Fair Pay Act of 2009: Implications for Compensation Modeling - Part 3

In Part 1 of this series, I provided a summary of two compensation modeling approaches: (1) the human capital approach and (2) the direct determinants approach. To recap:

If one had access to all of the data on the direct determinants of compensation and ran an ideal model, one would find that compensation is perfectly preducted by these factors, and that no protected class status variable would enter the model. That is, the model would show no gender or race effects on compensation. Under these conditions, could one infer that no discrimination exists? No- discrimination may exist either as disparate impact or as disparate treatment.

In Part 2 of this series, I discussed the implications of the Fair Pay Act with respect to disparate impact- the case in which a neutrally applied practice differentially affects the protected and unprotected classes. The central issue here centers around what is meant by "other employment practices" and an examination of direct and indirect determinants of compensation.

In the third and final part of this series, I will discuss the implications of the Fair Pay Act with respect to disparate treatment. Disparate treatment refers to the case in which a practice is applied differently for the protected and unprotected class members. An employee may claim disparate treatment on an individual basis by claiming that, but for the discrimination, (s)he would have achieved a better value on the direct factor. The central question here is whether the action at issue is an "other factor" under the Fair Pay Act.

With respect to the question of disparate treatment on a class-wide basis, the econometric issue is whether or not there is prima facie evidence that similarly-situated protected and unprotected class members on average do not have the same values on a direct or indirect "other factor", and whether or not the data support a claim of commonality. That is, the analysis of disparate treatment is essentially the same as it has always been, except that the outcome variable for which disparate treatment is alleged is the outcome on the determinant of pay.

Little should change in the analysis of disparate treatment claims as a result of the Fair Pay Act. The plaintiff will allege that some intentionally discriminatory employment decision (either a direct or indirect determinant) resulted in her pay being too low. This event could occur at any time in the employee's career. An employee could provide evidence that they would have scored "better" on any direct or indirect determinant of pay, but for the intentional discrimination. As long as that event reflects an "other employment practice", the event would no longer need to occur within the relevant time period.

For a class claim, the disparate treatment question concerns whether similarly-situated protected and non-protected employees on average have different "bottom-line determinant scores". This could be done by studying compensation as a function of (a) protected class status (whose coefficient indicates possible disparate treatment), (b)  all of the measurable determinants of compensation, and (c) all of the factors making protected and non-protected class members similarly situated with respect to the unmeasured, unmeasurable, omitted factors which affect compensation. Since we are dealing with a conglomeration of unmeasured factors, defining "similarly-situated" may become very complex.

In conclusion, the Fair Pay Act returns the statistical analysis of disparate impact and disparate treatment to where it was prior to the Supreme Court's ruling in Ledbetter. However, going forward cases will force the Court to specify exactly what constitutes "other factors" and what does not. This, in turn, will determine the focus of the statistical analysis.