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Identifying Hot Spots in Compensation and Issues to Consider During Year End Reviews

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Identifying Hot Spots in Compensation and Issues to Consider During Year End Reviews

Employers often begin planning and preparing for decisions concerning compensation for employees, including raises and bonuses, in the second half of the year. As attorneys, we provide guidance to our clients to ensure that these compensation decisions are made in accordance with federal and state laws. As part of this process, the time is also ripe to assist clients with reevaluating pay practices in hot spot areas such as misclassification of non-exempt employees and independent contractors, equalize any pay disparities, and ensure that pay plans and compensation practices are consistent with state law. In this presentation, we will guide you through these end of year compensation considerations and equip you with the tools you need to assist your clients to comply with federal and state wage and hour laws and avoid costly mistakes.

Transcript

Hello, and welcome to the today's CLE entitled Identifying Hotspots and Compensation and Issues to Consider During Year End Reviews. My name is Sarah Wieseltheir. I'm an attorney at the law firm of Fisher Phillips, and I will be presenting today's webinar. Fisher Phillips is a national labor and employment law firm and I focus my practice in part on wage and hour and pay equity issues. I provide advice and counsel to our employer clients on wage and hour matters as well as defend employers and lawsuits brought by their current and former employees under both federal and state, wage and hour and pay equity laws. Today, we're going to discuss certain considerations that employers should have when it comes to end of year compensation decisions and how we as attorneys can help guide our clients to ensure that their compensation decisions and classification decisions are in compliance with both federal and state law. As we approach the end of year, it's time to start planning and making decisions concerning compensation like raises and bonuses, and when making these compensation decisions, it's not only important to make sure that they are done in accordance with federal and state law, but as part of the process, the time is ripe to correct potential things that may not be correct, or in compliance with state laws in a way that doesn't draw attention or raise red flags to employees to correct issues without exposing yourself to potential litigation and claims for unpaid wages. So today we're gonna talk about compensation planning, classification of employees as exempt or non-exempt, classification of independent contractors, commission incentive, and bonus plans and pay equity considerations. The first topic we're going to discuss today is compensation planning. Now salary bands or pay bands are something that can help employers to maintain competitive salaries, track pay equity, improve retention, and increase employee engagement. Now, when I say salary bands, what exactly am I talking about? A salary band is a pay range with upper and lower limits of compensation for a specific job title based upon the knowledge, skills, responsibilities, and other objective criteria that are needed in the job. To establish a pay band, employers need to gather market data from multiple sources, perhaps by using an outside consultant and benchmark jobs to that data and in doing so, it's important to establish and align that compensation information to the company's compensation philosophy. Now, there are a lot of advantages of using salary bands or pay plans when planning for compensation. It provides flexibility, precision and transparency. Employees can understand what the market value is for their job and that their compensation isn't based on a whim or favoritism. Salary bands can also help to correct systemic pay inequities and are able to create transparency. We're seeing pay transparency laws springing up across the country, which require employers in certain states and localities or big cities like New York City for one to post the salary range for the position with job postings. Now, the exact details of these requirements are very based on state law, but depending on the state where your client may have employees, they may already be required to have salary bands or may be required to have them in the near future. And they're really beneficial so it's something that you may wanna encourage, especially your larger employer clients to consider. Now, it's critical to align the organization's approach with attracting talent with their business strategy and philosophy. If the goal of your client is to be a market leader that attracts high quality talent, but the pay philosophy tied to the talent strategy doesn't support it, it's going to be a challenge to attract top talent. And this compensation planning can happen middle of the year towards the end of the year, so that the company is set to make decisions, to make adjustments for pay ranges and salary bands at the end of year when your typical compensation decisions are made. Misclassification of exempt and non-exempt employees is also something that we can assist our clients with and is something that should be top of mind when thinking about end of year pay considerations. Now the Fair Labor Standards Act is the federal law that requires non-exempt employees to be paid a minimum wage and be paid over time of at least time and a half of their regular rate of pay for all hours worked over 40 hours in a work week. State laws will similarly require minimum wage and overtime. The default is that an employee is non-exempt. This is something that an employer needs to overcome, this default of being non-exempt in order to not be required to pay minimum wage and overtime to an employee. Now under federal law, the exemptions are two pronged. First, we have to look at the salary. Does the employee's salary meet the minimum threshold for an exemption status? Currently, that threshold is $684 per week under federal law. State law may be different, it may be higher. The second prong of the exemptions is to determine whether or not the employee's job duties meet one of the exemptions that are recognized under