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Equal Pay and Compensation Discrimination

Federal laws ban compensation discrimination in employment. But not all federal equal pay laws apply to small businesses. State laws may have more restrictive rules than the federal regulations. This article answers some frequently asked questions about employment laws and payroll discrimination.

Compensation and Discrimination

The Fair Labor Standards Act (FLSA) sets all rules about minimum wage, overtime, and equal pay protections. Since the FLSA, all regulations have amended or updated that law.

The laws against compensation discrimination include all payments made to or on behalf of employees as payment for employment. Payment includes hourly wages, overtime pay, and tips. Other forms of compensation include:

  • Bonuses
  • Stock options
  • Profit sharing
  • Life insurance
  • Vacation, holiday pay, and sick pay
  • Cleaning or gasoline allowances
  • Hotel accommodations and travel reimbursement

The compensation discrimination laws prohibiting disparate pay include:

  • Equal Pay Act of 1963The Equal Pay Act applies to any business with more than two employees. It requires employers to pay men and women equal pay for equal work.
  • Title VII of the Civil Rights Act of 1964 (Title VII). Title VII bans discrimination in hiring, firing, and other employment decisions based on race, religion, gender, or national origin. It applies to businesses with more than 15 workers.
  • Title I of the Americans with Disabilities Act. Title I of the ADA requires pay equity for disabled workers. It applies to businesses with more than 15 workers.
  • Age Discrimination in Employment Act (ADEA). This protects employees and job applicants over the age of 40 from discrimination. This act applies to businesses with more than 20 employees.

In 2020, the U.S. Supreme Court decision Bostock v. Clayton County, Georgia, held that Title VII protections applied to sexual orientation and gender identity.

The U.S. Equal Employment Opportunity Commission (EEOC) enforces claims under these laws. These statutes require employers to pay employees regardless of race, color, religion, sex, national origin, age, or disability.

Equal Pay Act

The Equal Pay Act states that male and female workers must get the same pay for the same job. The jobs need not be identical, but they must be equivalent. The job content, not the job title, determines equivalence. There are four factors employers must consider:

  • Skill. Skills are the knowledge, training, and experience needed for the position. These are the skills needed for the job, not the skills the employee has. For example, two bookkeeping jobs are equal under the EPA, even if one of the job holders has a graduate degree. Bookkeeping doesn't need a graduate degree.
  • Effort. The physical or mental effort needed in the position. Suppose men and women work on a machine assembly line. The last person also lifts assembled product off the line and places it on a board. If the end-line job requires more effort than the other assembly-line jobs, it would not be a violation to pay that person more. It would not matter who holds that position.
  • Responsibility. The level of accountability required in performing the job. The person who must lock the door at the end of the day would not have enough responsibility to justify a pay differential. But if the person had to verify the property was empty physically, that might justify the extra pay.
  • Working conditions. There are two sub-factors to consider: (1) physical surroundings and (2) hazards. Physical surroundings are the general working conditions of the workplace. Hazards are dangers in each workplace. Two people working in substantially similar locations must get the same rate of pay, even if the locations are different.
  • Establishment. The EPA applies to jobs within an "establishment," a distinct place of business. It does not apply to the entire company or enterprise. For instance, workers at a burger franchise in Los Angeles may have a different pay scale than workers at the same franchise in Des Moines. Under some circumstances, a central unit that hires employees and assigns them to separate work locations may be a single "establishment" under the EPA.

Lilly Ledbetter Fair Pay Act (2008)

The Lilly Ledbetter Fair Pay Act closed a loophole in Title VII and the Equal Pay Act, increasing protections for female employees. The older pay discrimination laws have a narrow window for filing a wage discrimination case. Employees must bring a claim for unequal pay within 180 days of the original discriminatory act.

The Fair Pay Act treats each paycheck as a separate discriminatory act, resetting the clock and extending the time the plaintiff has to file a claim.

Title VII, ADEA, and ADA

The other employment rights laws (the ADEA, ADA, and Title VII) do not require jobs to be "substantially equal." All that matters is that an employer is paying employees in a protected class less than similarly situated employees who are not protected.

These laws aim to correct disparate impact that existed before their enactment. Disparate impact happens when any act intended to have one effect has the effect of discriminating against a protected class of workers.

A Brief History of Pay Discrimination

Although the effects have declined since the enactment of Title VII, they are not gone. When women first entered the workforce in large numbers, they were lower in seniority than most male workers. On a pure seniority- or merit-based promotion system that required all new employees to begin in entry-level positions and "work their way up" within the company, women were not given equal pay for equal work. Employers claimed this was fair because employers based pay on time on the job, not on the work.

The Equal Pay Act prohibits sex-based pay disparity. The pay rate must be the same if the job descriptions are the same. Other examples of disparate impact affect other federal laws.

  • ADA discrimination. Employers must pay workers with disabilities at the same rate as other "similarly situated" workers. Disabled workers' pay rates must be commensurate with other workers of equal skill and seniority.
  • Title VII discrimination. Compensation systems can't perpetuate any systems that discriminated against protected classes before. For instance, a company requires all entry-level workers to have a high-school diploma. At one time, this rule discriminated against Hispanic workers. Even if it no longer has this effect, the rule is not allowed under Title VII.
  • ADEA discrimination. Businesses can't selectively terminate employees over 40 for "business purposes" that coincide with the denial of their retirement benefits. Employers may use "reasonable factors other than age," such as the FAA's mandatory retirement age for commercial pilots, based on public safety standards.

Affirmative Defenses

Pay differentials exist in jobs for reasons beyond gender discrimination. An "affirmative defense" exists when the employer can show it used one of these reasons, not gender or other discriminatory factors.

  • Seniority systems. Many companies have seniority-based pay scales, where people who have worked longer with the company get higher pay. If seniority systems result in unequal pay, employers can use seniority as a defense unless there is a discriminatory impact.
  • Merit systems. A merit system gives pay increases or bonuses based on improvements in the employee's job performance or output. Merit systems require comparisons between employees under similar working conditions.
  • Quality of production. Employers may give pay increases where an individual worker outperforms other individual workers. The employer must show that it based pay increases on production quality, not discriminatory factors.

Employers can't decrease the higher-paid employee's wages to correct a pay differential. Instead, they must increase the pay of the lower-paid employees.

Consulting an Employment Attorney

Compensation discrimination claims under the Equal Pay Act are complicated. Small business owners need legal advice from a skilled employment law attorney in their state.

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