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What Is the Paycheck Fairness Act and How Will it Affect Your Small Business?

Katharine Paljug

The Paycheck Fairness Act would amend the Fair Labor Standards Act.

In the United States, no matter the size of your business, it is illegal to pay men and women differently for the same work, a practice known as equal pay.

Fair pay and discrimination are complex topics, and as a result, more than one law governs equal pay. In 2019, the House of Representatives passed a bill intended to add one more law: the Paycheck Fairness Act. 

But what is the Paycheck Fairness Act, and how will it impact your small business?

The Paycheck Fairness Act is a bill introduced in the United States Congress that amends the Fair Labor Standards Act. It is intended to strengthen equal pay protections for workers and close the gender pay gap in the United States.

What is the gender pay gap?

The gender pay gap is the difference between men and women's earnings. On average, women who work full time in the United States earn 82 cents for every dollar that men who work full time make, according to the Bureau of Labor Statistics. The difference is even greater for black and Latina women than women who are white or Asian.

How is the gender pay gap calculated?

The gender pay gap, also known as the wage gap, is calculated by the Bureau of Labor Statistics based on salary data from around the country. 

It is difficult to say precisely how much of the wage gap is due to discrimination, since a variety of factors impact a worker's earnings, including their industry, location, occupation, education, negotiation ability and time out of the workforce. However, a 2010 report from the U.S. Congress Joint Economic Committee found that, even when controlling for all these factors, an unexplained difference in men's and women's earnings remained that is likely due to wage discrimination. 

Other analyses, such as one by the American Association of University Women, have found persistent gaps between the earnings for men and women that cannot be explained by measurable factors, such as education or choice of occupation. 

To address the wage gap and ensure fair pay for the work done by men and women, the U.S. has enacted state and federal laws.

What is the Equal Pay Act?

The Equal Pay Act (EPA) of 1963 made it illegal for employers to pay men and women in the same workplace different wages for substantially equal work. It was passed as an amendment to the Fair Labor Standards Act. Substantially equal work means jobs that ...

  • Require the same skill, education, ability, training and experience.
  • Use the same amount of effort.
  • Have the same levels of difficulty and responsibility.
  • Occur in the same working conditions and place of employment. 

The Equal Pay Act allows employers to pay employees a different wage if compensation is based on ... 

  • A merit system.
  • A seniority system.
  • Quality or quantity of production.
  • Any factor other than sex.

A decade later, in the 1973 case Corning Glass Works v. Brennan, the Supreme Court clarified that the EPA was intended "to remedy what was perceived to be a serious and endemic problem of employment discrimination in private industry − the fact that the wage structure of many segments of American industry has been based on an ancient but outmoded belief that a man, because of his role in society, should be paid more than a woman even though his duties are the same." 

Other laws that impact equal pay include the Civil Rights Act and the Lilly Ledbetter Fair Pay Act.

When was the Civil Rights Act passed?

The Civil Rights Act passed in 1964. Title VII of the Civil Rights Act is one of the federal laws that protects employees from wage discrimination on the basis of race, color, religion, sex, national origin, age or disability. These laws are enforced by the Equal Employment Opportunity Commission (EEOC), a government body that monitors for discriminatory hiring practices. 

It is illegal for an employer, including a small business, to retaliate against an employee who files a discrimination charge or otherwise participates in a discrimination lawsuit, such as by testifying, under Title VII.

What is the Lilly Ledbetter Fair Pay Act?

In 2009, the issue of paycheck fairness and wage discrimination was again addressed when President Barack Obama signed the Lilly Ledbetter Fair Pay Act into law. This law amended Title VII of the Civil Rights Act to say that the statute of limitations for filing an equal-pay discrimination lawsuit, which was set at 180 days, resets with each discriminatory paycheck. Previously, plaintiffs could only sue 180 days after an employer made the initial discriminatory pay decision.

How will the Paycheck Fairness Act strengthen the Equal Pay Act?