federal and or state law. Under federal law, you may be familiar with some of these exemptions. There's the administrative exemption where an employee's primary duty is office or non-manual work directly related to the management or general business operations of the employer or the employer's customers. An administrative exemption includes employees who exercise discretion and independent judgment. The executive exemption is reserved for employees whose primary duty is managing the enterprise or a customarily recognized department or unit, also have authority to hire or fire or make suggestions and customarily and regularly directs the work of two or more employees. The professional exemption under federal law includes alerted professionals like attorneys whose primary duty is the performance of work requiring advanced knowledge, which is predominantly intellectual in character and requires consistent use of discretion and judgment in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. There's also the creative professional exemption for individuals whose primary duty is their performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. Now the exemptions may be different under state law. So it's important to consider this applicable state law where the employee works to determine whether or not they meet that state's test to be exempt from minimum wage and overtime. Now, there are certain challenges that employers may face, especially now that we are coming back from the pandemic and things are changing in companies where all of a sudden, you may have somebody that used to be exempt that may no longer be considered exempt. Layoffs and furloughs have required people to absorb different job duties and responsibilities or wear different hats to cover the work of non-exempt employees that may no longer be there. When a non-exempt worker or employees subsume... I'm sorry, when the non-exempt work subsumes their responsibilities and an employee's actual job duties may no longer match their intended exemption, it's really important to make sure that there is a reevaluation, perhaps towards the end of the year, as to whether or not somebody is still meeting the test to be exempt. Now, there's also a question as to whether or not they meet the salary threshold. Perhaps their salaries were reduced and they may no longer meet that threshold. When trying to figure out if an employee meets the exemption, the default and the starting point is to assume that all employees are non-exempt and then to determine whether they fall into an exemption category. We can help our clients by conducting an audit to determine whether or not employees are properly classified. So an audit would involve looking at the various job positions or job titles, pick a category of employees or several categories, really evaluating what their job duties and responsibilities are and seeing whether or not they truly fall within an exemption under federal or state law. And if they don't, the end of year is really a good time to address that misclassification. If you had an employee who was previously exempt, and now all of a sudden you're telling them they're not exempt, they're gonna get overtime, someone who has a more professional position may view this as a negative. Professionals don't get overtime. I'm a professional person. They may be upset by that idea. They may also start thinking, well, I've been doing these duties and responsibilities for the last six months. Maybe you owe me unpaid overtime for that period of time. So the messaging is really important if there's going to be a change in classification and end of year is a good time to quietly make that change to make the change part of an overall evaluation of the business, of various positions. We did an audit, we worked with our attorneys, we're changing the way we do things here, and you can message it to the employee in a way that makes it clear that this is a positive development for them, but that they shouldn't have to worry about what had happened in the past. Now there's of course, always ways that we can address that if somebody is being reclassified to true them up to try to minimize potential exposure in a lawsuit. And why is that? There are high stakes for misclassification errors. An employer can be liable for the unpaid overtime. Entitled to liquidated damages. Under certain state laws, there may be up to 200% liquidated damages. So a $1 of unpaid overtime becomes $3 of unpaid overtime. Employees would also be entitled to attorney's fees and costs, and under certain state laws, there's an elongated statute of limitations period. So under the Fair Labor Standards Act, a claim for unpaid overtime has a statute of limitations of two years or three years if the conduct was willful. Certain states like New York and New Jersey where I practiced have a six year statute of limitations. There's also penalties in certain states for knowing violations and criminal liability. So a mistake can be expensive and it becomes even more expensive if employees file not just a private cause of action, but a class and collective action lawsuit, which may mean that it's not just all of your employees in this one job title, job title X that are looking for unpaid wages, but they can file a lawsuit that brings in every single employee that you've had in that job title, doing those job duties over a two or three year period under the FLSA or potentially even longer up to six years under certain state laws. So this can get very costly. That is why it is so important that we advise our clients on these misclassification issues, offer to conduct an audit of certain positions that may be a little bit questionable and assist them in how to message the changes so that they're going to minimize their potential risk of liability going forward. Another big misclassification category is independent contractor misclassification. Generally speaking, an independent contractor classification is going to benefit employers whereas an employee classification is going to benefit employees. Although the law permits the use of independent contractors, recent legislative and regulatory efforts by both federal and state legislators and regulators have highlighted a growing intolerance for these relationships. To make matters worse, there is no single test to evaluate