Obama's first law: The fight for fair pay

To comply with the new act, businesses will want to take a close look at their compensation decisions - and at how those decisions are documented.

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By Lenora Chu, CNNMoney.com contributing writer

President Barack Obama hands a pen used to sign the Lilly Ledbetter Fair Pay Act to Ledbetter, second from left.
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(CNNMoney.com) -- The issue of compensating your employees just got a bit trickier.

President Barack Obama's first bill, the Lilly Ledbetter Fair Pay Act he signed into law on Thursday, loosens the statute of limitations under which workers can sue employers for pay discrimination based on characteristics such as gender, race, age or disability.

To ward off discrimination suits, companies will need to meticulously document pay decisions and retain detailed employment records, legal experts say. In this, small companies may be at a disadvantage - few have access to the attorneys and human-resources professionals that will help larger businesses comply with the newly expanded law.

"This will affect [small companies'] legal and compliance costs... and potentially make them reluctant to hire additional employees," said Elizabeth Milito, senior executive counsel of the National Federation of Independent Business. "There's also the potential for one lawsuit that goes south to put a small business out of business."

The Ledbetter Act is named after the Alabama woman who sued Goodyear after discovering male colleagues in similar positions were paid substantially more than she was over the course of her 19-year career there. A jury ruled in Ledbetter's favor, but in 2007 the U.S. Supreme Court tossed out her claim. In a 5-4 decision, the justices ruled Ledbetter should have filed suit within 180 days of the very first time Goodyear paid her less than her peers. Having missed that window, Ledbetter had no grounds to sue, according to the court.

The Ledbetter Act essentially restarts the 180-day clock every time a worker receives a paycheck. That makes each paycheck a potential violation of the law - not just the first one. In practical terms, the change allows a worker many years to bring a lawsuit against a longtime employer for pay discrimination. And under existing law, a worker can sue to recover up to two years in back pay.

"That's a pretty nice window they get," said Philadelphia-based employment law attorney Christine Bonavita.

Some in Congress opposed the law because of its potential chilling effect on small companies. Senator John Ensign, R-Nevada, was one of 36 senators who voted against the act. He believes it will facilitate more discrimination suits - a costly distraction at a time when small businesses are critical to a U.S. economic recovery.

"Small businesses simply cannot afford to 'lawyer up' and fight back," Ensign says. "Our country needs more jobs, not more lawsuits."

Others view the act's gains as worth its risks. Olympia Snowe, R-Maine, the ranking Republican on the Senate Small Business Committee, co-sponsored the measure and strongly supported its passage. She praised the law for addressing "an issue that is fundamental to America - to the way we see ourselves, to the way we are seen by around the world, to the standards by which our country abides: equality, fairness, and justice."

Legal advisors say that in light of the new rules, many businesses should take a closer look at their compensation practices.

"If you've got 10 people doing the same job and they've got different rates of pay, ask yourself 'Why is that? Is it seniority? Or is it discriminatory?'" Bonavita says.

Being in compliance with the law may take some work and extra resources, says Cleveland-based employment attorney Keith Ashmus.

Bonavita and Ashmus recommend that companies take the following steps:

  • Run the numbers on all employees' compensation packages, including starting pay, merit raises, cost of living increases and benefits. Individuals who perform the same jobs and have the same qualifications should be paid at the same rates.
  • Ensure there are demonstrable business reasons for any disparities in compensation.
  • Train supervisors who have input into hiring, firing, disciplining and promoting workers on what the law requires.
  • Review and update employment policies and handbooks to emphasize that discriminatory compensation practices and decisions are strictly prohibited.
  • Conduct exit interviews when supervisors leave the company, focusing on whether any protected characteristic were considered when they made pay decisions.
  • Ensure that employees who question pay practices or file claims of discriminatory practices are not retaliated against.
  • Make sure performance evaluations are completed accurately and in a timely manner. That documentation can subsequently be used to support compensation decisions on promotions, raises and bonuses.
  • Indefinitely retain copies of all payroll records and performance reviews.
  • Review liability insurance policies to ensure that claims from ex-employees regarding incidents long past are covered. Make changes in coverage if necessary.

Special attention should be paid to documentation, says Bonavita. All records will be subject to discovery in the event of a lawsuit, and they can become critical evidence in defending against a discrimination claim.

Careful business owners might even consider altering the way they compensate their top performers, Ashmus says. If employers want to differentiate compensation based on merit, it might be safer to offer a bonus instead of a salary increase.

"Because a bonus doesn't last," Ashmus says. A pay hike, however, is reflected in every paycheck, thus restarting the 180-day clock.

When it makes sense, employees should be informed about decisions that change their compensation packages, Ashmus says. If they're not getting the maximum salary or raise, they should know why.

"Once they know, once they have the information, it's a little harder for them to justify waiting 30 more years to file a lawsuit," Ashmus says.

And, of course, that conversation should be documented. To top of page

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