Compensation Equation Gets More Complicated

Businesses would be wise to ask experts about their practices in light of new state laws.

Determining appropriate employee compensation can be a challenge on a good day, but it’s gotten significantly more complicated this year with New Jersey’s enactment of an equal pay law and guaranteed sick leave.

Now more than ever, businesses may want to consider consulting with an attorney or other expert to help them determine whether their pay and leave policies comply with the new laws. There are penalties for violations of the new laws, and the recompense specified for discriminatory pay practices can be especially onerous – triple the amount of the difference between what the employee was receiving and what the worker should have been getting.

Equal Pay

Dina Mastellone, chair of the Human Resource Training & Audit Programs Group and a partner in the Employment Law and Litigation Practice Group at Genova Burns, calls the passage of the Diane B. Allen Equal Pay Act “a game changer.” The law took effect July 1.

“All businesses must look at their existing pay practices to ensure compliance,” Mastellone says. “If, after performing their pay practice review, there is a pay differential, unfair or discriminatory pay differences must be immediately corrected. … This may include across-the-board pay increases, because decreases in salaries are not permitted under the new law.”

Michael A. Shadiack, partner and chair of the Labor and Employment Group at Connell Foley, says businesses should do a thorough analysis of compensation data to determine whether there are any pay gaps. While most often mentioned as a law to ensure women are not paid less than men, it affects a host of other protected classes based on race, national origin, age, sexual orientation, pregnancy, gender expression, and disability.

“You want to make sure the biases of the past do not get perpetuated,” says Marianne C. Tolomeo, another partner in Connell Foley’s labor group. “Because this is such a wide-reaching law and the penalties are so high, it makes it that much riskier.”

The law still gives employers some discretion in compensating workers, but different rates are permitted only if the employer can demonstrate that the differential is based on a seniority system, a merit system, or on such other legitimate factors as training, education, experience or the quantity or quality of production. The application of these factors can be tricky, though, which is why it would make sense to speak to a lawyer, and soon, about equal pay matters.

“We can perform pay equity audits, or we can counsel our clients in how they can perform their own self-audit, in order to evaluate the lawfulness of the client’s pay practices, minimize their exposure to an employee claim, and ensure they are compliant with federal and state law,” says Ben Widener, chair of the Employment Law Group at Stark & Stark. “We can review and evaluate their pay practices, compensation packages, benefits offered and any employment compensation agreements the client has with its employees and can identify any necessary corrective measures that should be implemented by the employer.”

Job Description & Performance Reviews

One way that employers can help ensure their compensation practices withstand scrutiny is to make sure they have written job descriptions for all positions and conduct written performance reviews so they can justify why one worker may be paid at a higher rate than another.

“What do your employees do? What are you requiring of people? What are you compensating people for?” Tolomeo says. “If this group gets paid more, is it for doing a more prestigious job?”

“The job description should be the first document you prepare, even before you advertise for a position,” Shadiack adds. “And make sure you properly classify the position.”

Having specific job descriptions with goals can help employers compensate those workers who are the best performers in additional ways, such as giving bonuses and other incentives based on how well employees meet their targets.

“That’s one way to differentiate,” Shadiack says. “Go beyond base pay.”

Mastellone says annual performance reviews are critical to being able to defend compensation decisions.

“Annual performance evaluations play a vital role in communicating, documenting and justifying employee compensation decisions,” she says. “The failure to adequately and honestly communicate reviews will doom an employer’s ability to support any employment actions or determinations. It also can be used against the employer to demonstrate that the employer’s actions were based on an illegal reason, such as discrimination.”

Widener agrees, but says annual or even semi-annual evaluations can do much more than help an employer justify compensation.

“It promotes communication between employer and employee so both are on ‘the same page,’” Widener says. “It is a tool by which both employer and employee can provide useful feedback to each other about expectations and job performance. The review, if done correctly, can facilitate better working relationships between employer and employee. Importantly, the review serves to provide a written record of the employee’s performance, for better or worse. In all of these ways, the performance review contributes to the employee’s professional development.”

While objective performance reviews would seem to be common sense, Tolomeo says that not all employers ensure that these occur.

“There are still a lot of subjective evaluation efforts taking place,” she says. “Someone likes this person more so he gives that person a bonus that is a little more than others get. If there is not a good, documented reason for the higher bonus, that’s a problem.”

In cases like that, it helps for the supervisor to think about why he likes one employee better than another, Tolomeo continues. It may boil down to one worker being more enthusiastic, more willing to jump in and help out. Those are the kinds of qualities that should be documented in a review and can be used to justify compensation differentiation.

Shadiack says one of the common problems with reviews is that supervisors doing the evaluations “lack the training” to properly evaluate workers and document their evaluations.

“We say, ‘You have to do these evaluations,’ but we don’t give any guidance on how we should evaluate performance,” he says.

Employers should know that there are many ways, beyond salary, to compensate workers and improve employee morale and some of these cost very little.

“Studies show that incentives and rewards lead to higher job satisfaction and retention rates as well as an increase in employees’ sense of satisfaction with their lives in general,” Mastellone says. “Incentives and rewards, other than pay – such as offering flexible work schedules – allow employees to maintain a healthy work-life balance. … Reducing the workweek from 40 hours to 32, offering free snacks, catering lunches, or allowing time off to engage in volunteerism for organizations that employees are passionate about, are other excellent incentives. A company in New Zealand recently enacted a four-day workweek and found that its employees were happier, more focused and produced the same amount of work.”

Sick Leave

Employers still have leeway in using generous leave time or paid time off as another incentive, but they must make sure that they at least comply with the new paid sick leave law that takes effect October 29.

Under that law, all businesses must give their full- and part-time workers one hour of sick leave for every 30 hours worked, to a maximum of 40 hours, or five full days, per year. A company can credit workers with their sick time at the beginning of the year, but as it is earned throughout the year. Employees can use the time: for their own illness or that of a family member’s; to attend a child’s school-related conference or function; or for other limited reasons. Employers can offer to pay workers for unused days at the end of the year or allow them to carry over some or all of their unused sick time, up to 40 hours. Workers do not receive pay for their unused days when they leave a business.

“The paid sick leave law has new record-keeping requirements for employers who have not already been tracking paid sick time and accruals, which must be tracked and maintained for at least five years,” Widener adds.

There can be some technicalities to making sure a paid time off policy complies with the new law, so it may be wise to have a lawyer review specific programs to make sure they do not run afoul of this new guarantee.

Keeping up with changing state and federal laws can be particularly challenging for smaller businesses that don’t have the same kinds of resources to be able to afford legal reviews. But the price can more than pay for itself if it saves a business from a state probe and possible fines or penalties for violating the law.

“We work closely with owners of small businesses, as well as managers and supervisors, to avoid costly human resource errors in order to protect their business, especially in avoiding violations of wage and hour laws,” Mastellone says. “Employment-related lawsuits can be costly, and small and large business owners alike need to put effective and compliant HR policies in place to protect them. We find that our clients value our partnership to assist them in hiring, retaining, managing and growing their workforces so they can focus on their customers, products and services and achieve their goals and thrive.”

Widener has a similar philosophy: “We recognize that with small businesses, the officers of the company often wear many hats, so we help our small business clients by taking on as much (or as little) of the human resource, legal and employment-related work as they need so they can focus their energy and attention on their business.”

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