independent contractor status for all purposes and compliance is often complicated by the fact that a different test may apply depending on the situation. Now, if somebody is classified as an independent contractor, it's beneficial to accompany employer or punitive employer, because that independent contractor is not covered by employment laws. They're not protected by the Fair Labor Standards Act, the minimum wage and overtime requirements. They're not going to be protected by the Family and Medical Leave Act and entitled to protected time off. If they or a loved one, a family member has to deal with a serious health condition or has a baby, needs maternity leave, then none of that would be covered or protected. Employers are not obligated to pay benefits or offer any job protection to independent contractors. Employers would not be vicariously liable for the individual's actions. Employers have a greater latitude in terminating independent contractors and enjoy a greater staffing flexibility, but whether or not someone is an independent contractor can be a real question mark and it can be really challenging to prove under various federal and state laws that somebody is indeed an independent contractor and not an employee. Now, as I said before, there's no single test to evaluate this, which means that the test to determine if someone is an independent contractor under federal tax law is going to be different than the test that we use under federal wage and hour law and it's gonna be different than the test that's used under state law, which can be a real headache and that's where we as attorneys come in and we can help our clients to evaluate whether or not somebody is properly classified as an independent contractor for various different purposes. Because a worker may be considered an independent contractor for some purposes, an employee for others. This is confusing, this is difficult to comply with. Our clients need help with this. Now, while there are various different tests, the tests for independent contractor status do share some common characteristics. For example, most are a balancing test where no single factor is determinative, which is helpful. They tend to analyze degree of control exercise over the worker, that's really the key, the degree of control, how much independence does an independent contractor have to perform whatever services or each functions for the company. And also the tests afford little weight to the party's characterization of the relationship. That means for the most part, having a document called independent contractor agreement doesn't really matter. Now, the main tests that are utilized are the IRS test, which is a 20 point test. The National Labor Relations Board has a test, the US Department of Labor has an economic realities test, and we also have the ABC test out there. So next, we're gonna go over some of the details of these various tests so that you are equipped to assist your employer or clients in determining whether or not there is a classification issue. Now up on your screen, you'll see the 20 factors that are part of the IRS test. And this is used to determine whether a worker is an employee for federal tax purposes. Historically, the IRS looked at these 20 factors, but it now takes a more holistic approach and it groups these 20 factors into three primary categories, and those categories are behavioral control, financial control and the type of relationship. So the first category is behavioral control. A worker is an employee when the company has the right to direct and control the worker. The company need not actually exercise the control, but have to have the right to do so. So the behavioral control piece is looking at the type of instructions given, the degree of instruction provided, the way the work is evaluated and the training that is needed or given to this individual. Basically if the company instructs the worker about when, where and how to do the work, it's more likely that they're an employee and not an independent contractor. The second category under the IRS test is financial control, which refers to whether the company has the right to control the economic aspects of the job. And that includes how the worker is paid, whether expenses are reimbursed and who provides tools and supplies. The IRS expects that an independent contractor has significant investment in resources like tools, training, office space, that an independent contractor pays their own expenses, that the independent contractor has the opportunity to make a profit or sustain a loss on the project based on the worker's skill and efficiencies. The IRS expects an independent contractor will offer their services to the general public and not just to the punitive employer and receive payment based on the task and not by the hour. The last chunk or the last category of the IRS 20 factor test is the type of relationship. This factor refers to how the relationship is perceived by the worker and company. It depends to a large extent on how the relationship is structured. To test this factor, the IRS looks at whether the parties have a written contract, does the worker receive employee type benefits? Does the relationship continue indefinitely and whether the services provided are a key activity of the business. Now, the United States Department of Labor has a different test referred to as the economic realities test, which is used for determining claims under the Fair Labor Standards Act. The focus of this test is whether the economic realities of the party's relationship are such that the worker is dependent on the company to which they provide services. If they are dependent on the company, then they are an employee. If not, they're more than likely an independent contractor. What are the factors we're looking at? The extent to which the work performed is an integral part of the employer's business. If it's integral, more like an employee. If not, more like an independent contractor. The worker's opportunity for profit or loss, depending on their managerial skill, the extent of the relative investments of the employer and the worker, whether the work requires special skill and initiative, the permanency of the relationship and the degree of control exercise are retained by the employer. An individual specific work circumstances