Tax Insights

Pay Equity: How Companies Can Tackle the Gender Pay Gap

Allison Hoeinghaus, Managing Director

John Schultz, Managing Director

Emily Milligan, Senior Associate

February 15, 2020 / North America

The idea that employees performing substantially equal work should be paid equally is not new. In fact, efforts to address pay discrepancies in the workplace, and specifically the gender pay gap, have been ongoing since before the passage of the Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964. While significant progress has been made, research shows that gender-based pay disparities continue to be a problem which cannot and should not be ignored by employers.

Impact to Organizations
Companies should be invested in ensuring equitable pay practices for a variety of reasons. Not only is paying employees equally for equal work performed and addressing any biases related to pay generally regarded as the “right” thing to do, it can also protect the company from severe financial and legal ramifications associated with inequitable or discriminatory pay practices. Additionally, as more focus is placed on pay equity (as is evidenced by recent state legislation, social activism, and proactive action by industry-leading companies), there are several internal and external factors that can be negatively affected by unfair pay practices.

Current and Potential Employees
In this incredibly competitive environment for top talent, recruiting and retaining quality employees is a significant challenge for most companies. By fostering an inclusive environment through equitable pay, employers can help bring in top talent from a variety of sources and cultivate a diverse employee population. By providing an equal pay environment, this will help with retention of this talent once they have been recruited. The combination of these factors in turn drives innovation and positive employee morale.

Investors are increasingly considering social issues, such as a company’s handling of gender pay equality, in their investment decisions. Thanks to enhanced reporting tools, like the Bloomberg Gender-Equality Index, investors can easily access pay and policy information relating to gender equality. As a result, some activist investors are pushing for companies to address and disclose gender-based pay disparities within their organization.

Mergers and Acquisitions
The due diligence phase of merger or acquisition activity involves an intensive investigation into each companies’ operations. Everything, including pay practices, is subject to close scrutiny during this process. Diligence is essential because it can help reveal deficiencies or liabilities that will be absorbed with the merging or acquired entity, such as existing gender pay disparity across one or more groups of employees. Even if each entity separately pays employees equitably, inconsistent pay practices could result in disparities in the combined employee population. Careful compensation analysis should be performed prior to integration to avoid demoralizing employees and inviting legal issues in the future. Performing this investigation prior to completing the transaction will help ensure a smoother integration for affected groups or possibly reflect cultural incompatibilities between the organizations.

Legal Considerations
In the United States, a lack of legislation at the federal level has resulted in an inconsistent patchwork of varying state regulations, making equitable pay compliance difficult for organizations with employees in multiple states. Both California and New York, for example, have recently passed legislation to update the previous laws related to equal pay, closing loopholes used by companies to justify gender-based pay discrimination and clarifying acceptable justifications for pay disparities (such as seniority or merit systems, or education). Additionally, a number of states have passed regulations discouraging employers from tying future pay to a candidate’s salary history (which may have been previously affected by bias) – for example, in New York it is now illegal for potential employers to inquire about a candidate’s compensation at a current or previous employer during the hiring process…

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