A pay equity audit identifies pay differences between employees that cannot be explained due to job-related factors. It is a multi-disciplinary effort that requires extensive domain knowledge expertise in labor law across various jurisdictions, such as econometrics, statistics and statistical modeling, workforce data management, and knowledge of regulatory audit processes by agencies such as the OFCCP.
This type of audit not only identifies problems, but also provides actionable solutions. It gives employers an opportunity to ensure fairness in pay and prevent employee issues. It allows employers to minimize risk by identifying and remediating deficiencies, providing greater standing to defend against and win claims of discrimination.
The findings from the pay equity audit can and should be privileged. The term “privilege” relates to attorney-client communications and attorney work product. The audit itself should be conducted under attorney oversight so that it is privileged and documents from the audit can be protected from discovery in a court of law. The purpose of the privilege is not to hide or cover-up any wrongdoing; rather, it is intended to allow the attorney overseeing the matter to facilitate candid discussions with the client or his or her company about the findings.
If your organization is considering being proactive on gender pay issues by undertaking a pay equity audit, consider taking these steps:
- Start with establishing attorney-client privilege through internal or external counsel.
- After the privilege protocols are in place, establish a project team. The project team should include multi-disciplinary experts designated by your organization’s counsel. Include personnel who understand your organizational functions, data sources, hierarchies, and compensation structure and philosophy across departments. The team will determine the scope of the audit, including the compensation measures to be analyzed, workforce segments, the number of employees, locations, and lines of business.
- Once the scope of the pay equity audit has been finalized, your organization’s HR team needs to identify employee groupings (Pay Analysis Groups or “PAGs”) and to identify business and economic factors for the analyses.
- Have your organization’s data team extract, aggregate, and consolidate the relevant data from disparate HR data silos. Identify any missing, incomplete or inaccurate data and reconcile those issues. Once the data has been cleansed and validated to ensure its accuracy, the data can be segmented for analysis.
There are multiple types of analysis that may be undertaken:
Average Wage Comparisons
Assess average percentage wage differences amongst employee classes by PAG for current and prior base wages and prior total compensation.
Wage Distribution Comparisons
Compare wage rate distributions across protected employee classes, providing a fuller picture of wage differences.
Statistical Model Building
Use multiple linear regression analyses to measure any remaining differences in average employee wages across protected classes after accounting for the legitimate business and economic factors you identified as tied to your compensation decisions.
Pay Analysis Group (“PAG”) Tests
Test the collaboratively defined PAGs to ensure that they are sufficiently distinct for analysis.
Cohort Wage Comparisons
Assess the consistency of audit findings among matched groups of employees, known as “cohorts,” and provide a more granular analysis of your workforce.
Age + Pay Comparisons
Measure the effect of age on pay rates, while controlling for business and economic factors.
Overtime Participation Tests
Measure overtime participation rates across Client’s workforce.
Affirmative Action Comparisons
Compare the protected class composition of your workforce relative to Census measures, based on EEO-1 job categories.
Your pay equity project team can have far-reaching impacts on many elements of your workforce, including legal, financial, and human resources.
As mentioned, you will want to consult with your general counsel or outside counsel. You may also want to involve accountants. Just as important, consider working with experts who are both familiar with pay equity laws and regulations, and in data cleansing and validation. A meaningful review of pay practices depends on the integrity of your organization’s employment data.
Overall, a comprehensive pay equity audit is the best place to start to understand what your organization is doing right in addressing pay disparity issues, and where it can improve—before a regulatory investigation or employee lawsuit.
This becomes even more important with the U.S. Equal Employment Opportunity Commission (EEOC) requiring organizations to provide employee pay data information in the 2019 EEO-1 Report.
This data is subject to disclosure to potentially adverse third-parties who may want to use it for litigation or regulatory complaints.
Take action to be a leader in the effort to provide equal pay to your workers and reap the rewards of a more enthusiastic workforce, positive PR, and avoiding costly regulatory penalties and litigation.