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Market Factors Do Not Adequately Explain Salary Differences For Male and Female Employees

    Client Alerts
  • May 22, 2009

The new Lily Ledbetter Fair Pay Act has focused employer attention on pay disparities based on gender, and the removal of the statute of limitations on the occurrence of the alleged discriminatory salary decisions.  Last week in Drum v. Leeson Electric Corp., the Eighth Circuit Court of Appeals reminded employers of the dangers of paying employees of opposite sexes different salaries for the same work.  In this case, the plaintiff was a female human resource manager who made $41,500.  She was promoted to a position with a slightly higher salary, but learned that her male replacement in the HR position started at $62,500.  She sued, claiming violation of Title VII and the Equal Pay Act.

In its defense, the employer claimed that market salary requirements prompted it to pay the male replacement a higher salary.  It could not locate a suitable hire at the salary paid to the plaintiff.  The Eighth Circuit noted that under Title VII and the EPA, the employer must show that the difference in compensation between employees performing equal work is based on a legitimate reason other than sex.  While the employer demonstrated the reasons for hiring the male employee at a higher salary, this does not explain why the plaintiff was undercompensated for the same job.  The defendant did not demonstrate reasons other than sex as to why it underpaid the plaintiff.

In other words, taking advantage of a female employee’s lack of awareness and acceptance of an undermarket salary is not a legitimate business reason that would defeat an equal pay claim.  While employers may save money in the short run by underpaying female employees, this practice ties their hands and creates substantial legal risk in the event that they later are forced to pay a replacement employee market rates.

These market differences can be discovered and addressed during the course of an internal salary review.  In light of Ledbetter, many employers are performing such reviews (under the direction of legal counsel to preserve privilege) and proactively addressing disparities before they rise to the level of risk demonstrated by the Drum decision.