Back in 2021, survey data from the Society for Human Resource Management reflected that nearly 58 percent of U.S. employers voluntarily conducted pay audits. With sweeping pay equity legislation being enacted across states and localities and a corresponding uptick in pay equity legislation over recent years, pay audits are a tool that more and more employers may use both to promote pay equity across their workforce and to ensure compliance with law. By conducting a pay audit, employers may better position themselves to identify and address potential gaps in compensation between employees in the same or similar roles, as well as to attract and retain the best-qualified employees. Pay audits can also help employers meet disclosure requirements under some state pay equity laws and defend themselves against pay equity lawsuits. Yet, pay audits do not come without risk, particularly if they are ill conceived or incorrectly implemented. The results of a pay audit could also reveal disparities that might cause employee relations issues, reputational harm, or litigation, especially if not properly addressed.
This article explores a few key steps employers can take to help ensure that they reap the rewards of pay audits without creating greater risk for their organization.
Step One: Understand What's Motivating the Audit
There are multiple legal and business considerations that contribute to an employer's decision to conduct a pay audit. For instance, an employer may decide to conduct a pay audit with purely business objectives in mind, such as recruiting more competitive applicants or as part of an overall effort to revamp its compensation packages to retain talent. Alternatively, legal concerns may prompt a pay audit, ranging from general compliance to anticipated or threatened litigation. Various federal, state, and local employment laws prohibit discrimination in an individual's terms, conditions, and privileges of employment. At the federal level, laws such as Title VII of the Civil Rights Act of 1964 and the Equal Pay Act prohibit employment discrimination in the payment of wages based on legally protected characteristics, including sex.
For instance, the Equal Pay Act prohibits wage discrimination between males and females in the same establishment who perform substantially the same work, unless any wage difference can be justified on the basis of a merit system, a seniority system, a productivity system, or a factor other than sex. Title VII also prohibits wage discrimination, though its prohibitions are broader than those of the Equal Pay Act, because Title VII not only prohibits the payment of unequal wages for equal work but also prohibits intentional wage discrimination against employees who may not be doing exactly the same work. Furthermore, in contrast to the Equal Pay Act, which prohibits only sex discrimination, Title VII prohibits wage discrimination on the basis of race, religion, sex, and national origin. Many states and localities also now have their own employment discrimination and equal pay laws, some of which include broader protections than those at the federal level and incorporate additional reporting/disclosure requirements regarding the payment of wages that employers must follow. Accordingly, compliance requirements or potential litigation under these laws may prompt an employer to conduct an audit.
The reason behind a pay audit impacts the approach selected for conducting the audit. It can also impact the steps needed to establish and preserve confidentiality or a claim of privilege. For example, a more routine pay audit does not enjoy the same types of protection from disclosure as one taken when investigating a legal complaint or threatened litigation, making other processes all the more pivotal. Thus, having a clear understanding of the motivation for a pay audit helps to inform the methods selected.
Step Two: Think Through the Logistics (i.e., the Who, What, When)
Once an employer determines that it will conduct a pay audit, it should think carefully through the logistics of the audit and develop a plan as to the audit's scope, including in relation to (1) who will be involved, (2) what will be audited, and (3) when the audit will be conducted. For instance, in some cases, to accomplish the organization's goals, the audit may need to encompass the entire workforce. Other times, and particularly for larger organizations, it may be entirely appropriate to audit a specific department or work location. Similarly, for those pay audits that are not responsive to a particular legal concern, there may be certain times of the year when an audit is logistically simpler to conduct or when doing so would help to mitigate the risk of raising any additional concerns with the organization's pay procedures (and potential litigation). These include timing the audit to align with when the organization ordinarily conducts performance reviews and/or awards raises.
As to the persons involved in the audit, questions include whether to conduct the audit internally or to use an external auditor. Internally, it is critical to include only those persons who are essential to conducting the audit and implementing any remediation, as the persons with whom information is shared can impact an organization's ability to maintain confidentiality and claim information connected to the audit is privileged from disclosure. This means that within an organization, only certain members of the organization's leadership team, human resources department, and legal department should likely be involved. If an outside auditor is engaged, it is important to manage its work. It is also often beneficial to engage outside legal counsel to lead the audit and analysis, particularly if an organization does not have its own internal legal department or if other third-party service providers will be engaged to assist with the audit. Legal counsel can confer with those third-party providers directly to support a claim that information is privileged.
Step Three: Resolve to Take Appropriate Action on the Audit Results Before Beginning the Audit
The decision to conduct an audit carries an implicit commitment to act upon the results of the audit if unfavorable, as the failure to do so could impact the employer's ability to avoid or defend against potential claims of illegal pay disparity. Indeed, a failure to take action following a pay audit that reflects unjustifiable disparities in compensation could be used to demonstrate a willful violation of applicable law and potentially subject an employer to enhanced penalties. To ensure that it has the ability to act if the time comes, an organization can develop an action plan in advance of conducting a pay audit, which considers different actions that may become warranted and the resources required to make those actions a reality. For instance, an organization should think through whether it will be able to adjust salaries, update compensation policies, and integrate the information disclosed by the audit into their long-term strategic plans. Doing so may reveal that the scope or timing of the audit needs to be shifted to ensure that the organization can be appropriately acted upon once conducted.
Step Four: Act Proactively to Uphold Confidentiality and Preserve Privilege
As referenced throughout this article, a major risk associated with conducting pay audits is creating unfavorable results and those results later becoming subject to disclosure, such as in connection with a government investigation or during litigation with resultant impacts on the company's position. To mitigate this risk, organizations need to be proactive in taking steps to avoid or prevent unintended disclosure of their analysis or possible admissions against their interest, or to create a strategy or timeline for addressing any issues identified, whether legally significant or simply significant from a human resources perspective. Typically, this includes taking measures to protect the confidentiality and security of the audit, including, where appropriate, establishing and preserving privileges against disclosure, such as the attorney-client privilege or attorney work product doctrine.
In addition to engaging legal counsel early in the process and limiting the number of other individuals involved with the audit, an organization should educate all persons involved on what types of information are privileged and how to preserve that privilege. Legal counsel should also be copied on correspondence related to the audit and, where appropriate, any documents that are created labeled as privileged and/or attorney work product. Even if the results of the audit do not raise unjustifiable disparities in compensation, maintaining the confidentiality of information connected to an audit remains key. An audit necessarily involves the collection of personal employee information (e.g., demographic information) and other workforce data, the disclosure of which could create privacy concerns and reveal other unintended information about the organization or its employees. For instance, while the results of a pay audit may not reveal inequity in compensation based on any legal protected characteristics, it could reveal information about compensation offered by the organization relative to the applicable market that, if revealed before a plan is developed, could have negative ramifications.
Step Five: Manage Messaging to Employees
How the audit and next steps are communicated to employees is also pivotal to ensuring that the audit has its intended benefit without subjecting the organization to greater legal exposure. Failing to provide employees with any information whatsoever may create the perception of a lack of transparency and lead to employee relations issues. On the other hand, unnecessarily providing information, such as on the underlying purpose for the audit or on the methodology used, or details of the results, can create greater problems. Not only does doing so place any claim of privilege at risk, but it may lead employees to question or attack certain decisions made relating to the audit itself. Improper messaging may also hurt morale and strengthen any legal claims an employee subsequently raises relating to pay disparity. Accordingly, if an organization intends to send messaging regarding an audit, it should consider consulting with counsel before doing so.
Employers with questions regarding pay equity or who are considering conducting pay audits are invited to contact the authors of this article or any other attorney in Venable's Labor and Employment Group.