Despite the progress that these laws made toward ending wage discrimination and closing the wage gap, the original EPA has become outdated. It also has several holes in its provisions that allow many forms of wage discrimination to persist, including the following: 

  • Different courts have interpreted sections of the law in different ways, which has weakened its effectiveness. Some courts have used a very narrow definition of "workplace," while others have allowed some instances of unequal pay to men and women based on factors not related to their job requirements.
  • The EPA allows for limited remedies that often aren't adequate to make up for the impact of wage discrimination on women's earnings. This also means that the consequences of wage discrimination aren't severe enough to deter employers from continuing unequal pay practices in the future.
  • The EPA was adopted before the current federal class-action rule, which makes bringing class-action lawsuits under the EPA nearly impossible because all plaintiffs must opt in.
  • The EPA only protects employees from retaliation after they have initiated a complaint or lawsuit. This allows companies to have policies that penalize workers who discuss compensation or wage discrimination with co-workers. 

The Paycheck Fairness Act is intended to close these loopholes and strengthen the Equal Pay Act by increasing penalties for unequal pay and making it easier for employees to bring class-action lawsuits against employers for wage discrimination. It would also ... 

  • Eliminate employer rules that prevent employees from discussing compensation. This would make it easier for women to find out if they are making less than their male counterparts for the same work.
  • Require salary disclosure. Employers would be required to share their salary information with the EEOC.
  • Ban employers from asking about salary history. Employers would not be allowed to ask employees what they made at their previous job. Currently, if a woman is underpaid as a result of wage discrimination at one job and she discloses her salary to a new employer, she might be offered a lower starting salary than a male new hire who was paid more at his previous job. This new rule would prevent wage discrimination by one employer from following women to a new job.
  • Provide employers with technical assistance and other training that will help them comply with reporting requirements.
  • Provide additional training to staff at the EEOC to help them identify and handle wage disputes.

What are arguments against the Paycheck Fairness Act?

Opponents of the Paycheck Fairness Act argue that it will lead to an increase in wage discrimination lawsuits against employers, as employees feel more empowered to sue for discriminatory pay practices. Other objections include that, rather than closing the wage gap that women experience, it will ...

  • Make employers less likely to offer flexible schedules.
  • Lead to employers hiring fewer women to avoid lawsuits.
  • Prevent employers from recognizing and rewarding employees based on merit and achievements. 

In past votes to block the bill from passing, opposing lawmakers have also stated that it is unnecessary, because gender discrimination is already illegal.

Was the Paycheck Fairness Act passed?

The Paycheck Fairness Act was first introduced by Rep. Rosa DeLauro (D-CT) in 1997. It was passed by the House of Representatives in 2009 but failed to pass the Senate, which meant it was not signed into law. 

The bill was reintroduced on Jan. 30, 2019, and passed by the House on March 27, 2019. It was also introduced in the Senate but has not made any progress or been brought to a vote by the Senate Majority Leader.

Will the Paycheck Fairness Act actually lead to equal pay?

Proponents of the Paycheck Fairness Act, who tend to be more liberal and favor workers' rights, say that it will discourage employers from making discriminatory pay offers, especially by preventing them from asking about women's previous salaries. If signed into law, it will also make wage discrimination less profitable for employers by increasing the penalties that businesses face for wage discrimination. 

Opponents, who tend to be more conservative and favor the rights of businesses, say that the act will lead to rigid pay scales in the name of equal pay. 

Many opponents also say that the wage gap is a choice that women opt into by choosing certain professions rather than the result of discriminatory practices from employers. Occupations with a higher portion of female employees, such as teaching or nursing, do pay less than careers that are typically male-dominated. However, research shows that even in female-dominated professions, the wage gap persists, with men being paid more. 

The Paycheck Fairness Act will not close the portion of the wage gap caused by the motherhood penalty, which research has found contributes to unequal pay. Due to lack of social support for parents, employer expectations that women will be less committed to their careers after becoming parents, and unequal labor distribution in many homes, mothers are more likely to find their careers and earnings stagnating. 

