Tight Labor Market’s Recruitment Focus Puts Pay Equity at Risk

Efforts at achieving pay equity are in danger of falling by the wayside as the tight labor market forces employers to boost salary offers to attract much-needed talent.

Since the Covid-19 pandemic left more open jobs than workers willing to fill them, companies are increasingly finding themselves having to offer higher and higher pay to entice workers to leave their current employers.

But if existing workers’ salaries remain stagnant, those recruiting efforts could translate into legal trouble.

Employers generally have flexibility in determining pay provided they don’t discriminate based on race, ethnicity, or gender. If companies don’t routinely run a pay equity analysis and address any disparities, they face the risk of pay discrimination suits or, if they are federal contractors, a fine from the US Department of Labor.

“Companies typically learn lessons the hard way: They get sued or a government agency finds them in an audit,” said Robert O’Hara, a partner at Epstein Becker Green P.C. “That gets their attention.”

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‘Informed Business Decision’

A company may find itself wanting to hire somebody for a critical position at a salary $20,000 higher than what was advertised, for example. Pay equity is rarely top of mind when making the decision to increase a salary offer to attract a recruit, O’Hara said. But it will undoubtedly come up when the company runs an audit.

Companies already running routine audits should keep track of employees who are being hired at a higher pay rate than other employees, he said. They should “red circle that for further review,” not when there’s a time-crunch, like when a pay bias suit is filed or if the company is teed up for a DOL audit.

Considering pay equity implications when bringing somebody on board is part of making an “informed business decision,” just like any other, O’Hara said.

“That’s something that’s usually missing in the exchange,” when hiring new employees, he said.

Too many employers are focused on recruiting and not enough are focusing on retaining the employees they have, said Lori Wisper, managing director for rewards at consultancy Willis Towers Watson in Chicago. To stay competitive, more employers should increase base salaries for at least high-performing or critical employees, she said.

“There is all this focus on attraction, but there really should be just as much focus on retention,” Wisper said.

Some states, like California and New York, are moving legislative proposals that would require companies to include a salary amount or range in job ads. Such requirements—already in place in New York City and other localities—could lead some employees to conclude that they’re underpaid.

Even if salary ranges aren’t posted publicly, there’s a strong chance employees will find out if they are being paid less or the same as a new hire with less experience, Wisper said. It won’t take much longer for them to make their way to another organization, she said.

“The minute you open that up and have an environment that encourages people to look out and see what their worth is in the marketplace, that’s where attrition starts,” Wisper said.

Currently, women workers in the US are estimated to receive 80 cents for every dollar that men of similar educational levels get paid. Though progress has been made for women in general, the gap widened for women of color.

Generally pay disparities resulting from the tight labor market are isolated and don’t directly correlate systemically with race, ethnicity, or gender, according to Alissa Horvitz, a partner at Roffman Horvitz PLC. But that won’t stop a plaintiff from suing, she said.

“Even if that is not a systemic issue, if it turns out that the difference in pay cannot be explained by any other legitimate reason other than race or gender, even if it is not systemic or across the board, there still may be a cause of action for a single plaintiff to raise this issue.”

DOL Audits

Even if workers themselves don’t take action in response to pay disparities, the federal government might.

The DOL’s Office of Federal Contract Compliance Programs enforces employment discrimination statutes against federal contractors. The agency requires contractors to run pay equity analyses in order to ensure there’s no discrimination on the basis of protected categories such as race or sex.

Employers targeted for an audit by the OFCCP likely won’t have much luck arguing that pay disparities are justified due to the labor market, O’Hara said.

“That in and of itself is interesting but that’s not necessarily going to sway them, they’re going to want to know more,” he said. “You can’t hide behind the market being the driver for these decisions.”

The consequences of failing to address pay inequality can be costly.

Last month, digital mapping and analytics company Esri agreed to pay $2.3 million to settle OFCCP allegations that it paid 176 women less than their male colleagues.

In May, LinkedIn Corp. entered into a similar settlement and agreed to pay $1.8 million to end an investigation into alleged pay discrimination against women working in two of its California offices.

The OFCCP tends to focus its resources on broad systemic inequities, meaning it probably won’t dig into a contractor’s compensation system if there are only isolated disparities. But the agency issued a directive this year signaling that it would take a closer look at contractors’ pay equity practices, meaning more employers could be on the hook.