Massachusetts’ New Equal Pay Law

Last month, Massachusetts Governor Charlie Baker signed into law the “Act to Establish Pay Equity”, which will go into effect starting July 1 of next year. The Act is considered ground-breaking in the U.S. for its additions to the state existing equal pay legal framework.

The Act has three main provisions that add to or change existing equal pay law. The first provision, which is creating all the news, creates a new prohibition against employers from asking prospective employees for their salary history. The purpose of this provision is to end ongoing pay disparity when employees who are paid less than their counterparts move jobs. Preventing prospective employers from asking for salary history should hopefully prevent pay disparity from continuing into a new job.

This provision does not prevent a prospective employee from volunteering their salary history (although employers should not try and skirt around the law by soliciting a prospective employee to volunteer that information – it should be solely of the applicant’s own volition). Nor does it prevent an employer from verifying that volunteered salary history with the prospective employee’s former employers. However, the Act does not speak as to whether an employer may ask prospective employees for their salary expectations (i.e., what they expect to be paid in the position they are applying for). We will likely have to wait for further guidance from the OAG on this point.

A subsection of the first provision also prohibits employers from having “pay secrecy” policies. As a result, employers cannot discipline employees for asking their co-workers about the pay and benefits they receive. Of course, an employer is not required to inform an employee of the pay and benefits his or her co-workers receive.

The Act creates a private right of action in employees for violations of the prohibition on salary history questions and pay secrecy policies. Unfortunately, the damages that could be recovered for violation of the salary history prohibition are unclear at this point.

The second provision of the Act amends Massachusetts’ existing equal pay laws to clarify what kind of pay discrepancies between “comparable work” are justifiable. The Act explicitly allows for pay discrepancies based on:

  •           Seniority, although employers may not deduct time taken off pursuant to FMLA leave or maternity and paternity leave from an employee’s seniority
  •           Geography
  •           Education or training
  •           Job performance based on sales, revenue, or other quantifiable metrics
  •           “Merit” based systems

“Merit” based systems will likely prove to be an avenue of litigation for aggrieved employees, as poorly-designed systems leave open the possibility for gender-based disparities.

The second provision also amends the statute of limitations for equal pay claims from one year to three years, with a new three-year statute of limitations applicable to each paycheck that violates the equal pay laws. The Act also clarifies that pay discrimination claims are not subject to the administrative filing requirement with the Massachusetts Commission Against Discrimination.

Finally, the Act reaffirms that employers have an obligation to eliminate gender-based pay discrimination. However, it also now provides an affirmative defense against equal pay litigation if the employer can show that it, within the past three years prior to the commencement of litigation, has completed a good faith self-evaluation of its pay practices and has made “reasonable progress” in eliminating gender-based pay discrepancies. An employer is not entitled to the defense if it cannot show that its self-evaluation was reasonable in scope or that it has made reasonable progress in eliminating any gender wage gap. Unfortunately, the vagueness of this affirmative defense will probably lead to litigation in every wage discrimination case over whether an employer’s efforts were “reasonable”. It should also be noted that the affirmative defense is only available against claims of wage discrimination, and not against claims of violations of the prohibitions against salary history questions or pay secrecy policies.

Startups are uniquely positioned to implement these new changes, since they are on the “ground floor” hiring their first employees. However, founders should be careful not to carry over things from the way they were done at their old “real job”, like asking applicants for salary history or discouraging employees from sharing details of their compensation packages with one another. In any event, when hiring its first employees, a startup should consult with an attorney to establish best practices for hiring, setting compensation, and other aspects of human resources.

“White-Collar” Overtime Exemption Levels Raised

The U.S. Department of Labor announced last week that, starting December 1, 2016, revised overtime exemption rules in the Fair Labor Standards Act would go into effect. Specifically, the “salary level” for the white-collar overtime exemption would increase from $455 per week (for an annual salary of $23,660) to $913 per week (for an annual salary of $47,476).

The “white-collar” exemption exempts employers from having to pay overtime (or time-and-a-half) to employees for every hour worked over 40 hours in a workweek, provided that the employee is employed in a “professional”, “administrative”, or “executive” capacity, and meets three tests:

  • the “salary basis” test: simply, that the employee is paid a salary or fee, rather than paid an hourly wage
  • the “salary level” test: that they are paid at least the new salary discussed above 
  • the “standard duties” test: varies depending on the capacity the employee is employed in:
    • for “executive”: the primary duty must be managing the enterprise or a customarily-recognized department or subdivision of the enterprise comprising at least 2 full-time employees
    • for “administrative”: the primary duty must be the performance of office or non-manual work directly related to the management or operations of the employer or the employer’s customers, and must also include the exercise of discretion and independent judgment with respect to matters of significance. Certain academic administrative personnel are exempt from the salary level requirements.
    • for “professional”: the primary duty must be the performance of work that requires advanced knowledge in a field of science or learning (usually requiring a degree) or that requires invention, originality, or talent in a recognized field of artistic or creative endeavor. Doctors, lawyers, and teachers are specifically exempt from the salary level requirements 

The DOL also raised the annual salary level for the “highly compensated employee” exemption (subject to a less stringent duties test) from $100,000 to $134,004. 

The salary levels for both the white collar and highly-compensated employee exemptions will now also automatically increase every three years based on inflation.

