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Get the Most Out of Your Employee Payroll Audit in California

Employee payroll audits, which have long been recommended as a best practice for corporations that want to stay on the right side of the law, have become even more critical with the current proliferation of labor and employment laws at the state level. Among other things, the California Fair Pay Act, which went into effect on January 1, 2016, places new demands on California employers that in many cases can only be effectively satisfied by means that include a payroll audit.

What is the California Fair Pay Act?

The new law goes further and imposes more obligations on employers than longstanding federal and state equal-pay and employment-discrimination laws. More than simply requiring employers to pay men and women equal pay for the same work, the California statute prohibits employers from paying members of one sex less than the rates paid to employees of the opposite sex “for substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions.” And the employees of opposite sexes whose jobs and pay are being compared need not work together in the same establishment. There are several important defenses to liability under the law, such as the employer’s use of a bona fide factor that is not sex-related.

How can a payroll audit help?

Determining what types of work are “substantially similar” in terms of skill, effort, responsibility and working conditions is no easy task. That’s where a payroll audit can help.

On a step-by-step basis, a properly conducted audit will identify potential problems under the California Fair Pay Act by identifying positions that have “substantially similar work,” analyzing the pay of these workers by gender, finding any disparities in pay, and determining whether any defenses apply. For example, does the company have a bona fide seniority system or merit system, or is there a business necessity for the disparities in pay?

In addition to these complex Fair Pay Act questions, employee payroll audits remain desirable or necessary for other purposes, such as ensuring that employees are treated fairly under the company’s employee benefit plan and that certain employees or groups of employees are not excluded from the plan.

What steps should be taken?

When conducting a payroll audit, it should be done with review and consultation of attorney with the end goal of identifying and quickly addressing disparities that cannot be explained adequately or need to be corrected. It is important to note that the audit is subject to attorney/client privilege and/or work product protection. The following are key steps in the audit process:

  • Consider all job titles/descriptions across all geographic regions

  • Consider how to identify or sort based on disparate geographical locations

  • Compare the positions that have “substantially similar work

  • Determine if the statutory exemptions apply

  • Identify explanations for disparities

  • Address disparities that can’t be explained

  • Determine what action needs to be taken

Ongoing Compliance

From a compliance perspective, the number one benefit to conducting employee payroll audits is the ability to determine what action needs to be taken to address and correct disparities if they exist. Failure to address disparities that can’t be explained within the requirements of the California Fair Pay Act or the Federal Pay Act can result in penalties, sanctions and, in some cases, litigation with the DOL and/or IRS. Ongoing compliance should include regular review of the following:

  • Handbooks and policies to remove outdated references to “equal” work

  • Policies that prevent employees from discussing or asking about other employees’ compensation

  • How compensation decisions are made and adjust if necessary

  • Job descriptions – update and describe as comprehensive as possible

  • Record keeping – records must be kept for three years

  • Training of HR personnel, senior management on the new law and how it should be applied in setting compensation at hiring

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About this Author

Kate Gold, Labor and Employment Attorney, Drinker Biddle
Partner

Kate S. Gold defends clients in employment and other business disputes in state and federal courts, arbitrations, and before agencies. She is Co-Chair of the Labor and Employment Group's Fair Pay Act Obligations Team.

Kate’s practice includes defense of individual, collective and class actions and focuses on business and employment litigation and counseling. She handles matters involving wrongful termination, retaliation, whistle blower, sexual harassment, race, age, family leave, pregnancy and disability discrimination; defends actions for...

310-203-4029
Heather B. Abrigo, Attorney,  Los Angeles, DOL
Partner

Heather B. Abrigo has extensive experience in all aspects of employee benefits and especially in working alongside plan committees to fulfill their fiduciary duties. Her clients come to her for assistance with qualified and non-qualified retirement plans as well as health and welfare issues. Heather works with public sector employers and navigating their retirement plan issues as well as their retiree health plans. She assists with Department of Labor investigations and Internal Revenue Service audits. 

Her services include but are not limited to assisting plan sponsors in meeting their fiduciary responsibilities, reporting and disclosure matters, and drafting qualified, non-qualified and welfare benefit plan documents. Heather assists various service providers in the financial services sector with their service agreements and complying with disclosure requirements under ERISA and the Securities and Exchange Commission.

Bar Admissions

  • California

Education

  • Southwestern Law School, J.D., 2005
  • California State University, Northridge, B.A., 2000

Court Admissions

  • U.S. District Court, Central District of California
  • U.S. Tax Court
310-203-4054
Phillipe Lebel, employment lawyer, San Francisco, Drinker Biddle
Associate

Philippe A. Lebel represents employers in all aspects of employment litigation, including wage and hour, wrongful termination, discrimination, harassment, retaliation, whistle-blower, trade secrets, and breach of contract litigation, in both the single-plaintiff and class-action context, at both the trial and appellate level, and before administrative agencies. He has represented dozens of private and publicly-traded companies of all sizes in connection with single-plaintiff and class action discrimination and/or harassment claims, and handles numerous...

310-203 4091