Attention companies: It’s time you start paying some serious attention to your compensation practices.

The Equal Employment Opportunity Commission on Feb. 1 proposed not one, but two, controversial pay equity reporting requirements that effectively would impose burdensome new compensation collection obligations on companies with at least 100 employees, and federal contractors with at least 50 employees, beginning in 2017. Whereas the government’s previously recommended proposal would have applied only to federal contractors, the new proposal, in comparison, would cover over 63 million employees.

Currently, companies annually report information to the EEOC concerning the makeup of their workforce, divided by race, ethnicity, and sex within certain job categories. The proposed regulations would significantly amend the Employer Information Report (EEO-1) by requiring companies to submit additional information pertaining to those employees’ W-2 earnings—such as salary, bonuses, and other forms of compensation—and total hours worked.

Both the EEOC and the Office of Federal Compliance Programs (OFCCP), which also collects EEO-1, would then use this information “to assess complaints of discrimination, focus investigations, and identify employers with existing pay disparities that might warrant further examination,” the proposed rule states.

“Collecting pay data is a significant step forward in addressing discriminatory pay practices,” EEOC Chair Jenny Yang said in a statement. “This information will assist employers in evaluating their pay practices to prevent pay discrimination and strengthen enforcement of our federal anti-discrimination laws.”

That’s really just a roundabout way of saying that the EEOC will be paying closer attention to whether an employer has conducted a pay analysis, “which could become an issue in an investigation,” says Reed Russell, a partner in the labor and employer practice at law firm Phelps Dunbar. It’s going to be a lot harder for an employer to justify suspect discriminatory pay practices if it hasn’t already taken the steps to do the pay analysis, he says.

“This information will assist employers in evaluating their pay practices to prevent pay discrimination and strengthen enforcement of our federal anti-discrimination laws.”
Jenny Yang, Chair, Equal Employment Opportunity Commission

Reexamining pay practices can also help mitigate potential pay discrimination claims. “It costs a lot less to do a pay equity analysis than to defend a lawsuit,” says Connie Bertram, a partner in the labor and employment Law Department at Proskaeur.

Compliance Hurdles

To protect the confidentiality of individual employee pay levels, companies would be required to report aggregate compensation data divided into twelve pay bands in each of the standard EEO-1 job categories, resulting in a complex matrix of employee compensation data.

According to the EEOC, employers “simply” will count and report the number of employees in each pay band. The EEOC further claims that the submission of W-2 data will not impose a significant additional burden on employers because they already compile this information for tax purposes. 

That may all sound well and good, but in reality, it’s not nearly as simple as the EEOC suggests.

For one, various legitimate factors play a role in employee compensation, which the EEOC’s pay band approach, on its face, artfully fails to acknowledge. Such factors include seniority, education level, professional certifications, industry experience, and even geographic location, where cost-of-living raises and frequency of those raises varies greatly.

EEOC's Proposed Rule

In its proposed rule, the Equal Employment Opportunity Commission discussed how it would collect total number of hours worked from employers:
Consistent with the recommendations of the Pilot Study, Component 2 of the revised EEO-1 will collect the total number of hours worked by the employees included in each EEO-1 pay band cell. This data will allow analysis of pay differences while considering aggregate variations in hours. The total hours worked also will permit an analysis that accounts for periods when the employees were not employed, thus reflecting part-time work.
The EEOC seeks employer input with respect to how to report hours worked for salaried employees. One approach would be for employers to use an estimate of 40 hours per week for full-time salaried workers. The EEOC is not proposing to require an employer to begin collecting additional data on actual hours worked for salaried workers, to the extent that the employer does not currently maintain such information. Employers are encouraged to comment on this issue.
Generally, however, the initial conclusion is that requiring employers to provide the total number of hours worked would impose a minimal burden. Employers will report only data that they already maintain. The panel of HRIS experts convened for the Pilot Study reported that “total hours worked” data is maintained by almost all payroll systems. The information is available for the previous quarter, the previous four quarters, and the calendar year. For employers that outsource payroll, this variable could be added to the one-time reporting query that is written to download income data.
Source: EEOC

An employee’s total W-2 compensation also could vary—and significantly so—each year if an employee receives bonuses, commissions, or tips, or works substantial and varying amounts of overtime, says Russell.