determine their employment status for FLSA purposes. No single factor is dispositive. It's important to note that the Department of Labor treats the following factors as immaterial to independent contractor classification, meaning that they do not consider these factors at all: The place where the work is performed, the absence of a formal employment agreement, and whether the worker is licensed by a state or local government, doesn't matter to the Department of Labor. However, like most of these tests, there is an emphasis on the degree of control. In an employment relationship, the employer controls the manner and means by which the employees perform their work. In an independent contractor relationship, the contractor controls the work. The company controls the result, not how the work is performed. The right to control is the focus of the inquiry and not whether the employer actually exercised the control. The next test we're going to discuss is the ABC test and it's called the ABC test because in the statutes, the prongs of the test are listed as subparts A, B and C. Now many states are starting to adopt the ABC test for independent contractor classification under state wage and hour law. It is a tough test to meet and it's the test that no surprise, we are seeing in states that have really strong employee friendly laws like California, like New Jersey. Now, the test requires a worker to meet all three prongs, A, B, and C, in order to be viewed as an independent contractor, otherwise they are an employee. The first factor is control. Worker has been and will continue to be free from control or direction over the performance of the service. Direction and control can include the following: Giving instructions, providing training, setting work hours, telling the worker what tools or supplies to use while performing work, hiring assistance, specifying responsibilities, directing the sequence of work, such as telling a worker to do certain things in a particular order. The next part, B, is that the service is either outside the usual course of business for which the service is performed or the service is performed outside of all the places of business of the employer, for which the service is performed. And C, the worker is customarily engaged in an independently established trade, occupation, profession, or business. Many factors influence whether work can exist separately and apart from the relationship with the employer or the company, I should say, including but not limited to the amount of work and length of time worked but for the current employer, the number of workers employed by the company or by the independent contractor, if they've got a staff, whether the individual pays his or her own expenses, whether the individual works for more than one person or firm, whether the individual uses his or her own tools, equipment, vehicles or other materials, the number of other customers and volume of business from other customers, or the amount of work received from the current employer compared to the amount of work received from others for the same services. Now under the ABC test, it's worth repeating the individual must meet all three prongs in order to be viewed as an independent contractor. Otherwise, states that use the ABC test will determine somebody to be an employee who is entitled to all of the benefits of employment. Now in some, while there's various different tests, an independent contractor is somebody who is free from direction and control. They may be assigned a task by the employer, but they're gonna decide how to do it. They're gonna use their own tools and equipment to do it. They're gonna set their own hours. They're not going to be evaluated by anybody or directed by anybody. Now limited training or information is generally okay. Obviously an independent contractor has to know what the company's expecting in terms of the services it's looking for, but it is a fine line between how much control or direction you can give somebody before it tips the balance from an independent contractor to an employment relationship. Now, why is all of this important? Because the risks of misclassification can be costly. An employer can now... If someone is misclassified and is truly an employee, all of a sudden they're entitled to all their projections of the employment law and there may have been employment law violations. Maybe they were entitled to FMLA leave. Maybe they should have been entitled to overtime. They could have claims now for unpaid wages and benefits. State law may have required meal and rest breaks or spread of hours pay, or some other wage and hour requirements that this person didn't receive and now they're gonna want to be paid for it. They're also going to seek liquidated damages, which can be trouble damages in some states. There can be back taxes owed, penalties and fines, issues with worker's compensation coverage, and social security contributions. It may invite unemployment audits. A lot of times, these independent contractor issues come up when the independent contractor relationship is ended and now this person violates for unemployment benefits and the state's unemployment office comes knocking on your door and you say, oh, no, they're not entitled to benefits, they were an independent contractor and the state applies their test, maybe the stringent ABC test or some other test and says, oh no, not only is this person not an independent contractor, but those other five people that you've got working for you and on this state under a similar scheme, they're employees too. And now you've got a problem and it could be expensive and it becomes a class and collective action, it can become even more expensive. Now, this is all to say that now is the time before the end of year to work with your clients to consider whether or not the independent contractors are appropriately classified because end of year is a good time to correct these errors and make changes again without raising red flags to an independent contractor, sue us because we've messed up. The last two years we've been under this relationship, we've messed up. Now this should really be on your client's radar and the reason I'm focusing so much on this in the presentation today is because independent contractor misclassification is such a hot issue right now. The