Pay Equity: Small Business Guide to Equal Pay for Equal Work
Charlette has over 10 years of experience in accounting and finance and 2 years of partnering with HR leaders on freelance projects. She uses this extensive experience to answer your questions about payroll.
This article is part of a larger series on How to Do Payroll.
Pay equity is the concept of paying employees comparably for similar work. This includes base compensation, as well as bonuses, overtime, opportunities for promotion, and other employee benefits.
Although relevant pay considerations should be considered, pay equity is intended to correct discrepancies based on race, gender, national origin, and sexual orientation, and prevent wage discrimination. Ensuring your company has equitable compensation is not only the right thing to do but also required by law.
Pay equity does not mean equal pay for every employee. Differences in pay between workers can exist and is often based on:
- Experience
- Tenure
- Skills
- Education
- Location
- Performance
Pay Equity Laws
Federal Laws
There are a couple of federal laws that any business owner needs to know regarding pay equity.
- Equal Pay Act: In 1963, Congress passed the Equal Pay Act, which mandates that men and women must be paid equal pay for equivalent work.
- Title VII: A year later, the seventh amendment of the Civil Rights Act prohibited employers from discriminating against employees based on race, color, religion, sex, national origin, physical disability, mental disability, and sexual orientation or in retaliation for an employee complaining about the employer’s job practices.
- Lilly Ledbetter Fair Pay Act: In 2009, the Lilly Ledbetter Fair Pay Act was established and built on the previous standing laws by removing the filing period deadline. This means that an employee can challenge discriminatory pay practices that occurred in previous years.
State & Local Laws
The vast majority of states provide for some pay equity laws, and every state must comply with the Equal Pay Act, at a minimum. For more detail on your state’s laws, please visit your state or locality’s Department of Labor website or this Paycor article on pay equity laws by state. Some of the state provisions are listed below.
- Employer liability: Employers can be held financially responsible if a court of law finds a company to have participated in wage discrimination.
- Salary conversations: Employees should be able to discuss salary conversations with their co-workers with no punishment by their employer.
- Pay data reporting: To achieve government oversight of pay equity, some states now require companies to report on salaries by gender.
- Salary history: In many states, employers cannot ask prospective employees about their salaries at previous jobs. This helps to stop pay inequities from moving from one job to the next, which can drive pay increases for women and minorities.
Implementing & Improving Pay Equity Policies
To implement pay equity policies, you first need to complete a comprehensive review of each job, the tasks involved, the job market, and current compensation structures. Your pay equity implementation should also include the creation of policies covering the factors you consider in setting pay bands, like experience, qualifications, performance, and other relevant factors.
Basic Steps to Auditing Your Policies
After you’ve set up your pay equity policies, you need to audit them regularly. This will help ensure that changes in the job market and company structure do not lead to significant disparities in pay between workers.
Here’s how to do that:
- Define your goals. Are you trying to limit legal risk? Are you trying to provide a pay gap analysis for owners or shareholders? Are you actively seeking to ensure pay equity across your organization?
- Review your current job descriptions for every employee. Make adjustments if their job duties have changed, and make sure they sign off on any changes.
- Examine your existing policies. How does your company decide pay bands? What criteria do you consider for compensation?
- Collect data on each employee. Determine each one’s job title, department, job level, hire date, protected class status, job location, hours worked during the last year, base salary or hourly wage, overtime pay, bonus, and other relevant information. This is often the most time-consuming step.
- Conduct a pay equity analysis for every employee. Collect data showing job market trends, performance reviews, and qualifications of employees in similar positions. Use your internal data to compare with the external research. The goal is to determine whether your employees are being paid similarly for similar work, and to compare those pay ranges with the external data you’ve collected.
- Take corrective action, where necessary. If you find that you’re paying workers doing similar jobs different wages but you cannot find a lawful reason for doing so, make adjustments to compensation.
Fair Pay Best Practices for Small & Midsize Businesses
- Do not ask for salary history. Even if your state allows you to request salary history for job applicants, it is not a good idea to ask for this information because the applicant may not have been paid appropriately at their previous jobs. Having an established compensation plan for your jobs will help ensure that you have pay equity among all of your employees. Using the market-level salaries along with your projected revenue compared to your competitors is a good place to start.
- Decide on salary negotiation. You should decide whether you want applicants to negotiate on their job offer. If so, then you, as the employer, should bring it up in the interview process. Studies show that women and minorities are less likely to negotiate salaries, contributing to their wage gap.
- Publish salaries or salary ranges in job posts. Establishing a salary band at the beginning sets up an open communication line between prospective employer and employee. Not only will that ensure employees with the same job are paid equitably, but it also helps you avoid applicants with higher expectations and puts new hires at ease that they are comparable to their peers.