By contrast, studies have shown that fatherhood gives men's careers and earnings a boost, as employers expect them to be more committed to work after becoming parents.

How will the Paycheck Fairness Act affect small businesses?

Small businesses are already required to follow federal law and provide equal pay regardless of gender. If the Paycheck Fairness Act passes, small businesses would be subject to its new transparency and accountability rules, including the following: 

  • Not asking employees about their salary history during hiring
  • Tracking and reporting salary data
  • Implementing policies that do not penalize workers for discussing salary or compensation with each other

Many small businesses would be eligible for an exemption from the law's salary reporting requirements, which would place an undue burden on small and midsize companies that larger businesses do not face. 

However, all businesses should keep records of employee compensation, whether the Paycheck Fairness Act passes or not, in order to have that data accessible in the case of employee questions, concerns or disputes.

What other laws affect how small businesses pay workers?

Small businesses are also impacted by minimum wage laws, which are passed by the federal government, as well as some cities and states. These laws require employers to pay their employees a minimum hourly wage. The primary law that establishes the minimum wage is the Fair Labor Standards Act (FLSA). This law covers most but not all employers and employees. 

Your small business must follow the FLSA if you ... 

  • Have $500,000 or more in annual sales; or
  • Your employees work in "interstate commerce," meaning they do business between states, including phone calls, sending mail, or handling goods that come from one state and are shipped to another. 

Workers who are not covered by the FLSA, and are not required to be paid minimum wage, include the following: 

  • Contract workers (who are not considered employees)
  • Workers on small farms
  • Outside salespeople
  • Employees of local newspapers with a circulation smaller than 4,000
  • Newspaper deliverers
  • Employees of seasonal recreation or amusement companies
  • Apprentices, students and learners (defined by federal law)
  • Employees who regularly receive tips that make their pay equal to the minimum wage (such as restaurant workers) 

Many, but not all, small business are required to follow minimum wage laws, as well as equal pay laws, when determining employee compensation.

Is minimum wage supposed to be a living wage?

When the Fair Labor Standards Act passed in 1938, it provided basic protections to workers by establishing a 44-hour workweek, prohibiting child labor and introducing a federal minimum wage. The FLSA set the 1938 minimum wage at 25 cents per hour, or $11 for a 44-hour workweek. The average cost of buying a new house was $3,900, the equivalent of just under 355 weeks of work at minimum wage. 

The current federal minimum wage, which has not increased since 2009, is $7.25 per hour, or $319 for a 44-hour workweek (though the standard workweek today is 40 hours). The average cost of buying a new house in the United States in January 2019 was $372,600, or the equivalent of just over 1,168 weeks at work at minimum wage. 

A living wage is the minimum income a worker needs to afford adequate food, shelter, clothing and other necessities. The FLSA did not use the term "living wage." However, a comparison between the buying power of a minimum wage laborer in 1938 and 2019 shows that the original minimum wage provided a much higher standard of living than the current one does.

What will be the minimum wage in 2020?

The federal minimum wage is not set to increase in 2020. However, many progressive politicians are joining with workers' rights groups to advocate for the minimum wage to increase to a living wage of $15 per hour. 

Many states and cities set a minimum wage different from the federally mandated one, and in some cases, these automatically rise with inflation to adjust for increases in cost of living. Some states and cities have recently passed laws to raise their minimum wages, usually to a value of $12 to $15. Others have scheduled increases for over the next several years. 

If you are unsure whether your small business or employees are subject to the Fair Labor Standards Act or any other minimum wage laws, consult a lawyer before you make any decisions regarding pay. Failure to pay minimum wage when you are required to could result in criminal prosecution and thousands of dollars in fines.

Image Credit: Monkey Business Images/Shutterstock
Katharine Paljug Contributing Writer
Katharine Paljug is a freelance content creator and editor who writes for and about small businesses. In addition to Business News Daily, her articles can be found on Your Care Everywhere, She Knows, and YFS Magazine. Visit her website to access her free library of resources for small business owners.