Pay Equity: How to Stay Compliant, Competitive, and Fair

Most HR professionals would agree workers should be paid fairly and equitably.

As with many good ideas, however, pay equity is governed by a multitude of laws to ensure employers uphold the principle in practice. These regulations protect employees from discrimination based on characteristics like gender, race, and age. While discrimination can happen in many ways, when it involves compensation, it becomes a question of pay equity.

Not surprisingly, workers expect to be paid fairly and equitably. Your organization’s pay structures and management policies have a huge impact on talent acquisition, culture, retention, and productivity.

Let’s look at how to meet pay equity compliance requirements in a way that also satisfies employees and helps you achieve business outcomes.

What Is Pay Equity and Why Is It Important?

Pay equity refers to how your organization implements fair pay practices. Employers must comply with federal regulations, violations of which may result in back pay owed to the aggrieved employee, attorney's fees, liquidated damages, and compensatory damages. Many employers are held accountable at the state and/or local level as well.

Employers are also held accountable by their employees. As part of your pay equity efforts, it’s critical to consider how you share compensation information with your workforce. This may include legally required activities like posting salary ranges for job openings. But it will also involve internal communications to explain performance review processes and define how decisions are made about pay increases.

Splitting Hairs? Pay Equality vs. Pay Equity

Pay equality starts with the Equal Pay Act (EPA), which specifically refers to equal pay for equal work regardless of sex.

Note that equal work doesn’t mean identical. The EPA “prohibits sex-based wage discrimination between men and women in the same establishment who perform jobs that require substantially equal skill, effort, and responsibility under similar working conditions.” (Italics added.)

Exceptions under the EPA include any pay disparity that is a result of seniority, merit, amount or quality of work, or some differential not based on sex. Since the passage of the EPA in 1963, several other laws have been enacted to protect additional groups of workers from wage discrimination.

While it’s mostly semantics, pay equity more broadly tries to address potential causes of wage discrimination that can occur anytime in the employee lifecycle.

In other words, pay equity isn’t just a compliance issue — it’s an organizational people strategy.

Pay Equity Is Good for Business

Striving for pay equity throughout your organization pays off. It especially makes sense when you look at it the other way around: Not prioritizing pay equity can have serious consequences like poor employee engagement and high turnover. Which ultimately impact the bottom line.

We all want to feel our work is valued, and one way we measure that is to compare our salary to others’. According to a survey by SHRM, when employees discover or perceive inequities, 19% talk to other employees about the difference. That can be a severe blow to morale.

In that same survey, nearly one in four employees believed they’d experienced a gender pay gap, and nearly one in five said they’d been in a situation where they found out someone of a different race or ethnicity was paid more for doing the same job.

Of workers who felt they were not paid fairly, two-thirds said something or took some kind of action to rectify the pay disparity, including telling their colleagues, asking for a raise, and looking for a new job. Recently there’s even been a trend toward “loud quitting” as employees post about their departure in a very public way on social media.

To help leadership prioritize pay equity, HR professionals can help them understand what’s at stake beyond the legal implications.

Are Pay Gaps Really a Problem?

Bureau of Labor Statistics data for the second quarter of 2023 shows persistent wage disparities by gender, race and ethnicity, and age.

While it’s important to note there can be factors other than discrimination that contribute to these disparities, such as a preference for flexible or gig work, pay gaps may indicate unfair practices. Still, in a survey by WorldatWork, 71% of organizations cite mitigating legal risk as an influence for pursuing pay equity, an increase of 20% since 2019.

In addition to warding off compliance penalties and litigation, equitable pay practices protect your reputation as an employer. Current workers and job candidates often have access to salary information and firsthand reviews of your company culture.

Not only can this impact your ability to recruit and keep top talent — it can affect your consumer brand if the company’s ethics are called into question.

What Are the Federal Pay Equity Laws?

There are currently four federal statutes employers must comply with regarding pay equity. Each prohibits discrimination, including salary discrimination, for a protected group of people.

