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Boom, Bust Economies Can Undermine Pay Equity Efforts

Oct. 30, 2019, 9:50 AM

As businesses scrutinize pay practices for bias, one emerging factor could be undermining efforts to close pay gaps: Changes in the U.S. economy, and the resulting boom or bust in starting salaries for a company’s similarly situated employees.

Employers fearing another recession might look over their shoulders at their pay practices since the last economic downturn to protect against potential claims of bias stemming from compensating new hires at a lower rate when money was tight but job candidates were plentiful.

A worker hired during the 2007 recession’s “seller’s market” may not have had the power to negotiate for more for fear of asking too much, while workers in today’s tight labor market often find themselves in the driver’s seat as companies try to attract employees to those jobs—often with higher pay. Businesses could open themselves up to claims of pay discrimination, though, if the pay disparities come out—especially if the differences are more pronounced across gender or racial lines.

When it comes to pay equity disputes, federal law allows companies flexibility in determining pay. The Equal Pay Act says that essentially any factor other than sex can be a basis for explaining differences in pay.

In a scenario involving economy-driven pay disparities, workers could have more success bringing discrimination claims in state courts. Massachusetts, New Mexico, and Oregon have passed pay equity laws that narrow the factors—such as years of service, expertise, level of education, and even geographic region—a business can use to account for pay disparities. By listing specific factors in legislation, states aim to give more power to employees to bring and win pay discrimination lawsuits.

Alternately, California’s law was modified to say that businesses can use a factor other than sex to explain pay disparities, “but it must be a bona fide factor which you used contemporaneously when you made the decision,” meaning you can’t, after the fact, use a factor you discover after the pay decision is made to explain away a discrepancy, said Mickey Silberman, a shareholder with Fortney & Scott who specializes in pay equity lawsuits.

While these laws allow companies to pay similarly situated workers differently based on these factors, “companies are responsible for ensuring that they are not systematically underpaying based on sex,” said Victoria Budson, founder and executive director of the Women and Public Policy program at the Harvard Kennedy School of Government. “The economic factor at the time could explain why the pay is different, but the law requires equity.”

Audit and Adjust

Women and men both are hired during upturns and downturns in the economy, but companies should be doing regular audits to ensure their pay equity practices are sound, Budson said. If companies find that, for a variety of reasons, they’re not paying men and women equally for the same work and involving the same exemptions, “they’ll need to make equity adjustments,” she said.

When considering legal liability, a company always should ask whether it intentionally discriminated by offering 50 cents on the dollar during a recession when potential employees would take that salary, and then whether an employee 10 years later after the recession would get four times that salary, simply because of the different economy, said Consuela Pinto, also a shareholder with Fortney & Scott.

Pinto said an employer’s obligation kicks in when it observes that gap, and then that employer is likely on the hook to take action. “I would advise employers, if it’s an issue of the economy, that’s a gap I’d try to close, because at some point, that’s not going to be a good argument anymore.”

Adjusting for pay differences caused by the economy or other factors is not a one-and-done endeavor, however. Businesses will have to manage pay equity across a workforce constantly because they’re always hiring, said Scott Cawood, president and CEO of compensation trade association WorldatWork.

The cycle of new hires also means that there always will be pay variables “that ultimately could end up in a pay equity situation,” he said.

Negotiation Matters

It’s also not just who’s coming in during an economic boom time, but how they negotiate salary, as well.

“Men are disproportionately more willing, in their current job that they are happy in, to go to their employer and say, ‘I’m worth more than what I’m being paid now,’” Silberman said. Moreover, research has found that when women negotiate for higher pay, it’s seen as aggressive or intimidating, and can backfire.

To mitigate the effects of gender differences in negotiation—both the willingness to negotiate and how salary negotiations are perceived differently due to gender—the American Association of University Women has partnered with several cities across the U.S., including New York City, Boston, and San Francisco, to offer free training to women.

Responding to external factors that can create gaps in pay, such as the economy or negotiation tactics, employers are now considering whether they should stop allowing managers to negotiate pay, Pinto said.

Giving managers too much discretion in a new hire’s salary “could be walking them into a pay difference that they can’t explain,” she said.

To contact the reporter on this story: Genevieve Douglas in Washington at gdouglas@bloomberglaw.com

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com