October 25, 2022

Pay Audits: Factors Employers Should Consider to Maintain and Protect Privileges

6 min

Companies conduct pay audits for a variety of reasons—whether it's to ensure the company is meeting certain benchmarks, to comply with audit requirements under state or federal laws, to promote or improve workplace diversity initiatives, to investigate and remedy disparities, etc. And while pay audits have numerous benefits, they are not risk free. However, with the right steps, companies can reduce and protect against some of those risks. This article discusses some of the pros and cons of pay audits and steps companies can take in conducting them to ensure that the processes and results remain protected under the rules of privilege and minimize potential risks.

What Are the Benefits of Conducting Pay Audits?

Pay audits can provide companies with an effective method for evaluating and improving their pay practices and get ahead of any potential problems. For example, pay audits can help to identify and remedy any pay disparities or gaps among groups of people. They can also be helpful for avoiding or defending against potential litigation and, in some jurisdictions, can even serve as a complete defense against a pay equity lawsuit. Pay audits can also help companies to more efficiently monitor and comply with corporate governance and legal requirements related to audits and disclosures.

What Are the Potential Risks Associated with Conducting Pay Audits?

If not done properly, pay audits have the potential to create various risks for companies, even when conducted in good faith. One of the main risks associated with an improperly conducted pay audit is unintended disclosures of the results. For example, unintended disclosures might reveal pay disparities or deficiencies before the company can analyze the results and determine whether such disparities are the result of legitimate causes, such as pay differences based on employees' education levels, experiences, positions, etc., or whether further examination or corrective action needs to be considered. Such unintended disclosures could expose the company to actual or threatened legal action, reputational harm, decreased employee morale, or other risks.

One way unintended disclosures arise is where the company is required to turn over documents during the course of discovery in litigation. A common defense used during discovery to justify withholding documents is that the information is protected by attorney-client privilege or the attorney work product doctrine. As explained below, these protections can apply to pay audits, but only when proper steps are taken in conducting the audit to ensure protection.

What Should Companies Do to Limit the Risk of Unintended Disclosures of Pay Audit Results?

A critical way to reduce risk is to ensure the protections afforded under attorney-client privilege and the attorney work product doctrine are maintained while the audit is conducted. Attorney-client privilege protects confidential communications between an attorney and client sent or received for the purpose of obtaining or rendering legal advice. The broader attorney work product protections can apply to documents that would not otherwise be protected by attorney-client privilege where such materials are prepared in anticipation of existing or threatened litigation. For a more detailed explanation of these rules, we recommend reading our previous alert, where we explained how employers can use legal counsel to their advantage to maintain the protections afforded under these rules in HR matters involving employment disputes and issues and protect themselves from unnecessary litigation. Here, we provide some key steps that companies should consider to ensure that these protections are established and maintained while conducting a pay audit:

  • Be Proactive and Plan. Maintaining these privileges should be front of mind from the start—they do not apply retroactively. Meaning, the privileges do not attach to any discussions that occur or documents prepared during a portion of the audit conducted before the protections are established. This can expose communications or work product, such as audit processes and results, to potential discovery in litigation, resulting in unintended disclosures to actual or potential adversary parties. To minimize these risks, at the outset of the audit process, companies should engage counsel, establish clear protocols to be followed, and designate who will be involved in the audit and their responsibilities.
  • Establish and Maintain the Purpose of the Audit. Communications are privileged only if they are confidential between an attorney and client and made for the purpose of securing legal advice. Work product, which includes attorney advice, is privileged when it is prepared in anticipation of litigation. Notwithstanding this difference, for either privilege to apply, the pay audit must be conducted in conjunction with a legal purpose, and not merely as part of routine compliance efforts, fact-gathering, or some other business purpose. Thus, the very first step in conducting a pay audit should be to engage legal counsel. If your company has an in-house legal team, you may want to consider retaining outside counsel as discussed below. But if in-house counsel is used, the investigation and analysis should be left to them and affirmative steps should be taken to clearly identify and document the legal, non-business purpose of the audit.
  • Consider the Need for Outside Counsel. It is very common for in-house counsel to provide a company with both legal and non-legal business advice. As a result, the line between legal and business advice can often be blurred. Thus, using in-house counsel to conduct a pay audit could make it more difficult to assert attorney-client or work product privileges and could increase the risk that a court will find that the privileges do not apply. Retaining and involving outside counsel for their legal expertise can help to remove any ambiguity regarding the legal purpose of the audit and reduce the risks associated with using in-house counsel.
  • Protect the Privilege. Establishing attorney-client privilege does not mean that communications between an attorney and client are guaranteed absolute protection. The privilege attached to these communications is held by the client, which means that the client also holds the ability to waive the privilege. Where the client is a company, privilege is waived if communications are disclosed to third parties outside the group of individuals who are designated as having a business need to be involved with or to know the results of the audit. Thus, to reduce the risk of inadvertent waiver, the individuals involved in the audit should be established at the outset and limited to those who are relevant and necessary. The designated internal audit team should also receive adequate training and directives on these privileges and how to protect privileged information.

While the attorney-client and work product privileges are well established, they can present complicated legal issues. Employers with questions about attorney-client privilege or attorney work product or about conducting pay audits are encouraged to reach out to the authors of this article or any member of Venable's Labor and Employment Group.

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