1. Equal Pay Act (EPA) of 1963 — This law requires employers to pay men and women equally for work that is substantially equal in overall job content.
2. Civil Rights Act of 1964 — Title VII of this law prohibits discrimination based on race, color, religion, sex, or national origin in the hiring, promoting, or terminating of employees.
3. Age Discrimination in Employment Act (ADEA) of 1967 — Similar to the Civil Rights Act, this act protects employees 40 and older from discrimination in hiring, promotion, or termination.
4. Americans with Disabilities Act (ADA) of 1990 — This act prohibits discrimination against people with disabilities, although it does currently permit employers to pay subminimum wages based on comparative productivity. However, some states have banned or are considering banning this practice.

The Lilly Ledbetter Fair Pay Act of 2009 extends the statute of limitations of the Civil Rights Act, the ADEA, and the ADA so each discriminatory paycheck is an actionable offense.

Of course, this is just the tip of the iceberg when it comes to pay equity legislation.

State and Local Pay Equity Laws

In April 2022 Mississippi enacted its equal pay law, meaning all U.S. states have some pay equity legislation on the books. Be aware that some states have reporting requirements to help ensure fair pay practices. For example, State Pay Data reporting for California evaluates the compensation, gender, and ethnicity of all job classes, while Illinois Equal Pay Certification requires employers to submit compensation data, gender, and ethnicity information for all job categories.

In the absence of a federal law, many states have pay transparency regulations requiring employers to provide applicants and employees the expected compensation range in job postings. (Paylocity maintains a listing of state pay transparency laws for clients.)

State laws also may prohibit asking about salary history during the recruitment process to prevent existing discriminatory practices or gaps from perpetuating. (The Pay Equity for All Act, which is currently pending, would restrict how employers use candidates’ salary history at the federal level.)

For more compliance information, check out our Introduction to Payroll Compliance

Addressing Pay Equity Issues

Before you can fix pay equity issues, you have to know about them. And because the labor market continually shifts and employment laws change, an organization needs to evaluate it's compensation structures on a regular basis.

It all comes down to having the right data and the tools to analyze, report, and act on it.

A comprehensive HCM solution makes it easier for approved administrators to collect and report pay data while keeping employee information private and confidential. But there are many other ways to leverage your pay equity analysis.

What Is a Pay Equity Audit?

In addition to heading off possible compliance issues, a pay equity self-evaluation can help organizations identify and address discriminatory pay practices and disparities like pay compression before they become an employee morale problem.

Even more, a thorough and recurring analysis of pay structures and recent pay decisions should reflect your compensation philosophy, connecting pay programs and total rewards strategies to business outcomes.

Typically, a self-evaluation looks for trends (good or bad) in starting salaries, job classifications, performance ratings, and promotions based on self-identified characteristics such as race or ethnicity, gender, educational level, etc. This analysis may include market pay benchmarking to ensure your pay structures are competitive as well as equitable.

A voluntary pay equity audit is just that — voluntary. Once you’ve carefully analyzed the data, you will need to decide what, if any, corrective actions you take. This may help you avoid an official inquiry from the EEOC, but your proactive efforts also show employees the company is invested in their financial well-being.

Again, it’s critical to communicate carefully and intentionally about any changes you decide to make, whether it’s a one-time adjustment or a different compensation structure altogether. Understandably, employees pay a lot of attention to their pay.

Staying Ahead of Change with Compensation Management Software

A compensation management solution provides an efficient system to reward people fairly and competitively. When integrated with a platform like Paylocity that uses a single employee record to collect and report on key workforce metrics, compensation software helps simplify pay-related decision making, ensure budget alignment, and drive equity across employees.

When choosing the right compensation solution for your organization, look for these features:

• Budget Management: Does it help you configure population and eligibility requirements, proration rules, and automated approval processes to ensure increases are distributed accordingly?
• Analytics: Does it provide a view of total compensation that you can share with leadership to make data-driven decisions and communicate effectively with employees?
• Automation: Does it automate processes that simplify compensation planning and management?
• Compliance: How do the solution and the provider help ensure compliance as compensation requirements change?

See how Paylocity’s Compensation Management software can help you attract, engage, and retain talent while maintaining compliance with pay equity laws.