White House released a report in late February 2020 about its long-term plan to encourage worker organizing and collective bargaining and it specifically recommends that the Department of Labor, the United States Department of Labor, continue to prioritize action to prevent and remedy the misclassification of workers as independent contractors. The suggested plan includes rigorous enforcement, partnerships with other agencies like the IRS and Department of Transportation, guidance, rules, and education for employers and workers and robust outreach to workers, unions, workers advocates, and employers about misclassification. The Department of Labor is hiring 100 new investigators to boost the enforcement efforts. We're seeing this targeting specific industries as well. The construction industry is being hit hard, the trucking industry, especially where you have owner operator business models, delivery drivers, and the gig economy. Also COVID-19 has had an impact on classification considerations. At least 12 states have passed laws, specifically targeting independent contractor abuse and it's really a hot issue, the Department of Labor can come knocking and it's important that we guide our clients through this process, do a true audit of the individuals they want to classify or remain classified as independent contractors and work with them, perhaps at the end of year, to rectify any misclassification issues. The next topic we're gonna talk about is commission plans and bonus plans and pay plans. End of year is a good time for employers to review their pay plans, to make sure that they are not only reflective of actual compensation practices and in line with the company's compensation philosophy, but also legally compliant. Now, many states do not have specific laws regarding commission plans, but others do. New York, for example, and California have very specific rules about commission agreements. What must be included in the agreement, when commissions must be paid? What happens upon termination of employment with respect to earned commissions? Even if the state where an employer has commissioned salespeople does not have specific laws on the topic or require a written agreement, some form of a written pay plan is really a best practice and refreshing those pay plans on an annual basis will help to make ensure that the pay plan is legally compliant and also meets whatever requirements the company has. There may be changes, they may wanna change their model or their structure and end of year going into the new year is a perfect time to review these pay plans, update them and get them distributed to employees before new goals are set at the beginning of the year, new targets are set, make sure everyone knows and understands what the terms are. Now, when I say a commission, that is going to be defined under state law, but generally speaking, commissions are compensation based on a percentage of a salesperson's orders or sales. Commissions are considered wages once the commission is earned. In most states, that means that earned commission is going to be due and owing as required by the state law. And there are limits on deductions from those commissions and on forfeiture of those commissions. However, an employer has the opportunity to define when and how a commission is earned. When it comes to best practices for commission pay plans or pay plans as a whole, a written document is best because under most state laws, the issues come up with commission and bonus plan when there's an ambiguity, when it's unclear as to when a commission is earned, when it's unclear as to how commission is calculated. In New York, if something is unclear or there's no written agreement for a commission agreement, it is presumed that the employee's interpretation or an understanding of the commission agreement is correct. We don't wanna leave things, important things like how commission is earned and calculated ambiguous. That's why a written plan, making clear to employees, the details of the commission plan is really key. And I would recommend that an employee be required to sign some sort of acknowledgement that they've received the plan and that they understand it. Certain states are gonna require a written agreement anyways, and in that case, you're going to need the company to also sign the agreement. That's like New York, California, I believe New Hampshire actually is another one of those states that require a written agreement. The written agreement should clearly define who is eligible to receive commissions. Maybe it's a certain job title. Maybe the employees must be in good standing. Maybe they need to be employed for an entire quarter to receive commissions, things of that nature should all be spelled out. The commission pay plan should describe how and when commission is earned, calculated and paid. It's critical to find the criteria that must be met before commission is earned because before it's earned, it's not wages and it can be forfeited or adjusted, but once it's earned, it's a wage that the employee is entitled to. Should also keep in mind that a payment might still be non-discretionary even if there are no formally announced metrics, which sometimes happens with annual amounts labeled as bonuses or gifts that have an established pattern in terms of whether, when and how much is paid to the employee or that position. So what's an example of what should be included in a commission pay plan? Well, it should state that a commission is earned on the date the sale is made, or a commission is earned after the customer's payment is received by the company. If there's any follow up work that needs to be done to earn a commission, that should all be spelled out. Now, depending on the product or service that is being sold and when the commission is earned, we may want to also include language that carefully explains what happens with a commission if a customer cancels, or gets refunded. Certain states laws permit a deduction or forfeiture of certain commissions, even if they've already even paid out, if there's some sort of a refund or cancellation. Other states do not allow this. Therefore if you're a company that you're assisting with a pay plan has employees in a state that doesn't allow these forfeitures, you might need to get creative. For example, if customers