Overview

With its recently enacted Equal Pay for Equal Work Act (the “Act”), Colorado is one of more than a dozen states taking action to protect employees against discrimination and ensure equal pay for equal work. Despite the presence of federal legislation, which has been mostly bark but no bite, recent studies continue to show a significant gender pay gap. As a result, state and local governments have begun passing their own legislation, which often includes inconsistent rules with varying degrees of protection for employees. Colorado’s pay equity legislation is among the nation’s most stringent, imposing notice requirements on employers in limiting the acceptable reasons for pay disparities, among other requirements. The law goes into effect January 1, 2021, at which time employers will be responsible for understanding and complying with these regulations.

Employers Subject to the Act

The Act applies to both private and public employers with any employees in Colorado, including government and religious entities. Unlike some previous legislation, there is no carveout for small businesses or household employers (e.g., households with employee childcare givers, housekeepers, etc.). Certain provisions, described in more detail below, impact job postings, which create some ambiguity as to whether the Act applies to employers with no current employees in Colorado, but may be looking to hire employees in the state.

Key Provisions

Pay Disparity

The Act’s primary purpose is to prohibit sex-based wage discrimination for “substantially similar work, regardless of job title, based on a composite of skill; effort…; and responsibility”. In other words, equal pay for equal work. Discrepancies may exist to the extent that employers can demonstrate that they are not based on wage history and are fully explainable by one or more of the following factors:

• Seniority system
• Merit system
• System which measures earnings by quantity or quality of production
• Location
• Relevant education, training, or experience
• Travel, if it is required by the work performed

Recently passed legislation in New York and California contain similar provisions that are designed to clarify the acceptable justifications for pay disparities, and to close the loopholes that previously existed under federal regulations.

Pay History

Many of the pay equity laws passed by other states contain more general provisions that ban employers from considering wage history when setting compensation rates for prospective employees. The intent of such legislation is to avoid inadvertently tainting current wage rate decisions by factoring in past wages, which may not have originally been set fairly. Similarly, the Act prohibits employers from requesting salary history from applicants, and employers may not retaliate against applicants who refuse to provide such information.

In contrast to the rules preventing employers from asking salary-related questions, the Act includes provisions that protect employees’ rights to discuss salary information with each other. Specifically, employers may not prevent employees from disclosing, discussing, or comparing salary information as a condition of employment, and employers may not require employees to sign a waiver for the same purpose. These rights were previously provided to certain employees under the National Labor Relations Act, but it contained various carveouts that are not present in the Colorado Act.

Notice and Recordkeeping Requirements

The Act imposes additional requirements pertaining to employee records and job postings. Specifically, employers will be required to disclose compensation amounts or ranges for each job posting, along with a description of all benefits and other compensation being offered. To date, Colorado is the only state to enact such a provision, which is likely to present challenges for employers who have previously not made salary information public or defined salary ranges for open positions.

Additionally, for internal promotion opportunities, employers will be required to make reasonable efforts to notify all current employees on the same calendar day of promotion opportunities, as well as prior to the employer making a promotion decision.

Employers will also be required to maintain job descriptions and wage histories for all employees for two years after their employment (which corresponds to the timeframe for employees to file a lawsuit after a violation).

Employee Claims

Under the Act, employees have two years to pursue civil action against employers after experiencing wage discrimination. Per the legislation, each instance in which a discriminatory wage rate is paid is considered a separate violation. Alternatively, employees may pursue relief under an administrative process that is currently being developed by the Colorado Department of Labor and Employment.

Employers may be liable for damages equal to the difference between what their employees should have been paid had there not been a violation, what the employees were actually paid for a period of three years, as well as liquidated damages in the same amount (i.e., a total liability of up to two times the three years of underpayment) unless the employer can prove the “act or omission giving rise to the violation was in good faith”. The regulations stipulate that employers can point to a pay equity study completed within two years prior to the claim as evidence that the violation was in good faith, but the study must be thorough, comprehensive, and conducted with the specific goal of identifying and remedying unlawful pay disparities. This provision of the Act provides a meaningful incentive for employers to conduct pay equity analyses and proactively remedy pay disparities.

Risk Factors

The numerous changes effectuated by the Act create potential risks for even the most diligent employers. The new legislation’s changes span multiple organizational functions and departments, all of which will need to coordinate together to ensure that the employer is compliant with the Act. The following list provides some potential risk factors that may need to be addressed prior to 2021:

• Inconsistent or outdated pay policies, especially those based on prior salary history, as opposed to market data or one of the acceptable disparity explanations listed above (e.g., seniority)
• Lack of recent pay equity analysis
• Vague or undefined salary ranges for job openings
• Job applications or other materials (e.g., interview templates) that request salary information
• Handbooks or other policies that prohibit employees from discussing compensation
• Outdated job descriptions
• Inconsistent or decentralized record retention

Employers who are experiencing one or more of these risk factors will likely have work to do before the Act goes into effect, but there is still time.

How to Prepare

To prevent violations, the Act provides significant incentives in the form of steep penalties (potentially up to two times three years of underpayment) and a provision allowing employers who have previously conducted a pay equity audit to avoid paying liquidated damages. In order to avoid starting 2021 out of compliance, employers may want to consider the following:

• Conduct a Pay Equity Analysis – As previously mentioned, employers who have conducted a pay equity audit with the intention of identifying and correcting disparities within two years prior to a claim may be able to avoid paying liquidated damages.
• Conduct a Market Compensation Analysis – As of 2021, employee salary history may no longer be relied on to set wage rates. A better practice is to determine the average market range for the position (factoring in location, years of service, etc.), then set the wage rate according to your internal compensation philosophy. Employers should assume that job postings, which will be required to include compensation ranges, will be seen by both current and prospective employees, as well as market competitors. For many companies, this is a new requirement that should be considered carefully when disclosing compensation ranges, as it could create issues among current employees depending upon where they fall within the disclosed range.
• Update Relevant Documents – Job postings should be reviewed to ensure that they contain accurate and complete information as required under the Act. Similarly, job descriptions will need to be maintained for two years after employees terminate their employment. As such, it is important that employers review and, if necessary, update their processes to ensure that materials are properly retained. Additionally, since they will no longer be allowed to request salary history information from applicants, employers should review their recruitment and interview processes to ensure such questions are removed from job application materials. Lastly, handbooks and official policies and process documents should be prepared, reviewed and/or updated to ensure consistency and compliance in accordance with the Act.
• Train Staff – To ensure that everyone is prepared for the new regulations, employees should be trained on the relevant changes to Colorado’s law (e.g., supervisors may not prohibit employees from discussing compensation and interviewers may not request salary history information).

Alvarez & Marsal Taxand Says

Employers may find these legislative changes overwhelming, and could have concerns as to whether internal resources are adequate to properly prepare for the Act. We urge employers to keep in mind that the liability resulting in violations of the Act exist whether an employer is aware of the issue or not. Therefore, it is much safer to proactively identify and correct problems where possible. The compensation experts at Alvarez & Marsal have the experience and the expertise to help your organization address any risk factors and/or concerns prior to the Act’s January 1, 2021 effective date.