What Accountants Need to Know About Pay Equity in New Jersey: Discovering and Addressing Pay Disparities
When the Diane B. Allen Equal Pay Act became law on July 1, 2018, New Jersey became the state with the most progressive pay equity statute in the nation. In the year since, employers and their trusted advisors have turned their attention to the daunting task of understanding and complying with the legal mandates of this sweeping pay equity legislation. Here’s a brief look at the Equal Pay Act and an overview on how to identify and address pay disparities to avoid costly litigation.
Pay Equity in New Jersey
New Jersey’s Equal Pay Act makes it unlawful for an employer “to pay any of its employees who are members of a protected class” at a lower rate of compensation for “substantially similar work” performed by employees who are not members of the protected class. Going far beyond the federal Equal Pay Act (EPA), which simply provides equal pay protections based on gender, New Jersey’s law covers all 17 protected classes recognized by the state’s anti-discrimination statute. Consequently, the New Jersey law extends pay equality protections to race, age, religion, national origin, marital status and pregnancy, among many other protected classifications. Absent an established seniority or merit system, New Jersey employers may only justify pay disparities if the differential is based on one or more legitimate, bona fide factors (like training, education, experience or the quantity or quality of production) and can demonstrate that those factors are job-related with respect to the position in question and based upon a legitimate business necessity where there is no alternative business practice available.
Given the far-reaching financial implications of pay equity mandates in New Jersey — including the potential for costly litigation — employers have taken steps to protect themselves by conducting compensation audits to identify and remedy pay disparities.
The Pay Equity Audit
Pay equity audits can be very beneficial to organizations provided they are done right. Here are some key concepts and tips for conducting or managing a successful pay audit:
- Plan ahead. It is important to identify the purpose or goals of the audit, get buy-in from senior management and put together the right team. Critical members of the team include human resources personnel, finance or payroll personnel, legal counsel and sometimes an economist or statistician to build statistical models and the pay analyses.
- Examine pay practices and policies. Taking time to examine or re-examine historical and current pay practices and policies is another key step, both for purposes of establishing the correct methodology for analyzing pay and understanding and explaining pay disparities.
- Collect relevant data. The relevant data for analyzing pay ordinarily includes the following for each employee included in the analysis: job title, department, job grade or level, hire date, gender (and, depending on the scope of the audit, other protected class identifiers such as race), job location, hours worked over the past 52 weeks, base wage or salary, overtime pay and bonuses or other forms of compensation.
- Determine employee performance. The next step is to determine who performs “substantially similar” work so that the data analysis is reviewing comparable positions.
- Analyze the data. The goal of data analysis is to determine whether men and women (or other classes of protected employees) within the group are paid equally. The methodology used to make that determination can vary, depending upon the size of group and the complexity of the compensation scheme.
- Assess differences. Rarely are employees who perform comparable work paid exactly the same amount. A differential in pay is justified if the employer can demonstrate that the difference is based on: a seniority system; a merit system; a system which measures earnings or quantity or quality of production; or another bona fide factor that is job related, based on business necessity, for which there is no alternative business practice that would serve the same business purpose without producing a wage differential.
- Take corrective action. Where pay differentials cannot be explained by one or more lawful justifications, steps should be taken to remedy the pay disparity. In most instances, this will require adjustments to compensation, although sometimes restructuring positions to better align responsibilities with pay is a viable (and less-costly) alternative.
CPAs, accountants, consultants and compensation professionals can play an essential role when it comes to protecting an organization from expensive pay equity litigation and ensuring employees are paid equitably. Their intimate knowledge of an organization’s payroll practices and finances can provide invaluable assistance and insights when a company decides to conduct a privileged pay equity audit to identify and address pay disparities.
This article appeared in the September/October 2019 issue of New Jersey CPA magazine. Read the full issue.