have a two week return window, that should be part of the criteria for when a commission is earned. Perhaps, a commission is not earned until two weeks after the product is delivered to the customer and that accounts for the return window and provides you some flexibility to adjust commissions before they are considered earned. It's also important to state when commissions are paid. State law may dictate this. State law may require commissions like in California to be paid once they are reasonably calculable. Other states may require commissions to be paid within 30 days of being earned. Other states may not specify. And once a commission is earned, it just needs to be paid on that next regularly established payday. If there is no provision regarding the timing of commission payments, that means that the general timing provisions apply, the default under state law is going to apply. Sometimes employers assume that silence means there's no timing requirement, but that's not the case. Other things that should be included in a commission plan is reserving the discretion of the employer to make changes to the plan any time upon notice. The plan should make clear that eligibility and calculation of the commission are within management's discretion. They have the discretion to make decisions and interpret the commission plan. The plan should also make clear that eligibility for a commission under the plan does not alter the at will nature of employment. You're also going to want to include language about what happens upon termination of employment and what happens if somebody is terminated after the commission is earned before the commission is paid. If earned commission, if a commission is earned and considered wages, under most state laws, a terminated employee will likely be entitled to that payment, even if they've separated from the company, even if they were terminated for cause. Of course, state law and case law is going to control, but generally speaking, once that commission is earned, employees are entitled to be paid that commission regardless of their employment status on the date the commission is paid out. Another best practice is to include an effective date of the plan. Perhaps the plan lasts for one year, for fiscal year 2022, or this plan runs from January 1st, 2022 through December 31st, 2022, and provide a new plan each year. That provides ability to make changes if needed and doesn't hold the company bound to a prior year's compensation plan if a new plan hasn't come out. It's really important as with all wage and hour issues to review state law requirements, because those are going to control whether certain information needs to be in a commission plan and whether a written agreement is necessary. And we wanna make sure, of course, we're in compliance with the state law to avoid unpaid commission claims. Incentive and bonus plans are similar to commission plans. Generally speaking, bonuses are not considered wages under state laws. So there is more flexibility when it comes to employers paying out and calculating bonuses. However, it is a good practice if there's an established bonus plan or program for it to be reduced to a writing and you can similarly have employees acknowledge the plan, receipt of the plan and that's just helpful. It's always helpful to not have any ambiguity because the less ambiguity, the less likely an employee would succeed on a claim that they were due unpaid wages, IE a commission or a bonus. Discretionary bonuses are likely not considered to be wages and employees are not going to have an entitlement to a discretionary bonus, but an incentive or bonus that's based on a specific formula, for example, hitting a certain target, that's gonna be considered wages once the criteria is met, and then it's gonna be treated similar to a commission. So it's really important to be clear whether or not a bonus is discretionary or not and if it's not discretionary, you wanna be very clear as to what the formula is, what it means to achieve the bonus, when the bonus is gonna be paid out, all those same considerations that we have when it comes to a commission plan really applies to a bonus plan as well. An end of year, heading towards the end of year is the good time to do these reviews with your clients, to update bonus plans and really on an annual basis, consider whether or not any changes need to be made, whether there's been any changes in the state laws that require updating of the bonus plans or commission plans and to redistribute it to employees. Now, our final topic for today is pay equity considerations. Federal and state law require at a minimum that employees be provided with equal pay for equal work. Under federal law, we have the Equal Pay Act, which is specific to women... I mean, men or women, gender, it's looking at gender and specific to the establishment. Are men and women in the same establishment being provided equal pay for equal work. Now nearly every state has its own law that prohibits gender-based wage discrimination, similar to the federal Equal Pay Act, EPA. Several states have expanded their pay equity laws to cover even more than gender-based discrepancies, such as those based on race and ethnicity or gender identity and expression or sexual orientation. Some states have even gone so far as to require pay equity based on all protected categories that are recognized under the state's civil rights law. So when it comes to pay equity considerations, it's really important to look at the state law that applies to the employees that your client has because it's going to be different and it's hard to keep track of. I myself have been trying to keep track of the various laws in all 50 states for the last few years. This information has been compiled in an interactive map that Fisher Phillips has on their website. It's available for anyone to use and I invite you to use it as a resource. It's something that I spend a lot of time updating to make sure that we are keeping track of what the key information is under the various state laws, because compliance is really tricky and really challenging. Now employers should take steps or to equalize compensation without drawing attention to potential pay disparities to avoid litigation, to avoid unpaid wage claims. Now ways that this can be done is to award