The FLSA itself only applies to companies that have annual gross revenue of $500,000 or more; companies that are hospitals, residences providing medical or nursing services, or schools are subject to the FLSA regardless of gross revenue. Additionally, regardless of the company’s revenue, employees whose work involves interstate commerce are also subject to the FLSA.

If your startup or your employees are subject to the FLSA and you are currently relying on the white-collar or highly-compensated employee exemptions, you will want to confirm if the salaries you pay to those workers now fall below the new salary level requirements. If so, you have two options: one, increase salaries to the new requirements, or reclassify the employees as non-exempt and begin tracking their hours worked in order to pay overtime if necessary. If you decide to reclassify employees as non-exempt, you can either choose to pay overtime, or control the hours employees work and redistribute them to ensure employees don’t work overtime (including hiring more workers if there is more work than can be handled by your current workforce in a 40-hour week).

Your Employees May Have the Right to See Your Company’s Books

Most startups are usually very private about their books and financials — one of the benefits of being a small, private company instead of a publicly-traded company is that you don’t have to show anyone your books. However, if your company is a Delaware corporation (as many startups are), that may not necessarily be the case, particularly if you’ve issued stock to your employees.

Section 220 of the Delaware General Corporation Law permits any stockholder of a Delaware corporation, upon written demand, to inspect and copy the corporation’s stock ledger, a list of its stockholders, and its “other books and records”, which can include financial records, for any proper purpose. Recently, employees of startups have been exercising their right under Section 220 to inspect their companies’ financial records for the purpose of determining the true value of the equity compensation they’ve been given. 

While some startups do provide their equity-compensated employees with regular statements of business and financial health, if your Delaware-incorporated startup does not do so, be mindful of the fact that your stockholding employees can, under Delaware law, demand to inspect and copy your company’s books. Of course, this is also another reason why it is a best practice to make sure that your employees (particularly your key employees who are compensated with equity) are signed to employment agreements that include confidentiality provisions. In any event, if your company is a Delaware corporation and a stockholding employee does ask to see the company’s books, it may be a good idea to make sure that the information you divulge is protected under a confidentiality agreement.

Further Reading:

Can My Startup Sponsor A H-1B Visa?

If you’re looking to move to the U.S. to launch a startup, you may be wondering if your U.S. startup could sponsor you for a H-1B work visa to come to the U.S.. Beyond the numerical difficulties of obtaining a H-1B visa — the U.S. only issues 65,000 H-1B visas, plus an additional 20,000 for holders of advanced degrees, per year, and applications typically outnumber available visas by 3 to 1 — startups may have other logistical difficulties sponsoring their foreign founders for a H-1B visa.

One of the major requirements for a H-1B visa is that the sponsoring employer must be able to hire, pay, supervise, and fire the sponsored employee. This means it is pretty much impossible for a startup whose foreign founder is the sole owner to sponsor, though a startup with other founders or employees can meet this requirement, though with some difficulty. As long as there are other founders or employees who can supervise the work of the foreign founder, and fire him or her if performance is deficient, then it may be possible to meet the requirement. However, the startup will need to demonstrate the startup’s ability to supervise and fire the founder through supporting documentation, such as business plans, corporate bylaws, operating or founder/shareholder agreements, or employment contracts.

Additionally, the startup will need to demonstrate through supporting documentation that it has sufficient capital to pay the sponsored founder’s salary. The H-1B visa requires that a sponsored employee be paid the higher of either the actual wage (the wage paid to another employee in a similar position in the organization), or the prevailing wage in the overall industry. Aside from establishing the prevailing wage for a startup, many startups may not have sufficient capital to demonstrate to the government’s satisfaction that it can afford the founder’s salary.

Finally, the sponsored founder will need to comply with other requirements of the visa, including having job responsibilities constituting a “specialty occupation”, along with having at least a bachelor’s degree or its equivalent in the field. The H-1B application is also quite expensive with no guarantee of success, including both application fees and legal fees for an immigration attorney to help you thorough the process. In any event, if a startup is trying to bring a foreign founder to the U.S., it should consult with an immigration attorney who may be able to identify other visas for which the founder may qualify.

Making Sure You Stay Up to Date With Employment Forms

When hiring employees, there are a couple of administrative forms that employers are required to collect from their hires, and in some cases store and keep updated.

The first form is the I-9, or the Employment Eligibility Verification Form. The I-9 identifies employees and determines whether they are eligible for employment in the U.S. I-9s must be fully completed within 3 days of an employee’s start; filing an incomplete I-9 or filing late can subject an employer to significant fines and penalties. Employers are further required to keep I-9s on file through the employee’s separation from employment, until the later of 3 years after the start date of employment or one year after the date of termination/resignation.

Employers are also required to collect W-4s from employees, which sets forth the amount of tax employers must withhold from employees’ paychecks. Employees are permitted to amend their W-4 at any time to reflect a change in their status (e.g., marriage, birth/adoption of a child), such that employers are responsible for ensuring that employees’ W-4s are up to date. It is often good practice to have employees update (or verify as correct) their W-4s on an annual basis — annual performance reviews, if used by the company, provides a convenient event to have employees update their information.

Of course, these documents contain sensitive personal information such as social security numbers and identity documents, so employers must ensure that physical or electronic copies of these records are secure. There are a number of companies that provide online systems for companies to collect and maintain these records.

Finally, employers should check federal state employement laws to see what other documents or information must be provided to or collected from employees, sometimes depending on the position the employee is filling — such information may include background check questions, sick leave procedure, or notices of at-will employment.