- Do an internal review. You should periodically compare your employees’ salaries by protected class (if possible) to ensure that unconscious biases are not at play for raises, promotions, and bonuses. You should also keep performance reviews over a period of years and review the decisions made by your performance managers to ensure there is adequate justification for any difference in pay.
- Work with a professional employer organization (PEO). Besides helping with day-to-day HR functions, PEOs can help ensure pay equity across your organization by providing you with informed advice on pay structures, compensation packages, and industry data. It will monitor changes in the labor market to identify potential pay discrepancies between similarly situated employees and advise how to rectify these issues. It can also provide legal guidance and ensure that you’re compliant in every state.
Brief History of Pay Equity & Why It’s Important
Since 1963, the Equal Pay Act has prohibited pay discrimination on the basis of sex. Between 1963 and 2016, advances on pay equity were fairly stagnant. Starting in California, New York, and Massachusetts in 2016, however, state-level pay equity laws started taking hold. Partly a result of public pressure building over several years, states enacted laws requiring similar pay for similar work, along with related laws banning salary history questions during the application process and requiring pay scale disclosures.
The majority of US jurisdictions have pay equity laws on the books—currently, only Washington, D.C. and Mississippi do not have any. Some states only require state employers to abide by pay equity laws, while other states have laws that simply mimic the federal law. Still, most states have laws more expansive than the federal law, so it’s crucial that you understand the laws where you’re hiring employees.
Pay equity is important mainly because it’s the right thing to do. Paying your employees similarly when they’re doing similar work can prevent discouragement among your team if they learn of vastly different pay rates.
Pay equity laws are also important because they ensure fairness for both you and your employees. These laws help companies maintain a competitive environment where no employee is underpaid or overpaid.
These laws provide employees with a sense of security that their wages reflect their experience and value to the organization. It also helps employers attract and retain talented workers by offering fair compensation based on the employee’s abilities, rather than race or gender.
Compliance Note: Related to pay equity laws, many states have pay transparency laws, requiring companies to post pay ranges or target salaries in their public job ads. Colorado, for example, has this requirement. Even if your business has no location in Colorado, but you’re posting a job on a nationwide job board that will be seen by candidates in Colorado, you must comply with the Colorado pay transparency law and provide the pay range.
Employees Affected by a Lack of Pay Equity
A lack of pay equity can have a major impact on employees, particularly those from marginalized backgrounds. Employees from certain backgrounds are more likely to be underpaid, with the gap being even greater for women and other minorities. This can lead to financial insecurity and create an unsafe working environment where employers are able to take advantage of their workers without consequence.
When pay equity is not in place, employees may feel they don’t have the same opportunities as their peers or be unhappy in their current positions because they feel undervalued or mistreated. This can lead to lower morale, reduced motivation and productivity, as well as decreased job satisfaction and loyalty.
Without equitable wages, employees may also struggle to make ends meet, putting them at risk for poverty or homelessness. Ultimately, a lack of pay equity has wide-reaching consequences for society at large, as it decreases economic activity and increases inequality.
Did you know?
- Black men earned 76% of the wages white men earned in the first quarter of 2022. Latinos earned 75%.
- Women earn 82 cents for every dollar a man makes and earn less at every level of education attained.
- Women of color start further behind in pay at the beginning of their careers, worsening with career progression.
- Hispanic and Latina women earn about 58 cents for every dollar a white man earns.
Pay Equity Frequently Asked Questions (FAQs)
What should your pay structure look like?
Your pay structure should be equitable, fair, and legal—and having properly established pay equity policies can help with this. When designing compensation structures for your company, consider job duties and qualifications, employee experience, market rates, and individual performance. Whatever you decide, you should establish written policies so your employees know what to expect.
How do you ensure equal pay for similar jobs?
To ensure equal pay for jobs with similar duties, compare salaries across departments, locations, and your industry. Where gaps are identified, review your practices and make any necessary compensation adjustments.
How can you detect and prevent wage discrepancies?
Detecting and preventing wage discrepancies takes work—you must set regular audits to ensure your company is achieving your pay equity goals. During these audits, it’s vital that you collect relevant data to ensure you’re meeting pay equity laws.
Are there legal implications related to your current pay practices?
Bottom Line
Pay equity is an important concept for your business. Not only is it required by law, but sound and fair compensation can help retain employees, boost employee morale, and encourage workplace diversity. Having honest conversations about wages, establishing a compensation plan, and reviewing your employees’ salaries will go a long way in ensuring people are paid fairly.
