Pay Transparency Laws & Growing EPL Exposures

4 hours ago
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Pay Transparency Laws and Growing EPL Exposures

Pay transparency laws refer to regulations that require applicable employers to disclose certain information regarding employee compensation – namely, salary ranges and benefits packages-in job postings for open positions, amid promotions and transfers, and upon request from existing staff. The United States has seen a rapid expansion of these laws over the past few years, with an increasing number of jurisdictions implementing them.

While pay transparency laws can certainly help promote pay equity and reduce potential genderand race-related wage disparities, they also pose additional employment practices liability (EPL) exposures. These laws aren't solely an HR matter, but rather a corporate governance issue that can leave noncompliant businesses and their leadership teams with costly litigation, insurance challenges and lasting reputational damage.

As such, it's vital for businesses to better understand these laws and how to reduce their related EPL exposures. This article provides an overview of pay transparency laws, explains their impact on the EPL space, and outlines related mitigation and governance strategies.

Pay Transparency Laws Explained

A growing number of states and cities have adopted pay transparency laws. These laws vary across jurisdictions, but core requirements include:

Salary and benefits disclosures - These laws generally require employers to clearly state the minimum and maximum salary or hourly wage range for all job postings, as well as benefits packages for open positions. Employers must also share this compensation information when workers are transferred or promoted to new positions and upon request.
Retaliation protections - Under these laws, employers may be prohibited from retaliating against employees who openly discuss their pay or other compensation information.
Salary history bans - In some jurisdictions, these laws may also restrict employers from requesting salary history from job candidates to determine their future pay.
Pay reporting - Under certain circumstances, these laws may require employers to periodically report employee compensation data to regulators.

Employers must comply with pay transparency laws in any jurisdiction where their employees work. This means that employers operating in multiple states or with remote employees stationed across the country may face a patchwork of regulatory requirements, creating an increasingly complex compliance landscape.

Impact on the EPL Space

In addition to increasing compliance demands, expanding pay transparency laws have provided greater visibility into employers' pay practices, exposing a variety of previously concealed compensation data. This has helped shed light on prolonged pay disparities, inconsistent compensation structures and patterns of employment discrimination among businesses and their leadership teams, increasing the likelihood of costly litigation. Common forms of pay transparency litigation include:

Discrimination and retaliation charges - Disclosure of historical compensation data may provide evidence of gender- and race-related pay disparities, prompting former and current employees to file discrimination charges against businesses and their executives. If current staff face adverse employment actions as a result of discussing compensation information or calling out pay disparities, they may allege retaliation.
Class-action lawsuits - When employees compare compensation data across different job roles and departments and identify repeated pay disparities, they may come together to file class-action lawsuits against businesses and their leadership teams. A key example of such litigation is a collective wage discrimination lawsuit, in which a business or its board members are sued on behalf of a large group of employees who reported similar pay disparities.
Third-party allegations - Besides litigation from former and current employees, businesses and their executives may also encounter lawsuits from job candidates who file pay transparency disputes. This third-party litigation primarily stems from candidates alleging that salary disclosures were missing from job postings or that the compensation information they were provided for an open position was misleading or otherwise inaccurate.

When businesses and their leadership teams encounter pay transparency litigation, this may trigger associated EPL claims. Depending on the nature of these claims and specific policy limits and exclusions, businesses may receive only partial coverage for any legal defense costs, settlements and judgments stemming from this litigation. Even if businesses have ample coverage for these losses, repeated EPL claims, especially those involving costly payouts, may result in heightened premiums, restricted capacity and greater underwriting scrutiny going forward.

Complicating matters, businesses and executives that fail to comply with applicable pay transparency laws may face severe regulatory penalties and fines, which are generally excluded from EPL coverage. This can exacerbate out-of-pocket costs and place significant financial strain on affected businesses and their leadership teams. What's more, pay transparency litigation and associated regulatory violations are often highly publicized, attracting negative media attention and diminishing stakeholder confidence. This can leave businesses and their board members with lasting reputational damage, potentially threatening continued customer loyalty and overall financial stability.

Mitigation and Governance Strategies

Fortunately, there are several steps businesses can take to avoid pay transparency litigation, violations and related EPL claims:

Strengthen compensation governance. Businesses should consult legal counsel to maintain compliance with applicable pay transparency laws in their respective jurisdictions, including locations where they recruit and employ remote workers. Corporate leaders should also be well-versed in these laws and actively participate in creating a structured framework of standards and processes for determining fair employee compensation. This may entail conducting routine pay equity audits and establishing defensible salary bands, ultimately ensuring compensation aligns with corporate strategy, drives employee performance and minimizes legal exposures.
Enhance pay transparency controls and culture. Businesses should also train management on pay transparency laws and their related responsibilities. In particular, managers should be educated on leading payrelated discussions, conducting appropriate hiring practices and maintaining consistent compensation documentation. Managers should also be strictly prohibited from taking adverse employment action against employees who discuss their salaries or raise concerns about pay disparities, thereby fostering open dialogue and a positive company culture.
Ensure proper coverage. Having adequate EPL insurance can make all the difference in helping businesses and their leadership teams minimize the financial fallout from pay transparency litigation. Businesses should work with trusted insurance professionals to closely review their EPL policy scope and exclusions, adjusting coverage limits and securing specialized solutions as needed to reflect the latest employment litigation trends. Key topics to address when making policy decisions include wage and hour exclusions, defense cost provisions, and coverage for pay equity and third-party employment claims.

Conclusion

Looking forward, pay transparency laws will likely continue to expand across the United States. As a result, it's vital for businesses to understand the potential implications of these regulations and take action to reduce their related EPL exposures. By raising awareness of pay transparency and implementing effective mitigation and governance strategies, businesses can better protect their leadership teams and promote a fair compensation environment.