable laws in any jurisdiction where they operate.

Salary History Bans

While perhaps not directly pertinent to your annual compensation review, salary history bans also remain a hot legislative trend. The rationale underlying salary history measures is that pay inequities are perpetuated when current pay is based on past employer decisions that could have been discriminatory. At the moment, seven states have adopted salary history legislation,⁹ along with New York City,¹⁰ San Francisco,¹¹ and several other municipalities.

These salary history laws often cover the same ground: they generally prohibit employers from asking candidates—or their current or former employers—about their wage history. Some states, such as Vermont, Delaware, and Massachusetts, also forbid employers from requiring that a prospective employee’s current or past compensation satisfy minimum or maximum criteria. And in other states, including California, Hawaii and Oregon, employers cannot rely on wage history information when deciding whether to hire a candidate and/or what salary to offer.

Most salary history bans incorporate exceptions, identifying when such inquiries may be permissible. Typically, a candidate’s voluntary disclosure of his or her prior wages is not a violation and will not preclude an employer from considering that information in either the hiring or compensation process. Additionally, some jurisdictions (such as Massachusetts and Delaware) allow employers to confirm an applicant’s salary history after extending a job offer that includes compensation. Employers also may be entitled to use salary history information when considering internal candidates for transfer or promotion. In fact, California amended its salary history law in August to clarify that point, among others.¹²

Although New Jersey does not currently have a salary history law, Naïve, your employer should keep tabs on this issue. Employers—particularly those falling within the boundaries of the U.S. Court of Appeals for the Ninth Circuit—should also be aware that reliance on salary history in setting pay may or may not suffice to justify a wage differential under the federal Equal Pay Act.¹³

Government Contractors

Although you did not indicate whether your employer is a federal or state government contractor, I’ll briefly add that such employers have special antidiscrimination obligations in jurisdictions across the country. Under the New Jersey equal pay amendments, for example, employers that enter into service contracts with public bodies are required to file reports with the state Commissioner of Labor that set forth information on compensation and hours worked, with reference to gender, race, ethnicity, and job category. Employers must report the required information for each “establishment.”

New Jersey employers that enter into public works contracts with state governmental bodies are similarly obligated, though the information that must be reported may differ somewhat from the information reported for services. In any event, the New Jersey Commissioner of Labor will issue regulations establishing the form for such reporting, including the pay bands for which the information will be reported. The Commissioner will disclose the reports filed by employers to employees, former employees, and authorized representatives of employees upon request.

Meanwhile, employers that are covered contractors with the U.S. government should note that the Office of Federal Contract Compliance Programs (OFCCP) recently revamped and simplified its procedures for reviewing contractor compensation systems and practices.¹⁴ Under the new directive, compensation analyses must be performed based on similarly situated analysis groupings as determined by job similarity (e.g., tasks performed, skills required, effort, responsibility, working conditions and complexity) and other objective factors, such as minimum qualifications or certifications. Once those groupings are identified, OFCCP will then statistically control for structural differences among positions and individual employee characteristics related to the contractor’s pay decisions. OFCCP also issued detailed principles that will guide its statistical methodology and modeling, and adopted a protocol to increase transparency during the audit process. 

Contractors both inside and outside of New Jersey should keep these developments in mind as they conduct annual internal compensation reviews and prepare to comply with reporting duties.

Recommendations

If “knowing is half the battle,” compliance is the other 75%. Now that you are no longer naïve about the legal changes that might affect your employer’s compensation reviews, it’s time to consider what steps you can take to ensure compliance.

Bear in mind that employers may face liability even if management is unaware of any lingering, unjustified pay disparities. Your annual compensation review process is the perfect time to be proactive. Employers should review their compensation systems carefully, including an analysis of the compensation of those employees performing similar work, with documentation of reasons for any differentials. An audit directed by legal counsel may be preferable so that findings can be protected by privilege.¹⁵

Employers also should revise policies for setting the compensation of newly hired and promoted employees, consider implementing formal pay scales, and discontinue practices that might violate any applicable salary history or wage transparency laws. Finally, training for HR professionals and managers is highly recommended to ensure that individuals making decisions about hiring, compensation, and career advancement opportunities understand their obligations.