year end bonuses to bridge the gap between employees who perform substantially similar work and offering raises to employees who are disadvantaged. Now what's key under federal and state pay equity laws is that you cannot decrease somebody's salary in order to comply with the law. You can only bring the lower paid disadvantaged person up. Now, equal pay for equal work or equal pay for a substantially equal work is a freeze that we see in a lot of the state laws. We're looking at the total compensation package. We're looking at not only base salary, but commissions, bonuses, benefit entitlements. Is someone entitled to an expense account? Is someone entitled to a company car allowance? Those are all parts of the total remuneration package that we are looking at for federal and state equal pay compliance. Now, there are certain justifications for when there can be a differential in pay. Under federal law, there can be a difference in pay if it is based on the quality or quantity of production, a seniority system, a merit system, or any factor other than sex. It's this catchall, which basically allows employers to point to any reason other than somebody's gender to validate the wage differential. And this very broad catchall has really led to the Equal Pay Act not having much teeth and has really been why there has been such a movement in the states over the last, I don't know, five or six years to enact more progressive pay equity legislation because the federal Equal Pay Act wasn't really doing it with this catchall. Now under state laws, we're seeing more specific reasons why there can be a pay differential for employees performing substantially similar or equal work. It can be tied perhaps to their education or their backgrounds, certain qualifications, certain objective criteria, as opposed to subjective criteria and a lot of states have codified the need for there to be a bonafide factor other than sex. So again, it's really important to look at the specific state laws to see what the landscape is, what is a reasonable or justifiable reason for a pay differential. Now, as part of this process, we can work with our clients to review and consider their policies and practices when it comes to pay. Are compensation decisions based on objective or subjective criteria? Objective criteria is always gonna be better. Subjective criteria, not so much. Is there documentation to justify the pay differentials? If you have two employees in the same role and the man is being paid $15,000 more a year than the woman, we wanna have a documented why. It might be that they have a master's degree that's relevant to the job duties and responsibilities, and that justifies the pay differential. But if there's a challenge to pay the pay, you may not remember that or the people who are involved in the litigation may not know that a hiring manager 10 years ago made that decision. We need to have these decisions documented. Another consideration, if pay differentials are based on performance, do the performance appraisals and documentation support the decisions? Oftentimes, managers don't like to give bad performance reviews. Everybody gets a three. Everybody gets a meets expectation. There's no justification or real detail within that document to show how someone's actually performing. So then if you're making pay decisions based on performance, but it's not backed up by those performance appraisals, that's a real issue because if the documentation shows that Joe and Mary were both meeting expectations, but Joe is being paid $20,000 more a year to perform the same work, that's a problem. Now, if the manager really believes that Joe is a higher performer, or maybe he takes on some additional job duties and responsibilities, that could be a good reason to justify the pay differential. But if the performance review is very vanilla or it looks the same on paper, that's not going to be helpful for the company. And then another factor is, are there legitimate factors other than gender or other covered characteristics that justify a pay disparity between employees performing substantially similar work? So that's what I just went over. We wanna see are there justifiable, legitimate factors for this pay discrepancy. The best way that we can help our clients to figure out if there's any pay equity issues lurking is to help them to conduct a pay equity audit. It is critical that a pay equity audit be either conducted by or under the direction of council so that it is cloaked with the attorney-client privilege and protected from disclosure in the event of future litigation. Big picture, a pay equity audit is a means to identify potential paid disparities, determine whether there are lawful explanations for those disparities and take steps to correct the disparities as appropriate. It's an opportunity to identify and correct weaknesses in the organization's systems and protect against claims of paid disparity going forward. Now, what exactly is an audit? First step, we're gonna gather the relevant data. What data is relevant? Job descriptions are relevant, not always this positive, cause the job description as we all know, may not be up to date, may not accurately reflect the duties and responsibilities, but it's a helpful document as a starting point. We're gonna collect the job titles and job categories. The actual name or job position name is not dispositive either. You wanna look at what people are actually doing to group them in those categories. Information like the higher date, gender, race or other identifiers, depending on the scope of the audit, that's all information you wanna collect. The job location. If you have their resume or employment application, that's helpful documentation to have as part of the audit. The total hours worked over the last year and their total compensation data of course. This means overtime, bonuses, commissions, stock options, vacation pay, all of that stuff. I like to collect this data in the form of a gigantic spreadsheet that has columns for all of these different data points so that it can be compared. Once you gather the data, the next step is to identify comparable jobs. In a large organization, a secretary in the accounting department may be performing similar job duties and responsibilities as a secretary in the legal department. And simply