Understanding Compensation Laws
There are many federal and state employment laws that regulate legal compensation practices. Some laws specify minimum compensation levels, such as the Fair Labor Standards Act (FLSA), which requires employers to appropriately classify employees and pay minimum wage and overtime rates accordingly. Other laws regulate the factors that employers can use when making compensation decisions, such as the Equal Pay Act and Title VII of the Civil Rights Act.
According to the U.S. Department of Labor, the Equal Pay Act of 1963 requires that men and women performing substantially equal work be paid equally. With respect to this law, equal work refers to the equality of tasks, effort, necessary skills, levels of responsibility and accountability, and working conditions. This law does not imply that men and women performing work of equal value be paid equally; it only applies to the nature of the work being completed.
Legally Permissible Pay Differences
While the Equal Pay Act and Title VII of the Civil Rights Act require that men and women be paid equally when performing substantially equal work, there are exceptions to these two laws. If an employer makes compensation decisions that are based on factors other than an employee’s sex, the employer is not violating these acts and is not committing gender discrimination. Such factors can include compensation systems based on seniority, merit, quality and quantity of productivity, or any other system based on a factor other than sex.
According to the Equal Pay Act, a company is legally allowed to offer different compensation for a man and a woman who perform substantially equal work if the compensation strategy is based on:
- standardized performance reviews
- years of service with the company
- years of prior experience in a highly similar position
- customer praises or complaints
- customer satisfaction with product or service quality
- productivity rates
- production efficiency and resourcefulness
- value or worth to the company
- achievement of target goals or milestones
- a broad banded pay system that evaluates employees on different criteria to determine where to place an employee within the pay range
- work location: teleworker vs. commuter or geographic placement (cost of living adjustment)
- working conditions: levels of supervision, degree of accountability for errors, or frequency of interaction and exposure with clients
- overall performance
Evaluating Compensation Strategies
Once a solid understanding of compensation laws has been achieved, it is critical for employers to evaluate compensation strategies to determine whether they are legal and based on factors other than an employee’s sex. The best way to identify legally justifiable compensatory factors is to:
- perform a thorough job analysis of each position within the company
- write an effective job description that outlines the basis for compensation decisions
- develop a standardized method of performance and productivity appraisal
The purpose of a job analysis is to identify all aspects of a position in hopes of identifying similarities and differences among positions, which can be used to develop effective job descriptions, reasonable performance and productivity expectations, and equitable compensation strategies. Furthermore, a job analysis enables an employer to determine whether a company is justified in offering different pay incentives, specifying educational and/or experiential requirements for employment (which ultimately lead to greater or lesser pay), and evaluating a job’s worth to an organizational structure, goals, and objectives.
The aspects to evaluate when conducting a job analysis include:
- required tasks
- location of work
- working conditions
- available resources
- interaction with other employees and/or customers
- required skills and abilities
- required education and/or experiential knowledge