All of this is to say that employers will be required to spend significant time and resources having to justify all the various non-discriminatory (and legitimate) reasons why employees are paid different wages. Thus, before issuing the first EEO-1, companies should do a dry run of their compensation practices in each pay band to get the kinks out of the system and identify potential problem areas, advises Bertram.

“It’s important to slice and dice the data not just in the way that you as the company think is relevant, but slice it every way a plaintiffs’ lawyer, federal agency, or judge might slice it,” says Bertram.

For example, let’s say your company just went through a merger or acquisition and goes from having 10 analysts to 400 analysts, and each one works in different departments with different job functions with annual salaries ranging from $48,000 to $200,000.

In that type of scenario, the employer will want to break down that “analyst” role by grouping employees together who do similar jobs and make similar compensation. For any given company, you’re going to find outliers, says Bertram, but the solution may just be a matter of changing the employee’s job title to a more fitting comparator job group in a similar compensation category.

Any pay analysis that a company does “needs to be done in conjunction with counsel to protect legal privilege,” says Russell.

Pay analyses aside, the new EEO-1 report would also create compliance headaches. Companies currently do not start running W-2 wages until the end of each calendar year. The snapshot of wages that will be required for the EEO-1 report, however, will be from July through September, which means companies would have to start running W-2 wages at an earlier point in the year.

For employers, particularly small- to mid-size companies, that don’t have robust HR information systems (HRIS) and payroll systems, “this is probably going to be a pretty big challenge,” says Bertram.

The revised EEO-1 also will require total number of hours worked by the employees included in each pay band. “This data will allow analysis of pay differences while considering aggregate variations in hours,” the proposed rule states. “The total hours worked also will permit an analysis that accounts for periods when the employees were not employed, thus reflecting part-time work.” The EEOC has not yet proposed an approach to deal with the reporting of hours for salaried employees, however.

Industry Response

Industry critics argue that the reporting requirements would impose unnecessary and onerous burdens on companies while providing no meaningful insight about discriminatory pay practices.

“The Chamber strongly believes that compensation decisions should not be made based on an employee’s race, ethnicity, or gender, but instead on an employee’s merit, qualifications, and contributions to his or her employer,” Randy Johnson, senior vice president of labor, immigration, and employee benefits for the U.S. Chamber of Commerce, said in a statement.

A handful of companies, however, have already started to make meaningful strides in improving workplace diversity. According to Intel’s 2015 Diversity and Inclusion Report, for example, the technology giant conducts an annual, comprehensive audit of pay in the United States to analyze its employees’ pay by gender and ethnicity.”

“In 2015, we set an ambitious goal to be the first high-tech company to reach full representation of women and underrepresented minorities in our U.S. workforce by 2020,” the company stated.

As another example, said that it assesses the compensation of its more than 17,000 employees. “To start, we have taken a sample size of men and women across the entire company and all departments—all with similar tenure, levels, and peak performance,” said Cindy Robbins, executive vice president of global employee success at Salesforce. “We found a need to adjust some salaries—for both women and men.”

“This process could take up to a year to complete, and we plan to review salaries on an ongoing basis,” Robbins said. “This will be part of our core principles moving forward. We are also implementing more rigor around adherence to our compensation structures during hiring and promotions.”

Clothing retailer Gap, web hosting company, social media site Pinterest, and real estate company Redfin are other companies that have publicly disclosed how they, too, are making meaningful efforts to expand their diverse workforce.

Now that the proposed pay reporting requirements have been published in the Federal Register, employers are encouraged to submit feedback. The deadline to submit comments is April 1.