What exactly is Equal Pay?
A reader sent me the following question
Is “equal” pay – the right ideal? Why not “equivalent” pay – for equivalent jobs? How do we judge equality? Will there be a margin of error and if so what will be the repercussions? We should also think from the perspective of a small business and helping it survive.
Why is it not equivalent pay?
Equal Pay is a bit of an umbrella term. It’s how this movement is known. But it’s not an precise term, and in reality, while we strive to achieve equal pay, that does not mean the exact same amount for every worker.
The EU Pay Transparency Directive defines it as equal pay for equal work or work of equal value. This definition gets us closer to want we want to achieve: if work equally contributes to the organization, then pay should be equal as well.
The reason why we use “equal” and not “equivalent” is simple: Equal has a history of being used in legal and policy contexts, particularly in the context of laws and regulations aimed at addressing gender-based pay disparities, such as Equal Pay Acts. It has become the standard: a widely accepted and commonly used term when we talk about pay equity and anti-discrimination efforts in the workplace.
How do we judge equality?
It’s actually not hard to establish what equality means, but it is a bit of work. You must establish a gender-neutral job evaluation and classification system.
Most organizations determine the value of a position through a combination of the following job requirements:
- Skill, Effort, and Responsibility
- Job Content
- Qualifications and Experience
- Working Conditions
- Contribution to the Organization
You don’t have to use all of them, and you are free to add your own, as long as you end up with an objective and transparent system.
You might want to keep the comparison fairly high level, but when it comes to the EU Pay Directive, you’ll need to explain how you objectively determined the absolute and relative value of each job. This means you’ll need to use an official scoring methodology like a point factor method. With this method, you assign points to each of the requirements. The total score determines the value of a job. Jobs with equal scores are considered to be of equal value. It’s obviously a bit more complex than that, but it’s a method that can be explained easily internally. It also stands up in court.
Will there be a margin of error?
Yes. The pay gap is never 0, unless you have one function and everyone earns the same amount. There are some companies that do that, but it’s not the norm. In all other situations, it’s unlikely you will reach a 0% pay gap because your workforce constantly changes as people come and go. That’s why the pay gap has a bandwidth: in the EU it’s 5%. As long as the differences stay within that range, you satisfy the requirements.
A word of caution from experience: if you set the goal of your equal pay project at 5%, you will end up higher. You never know when people leave or join and what they get paid. Someone might be promoted or receive a pay increase. Every pay event changes the balance, so you need a margin of error. Always aim for 0, and accept that you’ll most likely end up around 2 or 3%.
What will be the repercussions?
It’s interesting that we only talk about repercussions with regards to future pay transparency legislation. When in reality, equal pay laws have existed since the 1960s. Employees have taken their employers to court for unjust pay and won compensation many times in the past. The problem: the burden of proof was on the employee, and it’s very difficult to uncover unjust pay when a reward structure is shrouded in secrecy.
The EU Pay Transparency Directive changes that: the burden of proof moves to the employer. If an employer has a gender pay gap of more than 5%, the first action to take is a joint pay assessment, involving employees and their representatives, like unions and works councils. The goal is to repair the gap within 6 months and resolve the situation. This could lead to paying retroactive pay and compensation, with the aim of getting the employee to the same financial situation as they would have been in, had they been paid fairly.
But if the pay gap remains wider than 5%, the government can step in and fine companies. Every EU member state must create a governing body that oversees the reporting, collects data, and imposes fines when necessary. These sanctions come in the form of effective, proportionate and dissuasive penalties. These penalties are based on national law and guarantee a real deterrent effect. The directive does not stipulate a percentage or minimum amount, countries must set them based on their legislative practice. But obviously, the goal is to avoid that by making sure that employees receive equal pay for equal work or work of equal value.