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Court: Compensation based on employees’ market value may correct past pay bias

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in Discrimination and Harassment

Ever since Congress passed the Lilly Ledbetter Fair Pay Act, employers have had to struggle with evaluating their compensation plans to make sure they aren’t perpetuating past pay discrimination.

The law gives employees the right to sue for discrimination that occurred years or even decades ago if they can show their current paycheck is lower than it would have been if not for past discrimination. The argument is that because each subsequent pay increase is based on their past pay—typically because raises are percentage based—discrimination remains alive and well.

But now a federal judge has suggested that a better approach to fixing the problem may be found in the free market. If employers use the market value of jobs as a major factor in setting compensation, then even those whose pay is lower than it would be without past discrimination will be paid fairly because their increases will be greater.

Recent case: A group of highly compensated women working for Rolls-Royce sued, alleging that their pay was lower than similarly situated men because of sex discrimination.

But the company has a compensation plan that bases total compensation on what the local market pays people in similar jobs at other companies.

According to the judge, that means any past discrimination would be fixed because the company would have to pay everyone—women included—at a level dictated by market forces. For example, while an employer may value engineers as much as financial analysts, if the local market pays engineers more, then the company must also. Female engineers who experienced discrimination in the past would get bigger raises than men who were never discriminated against.

The court ruled in Rolls-Royce’s favor. (Randall, et al., v. Rolls-Royce, No. 10-3446, 7th Cir., 2011)

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