Practical Advice to Address the Lilly Ledbetter Fair Pay Act

One of President Obama's first official acts was to sign the Lilly Ledbetter Fair Pay Act. This Act has unleashed a tsunami of anxiety and defensive reactions over concerns about claims based on alleged long past discrimination in the workplace. Here are the facts without the hype.

Q: Did the Lilly Ledbetter Fair Pay Act ("LFPA") change the substantive law of discrimination?

A: No. The legal standards and legal analysis under the various anti-discrimination statutes – Title VII, ADEA, ADA, Rehabilitation Act – which were applied before the LFPA, continue unchanged.

Q: What did the LFPA change?

A: It changed the statute of limitations period (the time plaintiffs have in which to file a lawsuit) in so-called "pay practices" discrimination claims with the EEOC or federal court. Prior to the LFPA, the statute of limitations began to run when the discriminatory act-for example, an evaluation or a failure to promote- occurred even if the "effects" of the discrimination were not felt within the limitations period. Now if an employee can identify a discriminatory event or practice which was in effect or which affected the pay she received during the charge filing period (300 days in most states), the employee can file a timely charge of discrimination.

Q: Is there a simple way to describe this statute of limitations issue?

A: Yes. Today, each paycheck must be considered as a potential new act of discrimination. Here is why:

As you may recall, Lilly Ledbetter allegedly received a substandard evaluation and substandard pay increase one year because she had rejected a manager's sexual advance that year. Since her employer's pay practice was to grant increases based on a percentage of the prior year's salary, the effect of this alleged discriminatory event was felt in each paycheck she received from that day forward. When Ledbetter sued many years later, her case was dismissed because it was filed untimely (i.e., outside the statute of limitations). Today, the LFPA would allow Ledbetter to sue even though in her case the substandard and allegedly discriminatory evaluation was twenty years old.

Q: What should employers do now?

: Employers, first, must decide whether changing current compensation practices or amounts that might be affected by a past discriminatory act is possible or practical at the present time. Conducting an investigation, determining that discrimination is present, and then doing nothing is a recipe for a substantial punitive damages award.

Employers who are willing and able to correct pay practices that result in pay differentials affecting a particular employee or group should conduct an analysis of pay rates/salaries using the statistical/analytical software adopted by the EEOC or a comparable software program. At a minimum, pay rates/salaries should be analyzed based on sex, age, race, religion, national origin or disability, to determine if a prima facie case of discrimination is present.

Q: What should be done if the statistical analysis suggests discrimination is present?

A: Employers have two choices to reduce or eliminate liability. One choice is to determine if a defense to the prima facie case of discrimination exists. This is determined by performing a multi-regression analysis (a statistical analysis) of affected personnel. The purpose of a regression analysis is to determine if a non-discriminatory reason for the pay disparity exists. Even if a non-discriminatory reason exists, because the employer's pay practices fall below the threshold used by the EEOC, the employer remains vulnerable to a claim of discrimination. If the employer cannot determine a non-discriminatory explanation, it must make changes in the affected employees' pay. Once the adjustments are made, the Employer remains vulnerable to a claim of discrimination for a further 300 days, in most states.

The second choice is to simply adjust individual(s) pay rates/salaries upward to eliminate the disparity. This tactic has the advantage of avoiding an EEOC suit since the EEOC uses its analytical model as its threshold. This pay adjustment can be done immediately or in several discrete steps. In the latter event, the statute of limitations remains open until the 300 days after disparity is eliminated in its entirety.

A third option is to adopt a lockstep wage with an annual bonus compensation model. Employees under a lock step wage program cannot prove discrimination in annual pay under the EEOC's statistical model because no pay disparity exists. Performance is rewarded under an annual bonus. Claims that any particular annual bonus was discriminatory expire within 300 days of bonus award in most states. This third option significantly reduces the prospect of LFPA litigation.

Q: If an employer does an analysis and takes remedial action, does that end future liabilities associated with its pay practices?

A: Unfortunately, no. Remember the substantive law was not changed by the LFPA. If a supervisor performs a discriminatory evaluation after the employer conducts its analysis, liability under LFPA begins to accrue anew. Maintaining current pay practices requires a robust compliance and audit program to ensure LFPA liability is not created with each evaluation and wage increase cycle.

Q: How can an employer avoid future liability?

A: The academic's answer is: "Don't discriminate."

Employers essentially have two options. One is to create a pay/compensation system and an evaluation process with elaborate checks and balances followed by a yearly statistical analysis, and corrective pay adjustments if discrimination is found. The second option is to adopt a pay/compensation system of fixed pay grades and salary add-ons (of varying durations), a so-termed "lock-step" model coupled with an annual performance based bonus. Neither system will eliminate the threat of lawsuits completely or completely eliminate liability. The advantage of the second option is that liability will exist for only 300 days in most states, as the discriminatory act is the annual performance bonus. As a consequence, the cost of defending a pay discrimination lawsuit challenging a lock-step/annual bonus pay system is less, as discovery is much more limited.

Q: Is there any advantage to retaining an attorney rather than a consultant to assist with the statistical analysis?

A: Retaining an attorney to investigate facts and prepare legal advice puts the attorney-client privilege into play. While the application of the attorney-client privilege is not guaranteed, not hiring an attorney will guarantee that any reports or advice will not be protected.



Q: Have an employer's recordkeeping obligations changed due to the passage of the LFPA?

A: Perhaps. As an evidence (or as a risk management) matter, an employer may decide to preserve the records of former employees (or at least the records relating to decisions affecting pay, such as promotions and evaluations) until all of their comparables quit, retire, or terminate. Remember the actual case of Lilly Ledbetter – her claim was based on a twenty-year old evaluation. If sued, an employer may have to explain the basis for an evaluation and a pay increase or a promotion decision which occurred many years earlier. A review of the Company's Document Retention Policy as applied to pay and compensation, and promotion decisions is certainly in order.