On January 29, President Obama announced a new executive action, beginning in 2017, that will require employers to submit information to the Equal Employment Opportunity Commission about employee pay broken down by gender, race and ethnicity. The executive action amends the current EEO-1 form to add 12 pay bands to each general job category contained in the form. The pay disclosure will impact all U.S. employers with 100 or more employees.

The President stated that the new disclosures are intended to increase the transparency of employer pay practices. He noted persistent gaps in pay, especially those based on gender. New laws intended to address employer pay practices have made no progress in Congress, and President Obama decided to use executive authority to require employers to disclose their pay information. The clear intent of the rules is to push employers to address pay discrepancies, or in the alternative to provide information that will allow the federal government to pursue claims based on such gaps.

The new requirement breaks each of the 10 EEO-1 job categories into 12 pay bands. Employers will list the number of employees in such bands according to gender, race and ethnicity. Pay is defined as total W-2 compensation. This may create a significant administrative burden for employers, because the required pay information is not calendar year based, but instead requires information on the previous 12 months using payroll periods between July 1 and September 30.

This methodology may result in disclosure of information that does not accurately reflect actual employer pay practices. The proposal calls for projection of part-time and partial year employees over a full working year, but this will not take into account the impact of partial year employment on incentive compensation. The pay bands also do not take into account the multiple variables that affect pay, such as seniority, education and market demand, and therefore may result in “false positives” indicating pay bias where none actually exists.

The EEOC indicated that it will use this information to create compensation benchmarks based on industry and metropolitan area. The agency could initiate investigations and litigation based on disparities suspected from the pay information. While the EEO-1 information generally is not subject to public disclosure, the pay disclosures may be discoverable from the employer in litigation.

When combined with new laws in many states addressing pay inequities, these disclosure requirement should prompt employers to focus on their internal pay practices and pay equity. Employers should analyze their pay practices to identify and correct discovered problems. The pay equity analysis identifies the factors that go into pay determinations, and can be used to defend claims of pay discrimination based on unreliable aggregate information. Parker Poe’s Employment team can assist employers with the development and implementation of such pay equity analyses.