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Compliance Pitfalls Arise in Negotiations on Starting Salaries

October 16, 2008
Related Topics: Compensation Design and Communication, Policies and Procedures, Workforce Planning, Featured Article, Recruitment
A recruiter brings in a highly qualified white male candidate to interview for one of multiple openings in a hard-to-fill position.

The candidate negotiates aggressively for a starting salary that exceeds the initial offer, citing a generous total compensation package from his current employer and competing offers from other firms. The new employer caves, meets the candidate’s demands and seals the deal. The employer also hires equally qualified female and black candidates who accept the original starting salary offer without negotiating.

This scenario, played out at hundreds of companies where a particular skill set is in short supply, carries the potential for gender- and race-based wage discrimination charges. The risk of charges stemming from starting salary disparities or reaching back to those disparities is rising as the economic downturn deepens, new legislation moves through Congress and the federal enforcement agencies respond to a recent government report that calls for greater scrutiny of pay practices.

The current economic downturn sharpened just as the Government Accountability Office released a report in August that strongly recommends greater equal-pay enforcement actions by the Equal Employment Opportunity Commission and the Office of Federal Contract Compliance Programs. Sponsors of several bills pending in Congress seized on the GAO report to renew their calls for the Senate to pass new bills on pay discrimination that have already cleared the House.

These bills include provisions that increase penalties for Equal Pay Act violations, prohibit employers from retaliating against employees who share salary information and extend the time frame for filing wage discrimination charges. The extended time frame will facilitate efforts by the enforcement agencies and the courts to reach back into starting salary data for evidence of discrimination. In addition, reinforcing the right to discuss salary information may increase pay comparisons and bring more starting salary disparities to light.

"The bills pending have bipartisan support," says Debra Friedman, an employment attorney at Cozen O’Connor in Philadelphia. "If the bills pass, this should be a wakeup call for employers because pay decisions, including starting salary decisions, will come under greater scrutiny."

Although the bills pending before the Senate target gender-based pay discrimination, disparities in starting salaries based on race or national origin are also prohibited and pursued by the EEOC and OFCCP. The EEOC oversees the employment practices of more than 600,000 private and public sector employers. The OFCCP oversees the employment practices of nearly 90,000 private sector employers that have contracts with the federal government.

Consistent negotiations
As the risk of discrimination charges rises, consistency is the key to maintaining compliance.

"There is nothing per se unlawful about a recruiter setting a salary based on the negotiating leverage of a candidate," says Richard Tuschman, member of the labor and employment and litigation practices at Epstein Becker & Green in Miami. "If a male candidate is able to bargain for a higher starting salary, it may be permissible to yield to that, but the employer must ensure that the negotiations are done consistently with all candidates."

As an example, Tuschman describes a scenario where a candidate says he is already earning $100,000 a year and needs $120,000 to change jobs, but an equally qualified female candidate doesn’t press the employer and accepts $115,000.

"That may be permissible," he notes. "But if the employer accepts the male candidate’s demands and grants the higher starting salary but then tells the female candidate that the starting salary is nonnegotiable, that presents a problem."

Tuschman cites a 2007 EEOC case that arose when a male employee used two outside job offers to successfully press for a pay raise. When female employees in the same position became aware of this and asked for raises, they were told the employer "doesn’t play that game."

"The employer did not have a defense because of the inconsistent response to the male and female employees," Tuschman says. "The principle is the same with starting salaries."

Also, if the employer relies on a candidate’s college degree or another qualification to justify a higher starting salary when a degree or the qualification is not required for the job or relevant to it, the potential for a discrimination charge appears.

"The employer must state that a college degree or another qualification is required or preferred and it must be relevant to the work," Tuschman explains.

If employers grant special consideration and higher starting salaries to candidates because they meet preferred qualifications, that treatment must be consistent.

"Employers must exercise caution, but the law allows some latitude," Tuschman says. "The EPA allows employers to defend unequal pay for any factor other than sex, so in most cases the employer can justify differences. But those differences can lead to charges down the road if the employer does not make appropriate adjustments to pay to reflect the employee’s contributions to the organization. Pay must be commensurate with the contribution."

Disparities in starting salaries can balloon over time as merit pay increases inflate the original offer. Differences in sign-on or hiring bonuses do not fold into base salaries but can be evidence of discrimination in total compensation calculations.

Tuschman emphasizes that pay discrimination cases can become quite complicated. If a discrimination charge is filed, the court may scrutinize the circumstances under which a male employee commanded a higher starting salary.

"It might be deemed justifiable in a tight labor market where demand is very high," he says. "But a safer approach is to bring the pay levels for female employees into line over time."

Prior salary
With respect to a candidate’s prior salary, the EEOC takes the position that an employer can’t rely solely on past salary to justify a higher or lower starting salary, because that would simply perpetuate past discrimination, according to Tuschman. But if a candidate has other offers and a higher past salary, courts have accepted this as a defense for paying a higher starting salary.

"The facts in each case are critical," he notes.

Friedman cautions employers to be careful about relying solely on the candidate’s prior salary in setting pay. If the prior salary is below market, it may be a sign of wage discrimination.

"Take a look at your internal market of incumbents for the position and review external benchmarks for wages for the job. Your most important market for starting salaries is your internal market, and employers should set starting salaries in relationship to that level."

Employers must carefully review the salary range for each position before new hiring begins.

"If a candidate is negotiating outside that range, step back and evaluate your possible reasons for going out of that range," Friedman advises. "If the candidate can argue convincingly that a higher salary is warranted, then the employer can consider that possibility and the justifications for it."

If the justifications are weak, the courts and enforcement agencies may believe that the company is trying to mask gender discrimination, Friedman warns.

"Courts are generally not receptive to the idea that a company had to grant a high offer to land a candidate. The courts look at other starting salaries, and it is difficult for the employer to explain why it had to raise the salary for one candidate but not another."

Justifying the disparity may be particularly difficult if a male candidate negotiates a starting salary that is out of the salary range.

"Even if the male candidate negotiated a higher point within the range than a female candidate, I don’t have great comfort that the employer’s actions would be defensible or permissible," Friedman says.

The tight-labor-market defense may work if the case involves starting salaries and incumbents’ salaries. The employer can argue that labor market conditions have changed since the incumbents were hired and new candidates command higher starting salaries. In this scenario, however, all new candidates must be offered the higher starting salary for the argument to hold, Friedman notes.

One obstacle to salary discrimination charges is the 180-day time limit for making a complaint to the EEOC. By the time a new employee is on the job long enough to compare salaries with other employees, the time limit has lapsed.

"Under the EPA, the time limit is longer but the range of claims that can be made is narrower," Friedman says.

The legislation now pending in the Senate would expand the time frame and prohibit employers from retaliating against employees who divulge salary information.

"Employees generally don’t discuss wages, and employers often discourage such discussions," Friedman notes. "It is important to review company policy so that the exchange of salary information is not discouraged, and employers must be aware that prohibiting such discussions is illegal."

The GAO report and the pending legislation may influence initiatives at the EEOC and the OFCCP.

"The OFCCP has been targeting systemic wage discrimination and the EEOC may step up its efforts," Friedman notes. "Employers should be aware of this."

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