Please click here to view video.

The rising tide of state pay equity legislation shows no sign of abating, with several new laws set to become effective in 2020 and 2021. Many of these laws differ from the federal Equal Pay Act by defining comparable work more broadly, limiting the factors on which employers can rely to justify pay disparities, and imposing additional penalties. A handful of the laws also attempt to balance these new burdens on employers by creating “safe harbors” for those who proactively assess and address their pay gaps.

Three states, Massachusetts, Oregon, and Colorado, include safe harbor provisions in their new pay equity laws. These provisions—the contours of which are outlined below—vary somewhat from state to state. The primary difference is that one (Massachusetts) provides potential relief from liability and liquidated damages for employers who perform voluntary self audits; the other two (Oregon and Colorado) offer more limited relief, from compensatory, punitive, or liquidated damages only.

Before embarking on self audits under these new laws, employers should consider not only their benefits, but also the risks that they can create, as hazards still lurk below the surface.

Massachusetts

Effective July 1, 2018, the amended Massachusetts Equal Pay Act (“MEPA”) provides employers an affirmative defense to liability if they can show that—within the previous three years, and before the lawsuit was filed—they voluntarily conducted a good faith, reasonable self-evaluation of their pay practices and made “reasonable progress” toward eliminating any unlawful gender-based pay gaps that the self-evaluation revealed.

Of the three states, Massachusetts has provided the most guidance on its safe harbor provision. The state’s Attorney General has issued guidance entitled “Self-Evaluations—A Basic Guide for Employers.” The Guide does not mandate a specific kind of analysis to fit within the safe harbor—providing simply that the self-evaluation be “reasonable in detail and scope.” It also recognizes that what is considered a reasonable evaluation will vary depending on the size and complexity of the employer’s workforce.

Notably, even if an employer’s self-evaluation is found to be insufficient in detail or scope, the Guide explains that—if the employer conducted the self-evaluation in good faith and has made reasonable progress toward eliminating identified pay disparities—the employer can still avoid liquidated (i.e., double) damages under MEPA, if not liability entirely. As for whether an employer has made sufficient progress toward eliminating disparities, the Guide explains that this depends on how much time has passed, the nature and degree of the progress compared to the scope of the disparities, and the size and resources of the employer. To demonstrate that it has made reasonable progress, the employer must be able to show that the steps it is taking will eliminate the disparities in a reasonable amount of time. The Guide does not set a timeframe for employers to begin taking remedial action after a self-evaluation reveals an unlawful pay gap, but it warns that if an employer fails to take action within six months of finding a pay gap, its self-evaluation could be used as evidence against the employer if an employee files a claim. Such a result is an illustration of a possible hazards of attempting to take advantage of the safe harbor.

Oregon

In addition to going beyond the federal EPA by defining work of “comparable character” more broadly and limiting the factors on which employers can rely to explain pay gaps, the Oregon Equal Pay Act of 2017 (“OEPA”) also extends beyond gender-based differences. Specifically, the OEPA creates potential liability for pay differences based on race, color, religion, sexual orientation, national origin, marital status, veteran status, disability, and age.

The OEPA offers a safe harbor for employers who have completed an “equal-pay analysis” within the previous three years, eliminated the pay differential for the plaintiff, and made “substantial progress toward eliminating wage differentials for the protected class asserted by the plaintiff.” The requirement to eliminate the pay differential for the plaintiff makes the pathway into OEPA’s safe harbor very narrow, as does the “substantial progress” requirement. Unlike under the Massachusetts scheme, OEPA’s safe harbor is not a defense to liability or to recovery of economic damages or attorneys’ fees. But it can provide shelter from some compensatory and punitive damages.

While not as detailed as the Massachusetts Guide, the Oregon Bureau of Labor and Industry (“BOLI”) has issued FAQs addressing the safe harbor provision. The FAQs explain that, to provide shelter from compensatory and punitive damages, the equal-pay analysis must be “reasonable in detail and in scope in light of the size of the employer” and must include “a review of practices designed to eliminate unlawful wage differentials.” The BOLI FAQs also explain that, in performing an equal-pay analysis, employers should first determine which employees are performing work of comparable character. The BOLI has also provided detailed guidance on the factors that may work comparable, which should form the basis of any equal-pay analysis. Employers should then look for compensation discrepancies between employees within those groups and determine if the differences are justified by any bona fide factors provided by law (BOLI’s guidance addresses those factors as well, which should also inform any equal-pay analysis). Finally, if the difference is not linked to any bona fide factors, the FAQs instruct employers to adjust the lower paid employees’ compensation “to match” that of equivalent employees.

Colorado

Like the OEPA, Colorado’s new Equal Pay for Equal Work Act, which becomes effective January 1, 2021, provides a more limited safe harbor. Under that Act, a court may not award liquidated damages if an employer “demonstrates that the act or omission giving rise to the violation was in good faith” and the employer had “reasonable grounds” for believing that the employer did not violate the Act. The Act explains that, in determining whether an employer’s violation was in good faith, “the fact finder may consider evidence that within two years prior [to the complaint] . . . the employer completed a thorough and comprehensive pay audit of its workforce, with the specific goal of identifying and remedying unlawful pay disparities.” Like the Oregon law, this good faith defense may save an employer from paying liquidated damages, but it is not a defense to liability based on pay disparities, nor does it limit recovery of economic damages or attorneys’ fees.

Safely Conducting Safe Harbor Audits

As noted above, safe harbor audits are not without risk. For example, an audit that exposes a pay disparity but provides a defense under state law because the employer is making “reasonable progress” toward eliminating the gap could still be used against the employer under federal law, where self-audits and incremental progress in addressing pay gaps are no defense to liability.

There are also unanswered questions about whether use of the safe harbor waives privilege and work product protections for pay equity audits. In that regard, at least one federal district court has held that while self-audits undertaken to assess legal risk are generally protected, audits intended for business purposes (such as for public statements about pay equity) are not protected, even if those analyses were conducted or directed by counsel. The Massachusetts Attorney General’s Guide highlights this risk when it notes that, if an employer conducts a self-audit that exposes a disparity but then does not respond quickly enough, the audit results could be used against the employer.

To manage these risks, we generally recommend a two-path approach to pay equity audits. Under the first path, the employer—through counsel—conducts privileged pay equity audit for the purpose of assessing legal risk. Based on the results of those privileged audits, employers can identify if there are areas where they have risk but may be able to take advantage of a safe harbor. Then, under the second path, the employer can engage a formal safe harbor audit for the identified areas, with the understanding that these formal audit results and related materials will likely become public. (We suggest a similar, two-track approach for employers who conduct analyses in support of their public statements about pay equity.) Before launching formal (and likely, ultimately, public) safe harbor audits, however, the employer should ensure that it has identified the potential sources of pay gaps, developed a plan to close those gaps, and has buy-in from the business to act quickly on that plan. Otherwise, the employer risks its formal safe harbor audit being used against it.

Despite the hazards that lie beneath the surface, these new safe harbors can provide an effective defense to liability and/or damages. And, by charting a careful course, employers can enjoy the benefit of that defense while minimizing the risks.