because they're in different departments doesn't mean that they should not be considered as comparators for pay equity purposes. So it's really important to figure out what the comparable jobs are and group employees based on those comparable jobs. Then we're going to calculate whether members of a protected class are paid equally in comparison to those outside the protected class. That involves an analysis of the pay data by the job groupings. Generally, we're looking for statistically significant differences. Depending on the scope of the audit, this may be something that you can review, you can do internally. It may be something where you need to hire an economist, an expert to help with that. There are plenty of economic consultants and accountants who specialize in these types of data analysis that can assist you. And the accountants or the economists, their job will be to analyze the data, figure out what is a statistically significant difference. And then as the attorneys, we assess whether those differences in pay are justified under applicable law. That's when we're looking at whether there's any documentation to support the difference, is the difference based on a bonafide factor, other than sex or race or whatever the scope of your audit entails. If the differential can be justified or explained by the documentation and information you have, that's great. If it can't and we cannot identify a legitimate legal reason for the compensation disparity after an investigation, it needs to be addressed. Now, how can it be addressed? Well, perhaps based on this audit, we realized that the person who's earning $10,000 more a year is actually performing different job duties, has a greater level of responsibility. Maybe that person's entitled to a title change. Maybe there should be a lead or a manager. Maybe we bump them up so that it's more clear that these two individuals are not performing substantially similar duties. Maybe we need to pay somebody a bonus or a higher bonus, greater bonus at the end of the year, in order to equalize the compensation and maybe going forward, the person who is earning less gets a bigger pay bump going into the following year. That's why you wanna think about these things end of year, because end of year is a good time to equalize the issues, to address the issues, correct the disparities as appropriate and required and again also isn't necessarily raising the same red flags. Now, I'd like to recommend that employers conduct audits on an annual basis if they can, because the compensation landscape is always changing. New people are coming in to the organization and new laws are being enacted. Laws are changing, case laws developing as to what are these legitimate pay disparities and whether or not employers are going to be liable for damages. Now I realize I didn't talk about damages yet when it comes to pay equity. Damages usually consist of the same types of damages we've been talking about throughout this presentation. The unpaid wages, liquidated damages, attorney's fees and costs. Not only is an audit a good idea as a measure to keep tabs on the compensation landscape and try to protect the company against potential exposure, but conducting a good faith pay audit could provide a safe harbor under certain state laws, as well as a strong defense to lawsuits alleging pay inequality. For example, under the Massachusetts Equal Pay Act, there is an affirmative defense to liability if an employer can show that within the previous three years and before the lawsuit was filed, they completed a good faith self-evaluation that was reasonable in detail and scope of its paid practices and can also demonstrate reasonable progress in eliminating gender-based comprehension differentials, this is huge. Oregon, Puerto Rico, Colorado have safe harbors available. And even if a safe harbor is not within the state's law, it's still, as I said, could be a good defense, a strong defense to a lawsuit. And again, we wanna make sure our pay audit's privileged because we don't want the information to get in the hands of people who we do not want to have it. Also, when it comes to pay equity, we wanna help our clients to consider systemic changes. We can help our clients to draft formal compensation policies and procedures that make clear, that paid decisions must be made on objective criteria that is in compliance with federal and state pay equity laws. Consider standard pay ranges or guidelines for each position or job classification, that's how we started off our discussion today and we also wanna train decision makers. Decision makers should be trained on how to make proper pay decisions that comply with organizational policies and the applicable law. The appropriate factors to consider when making pay decisions, how to apply guidelines and exercise discretion properly and how to document compensation decisions. Taking these steps will put employers in a better position to make compensation decisions and ensure compliance with state pay equity laws. Now we went over a lot of things in this presentation today, but the important key takeaways really are that wage and hour and pay equity compliance issues can be costly for our clients. The end of year is a perfect time for employers to evaluate their compensation plans, their compensation practices, their classifications of employees or independent contractors, and figure out where they are. Take the organization's temperature, see if any changes need to be made and correct them. And at the end of the year, it is a really nice time to wrap it all up in a bow, make these changes for the employees going forward, for the organization going forward without calling to attention that there could have been a potential issue. It's also a good time to address these issues and sweep it in as bonuses, pay bumps, just tying up loose ends for the end of the year and that is all something that can help our clients moving forward. If you have any further questions or I can be of further assistance as you advise your clients on these complex and complicated wage and hour and pay equity issues, my contact information is on the end of the PowerPoint slide. I thank you all for your time today.

Presenter(s)

SWJ
Sarah Wieselthier, JD
Of Counsel
Fisher Phillips

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