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INSIGHT: Is Pay Equity on Your Due Diligence Checklist?

May 21, 2019, 8:00 AM

Pay equity has taken its rightful place in the news cycle. More than ever, “equal pay for equal work” is a message that is being heard loud and clear.

Gaps in pay equity should be on the radar screens of those seeking to purchase, invest in or strategically partner with a given entity as well, given their prevalence and possible impact on company operations.

Potential stakeholders must do a deep dive into a target’s compensation structure to ensure that they are not buying into trouble in connection with and investment, acquisition, licensing deal or other business arrangement.

Pay Equity During Corporate Transactions

In the merger or acquisition context, a purchaser who absorbs new personnel also inherits the seller’s compensation structure. As such, the buyer or investors should consider the existence of pay equity issues that could adversely affect valuation, labor costs or increase the risk of future litigation.

This requires enhanced due diligence to determine if gaps in pay equity exist—diligence that contemplates whether the seller (1) maintains and consistently applies appropriate policies reflecting pay equity; (2) properly groups employees performing the same, substantially similar or comparable work; (3) assesses data and statistical evidence to identify whether any pay equity gaps exist in the workforce and, if so, whether they are attributable to unlawful factors (read: gender) or job-related criteria (such as, tenure and education); (4) has identified any policies and practices that tend to promote pay inequities; and (5) continuously reviews and updates pay equity compliance.

Taking a belt and suspenders approach to due diligence, buyers and investors would be wise to involve HR professionals and employment lawyers to mine for the existence (or extent) of latent pay equity risks associated with potential purchases, takeovers, joint ventures and the like.

They should also preserve the right to seek indemnification for damages that may result from reduction in the value of an acquired business or losses to future profits caused by a lack of pay equity.

The Legislative Playing Field

For their part, federal, state and local legislators have reacted to the clarion call for pay equity by proposing, enacting and, in some cases, refining laws to address and reform pay disparities among protected classifications of employees (most notably, the gender pay gap).

In fact, protections have expanded beyond equal pay for equal work and now require equal pay for “substantially similar” or even “comparable” work. At the same time, the geographic scope to permit comparisons of employees in different locations (for purposes of pay equity) has also been stretched.

There is more, much more. Congress reintroduced the Paycheck Fairness Act seeking to close gaps in existing equal pay laws, limit salary history inquiries in hiring and protect employees from retaliation for discussing compensation. Along these same lines, legislation has been passed in several states, cities and one U.S. commonwealth that bans employers from inquiring about the salary history of job applicants (this, in a move to shrink the gender pay gap).

Indeed, prohibitions are in place in California, Connecticut, Delaware, Hawaii, Massachusetts, Oregon, Vermont, New York City, Philadelphia and Puerto Rico, all meant to minimize the risk that women will be compensated less than males based on their previous earnings.

Similar laws seeking to promote the payment of objectively fair wages are also on the books in New Jersey, New York, Pennsylvania, Chicago, Louisville, New Orleans and Kansas City, though these apply only to certain government employers.

And the beat goes on. The Equal Employment Opportunity Commission has reinstated its pay data collection rule. Employers who file EEO-1 reports must now provide data on pay ranges, hours worked, employee race, ethnicity and sex by job category, together with Form W-2 wage information. Toward that end, the federal district court in Washington, D.C., has required the EEOC to collect 2017 and 2018 pay data by Sept. 30, 2019.

Out West, the Ninth Circuit Court of Appeals weighed in not too long ago and held that salary history cannot be used to justify pay inequity between males and females. Translation: businesses in Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington can no longer justify compensating a woman less than a man for the same or substantially similar work simply by virtue of her prior position. Employers that do so are in violation of the Equal Pay Act.

The upshot for employers is that they need to rethink their approaches to dealing with pay equity issues, shifting from a reactive mindset to proactive one.

The Takeaway

Long story short: a company that obtains a new workforce by virtue of a corporate transaction is on the hook for existing pay equity issues created by the past employer—issues that attach immediately upon a deal’s closing. That being said, it is of paramount importance that parties to a transaction keep their eyes peeled for pay equity concerns.

To be sure, getting pay equity right improves employee morale, increases productivity and attracts and retains talent. It also increases a company’s brand and reputational value.

On the other hand, getting it wrong not only sacrifices all of these benefits, but also may imperil asset valuation and subject a buyer and investors to legal exposure—not to mention a public relations fiasco that may prove very difficult to unwind.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Marc Zimmerman is a partner at Michelman & Robinson LLP, a national law firm with offices in Los Angeles; Orange County, Calif.; San Francisco; Chicago; and New York City. He represents management across a range of industries in employment-related litigation and transactional matters.

Michael Poster is a partner at M&R. He leads the firm’s Corporate & Securities Practice Group, and focuses his practice on corporate and financing matters, particularly those in the music business.

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