On September 16, 2014, the Wisconsin Court of Appeals issued a landmark decision establishing new rules governing pay equity in Wisconsin workplaces. The case, Rice Lake Harley Davidson v. LIRC and Diane Mack, serves as a strong reminder to Human Resource professionals on the need to closely and continuously monitor wage levels of employees to ensure compliance with both state and federal pay equity rules. The case further demonstrates the difficulties that exist in determining whether those rules are satisfied and the risks that can result from non-conforming pay practices.
Facts of the Case
Pay equity cases are largely determined by the underlying factual differences between the higher paid male employee and the lower paid female employee. The factual differences in the Harley Davidson case were very controversial.
In 2003, a small Harley Davidson dealership in Rice Lake, Wisconsin hired Diane Mack. Mack was not from the area. She had no prior sales experience in any form of motorized vehicles. She was not a member of any motorcycle clubs. Most recently she had worked as a bartender in Menomonie, earning $10.00 per hour plus tips.
The dealership gave Mack a starting salary of $28,000 and within a year increased it to $34,000 (equating to approximately $16.35 per hour, $6.35 per hour more than she had been earning bartending).
In 2004, the dealership hired a new sales manager, Harold Dodge. Dodge had lived in the Rice Lake area for over 30 years. He was a longtime owner and rider of Harley Davidson motorcycles. He was the president of the local Harley Davidson Owners Club.
Dodge was most recently employed as Quality Manager at a prominent local manufacturer, where he was trained in ISO quality management certification processes. Dodge had been receiving a salary of $56,000 at his Quality Manager position. The Rice Lake Harley Davidson dealership offered to match his salary in order to induce him to accept the position.
In 2005, a new sales manager was brought in by the dealership, and Dodge’s job title was changed to general salesperson. He retained his starting salary.
In 2006 and 2007 both Mack’s and Dodge’s compensation were restructured into a commission plus base salary formula. Dodge’s base salary was reduced by 35%, to $36,400. Mack’s base salary was reduced only 21%, to $27,040. Both Mack and Dodge received the same commission formulas.
Mack admitted that as early as 2004 she was aware that Dodge was being paid significantly more than she was, but she never pursued any form of complaint. However, five years later, in 2009, Mack became disgruntled following her discharge from the dealership. She filed a complaint with the Wisconsin Equal Rights Division alleging that she was the victim of longtime wage discrimination based on the higher pay that Dodge had received. (Mack also claimed that her discharge was motivated by gender discrimination, but that claim was dismissed)
The dealership defended the claim on grounds that Mack’s claim was time-barred because she had known about the disparity for five years and had not done anything about it. The dealership also argued that the differences in pay were the result of factors “other than sex,” such as Dodge’s qualifications, experience, job duties and prior salary.
A Wisconsin Equal Rights Division administrative law judge found that the claim was not time-barred and that the dealership had engaged in unlawful wage discrimination. On September 16, 2014, that decision was upheld by the Wisconsin Court of Appeals.
Key Points in the Decision
The Rice Lake Harley Davidson case breaks new ground on wage discrimination claims in Wisconsin in several respects:
Wisconsin Significantly Expands the Time Period for Employees to Sue
Prior to the Harley Davidson decision, Wisconsin had been one of several states that held that the 300 day statute of limitations for filing discrimination claims begins at the time the decision which implemented the disparate pay was made and the employee was made aware of the decision. Mack’s attorneys argued, however, that the Wisconsin rule was wrong and recommended that Wisconsin adopt the new federal interpretation of timeliness contained in the “Lily Ledbetter” Fair Pay Act.
The Lily Ledbetter Fair Pay Act of 2009 was passed in response to a United States Supreme Court case which, in a 5-4 decision, held that a victim of wage discrimination had no right to file a claim if the decisions which created the wage disparity were made outside of the applicable statute of limitations. Under the new Act, each time a victim receives a paycheck that reflects an unlawful pay disparity, the statute of limitations begins anew.
The Rice Lake Harley Davidson dealership argued that the Lily Ledbetter Act was not applicable because the case was governed by the Wisconsin Fair Employment Act, not by federal law. The Wisconsin Court of Appeals agreed that was the case but also held that its past decisions, which limited pay discrimination claims to those made within 300 days of the decision, were wrong and that the true intent of the Wisconsin law was to allow a new statute of limitations to start upon the issuance of each paycheck. (In effect, the Court adopted the substance of the Lily Ledbetter Act without formally adopting the federal law.)
Wisconsin Narrows Available Defenses to Wage Disparity Claims
In addition to dramatically expanding the time period in which employees can file claims, the Court of Appeals also took an extremely limiting approach to the defenses available to employers accused of wage discrimination.
First, the Court held that there was no need for Mack to show that the wage discrimination was intentional.
Under federal law, a victim of wage disparity can pursue a claim under the Equal Pay Act or under the sex discrimination provisions of Title VII of the Civil Rights Act. The elements of the two laws have some key differences, including the requirement to show that the discrimination is intentional under Title VII. In Wisconsin, however, there is no state law equivalent of the Equal Pay Act, only the Wisconsin Fair Employment Act, which is a counterpart to Title VII, along with some additional “protected categories.” Notwithstanding this, the Court in Harley Davidson held that Ms. Mack’s claim could be construed using the elements of the federal Equal Pay Act, meaning that no evidence of intentional discrimination was necessary. Wage disparity claims in Wisconsin are now construed under the “strict liability” test.
Second, the Court took a very narrow interpretation of what “factors other than sex” are sufficient to justify wage disparity.
Under the Equal Pay Act, as adopted by the Court in Harley Davidson, an employer may avoid liability by establishing that the pay disparity results from 1) a merit system; 2) a seniority system; 3) a system that measures earnings by quantity or quality of production, or 4) any factor other than sex.
The dealer in Harley Davidson argued that multiple factors “other than sex” resulted in the difference between Dodge’s pay and Mack’s pay. For example, Dodge lived in the area and presumably had more familiarity with potential customers and Dodge was a prominent Harley Davidson enthusiast and president of the local Harley Davidson Club, thus presumably lending more credibility to his status than someone less associated with Harley Davidsons. Dodge had many years of experience as a Quality Manager at a prominent manufacturer. Mack was a bartender. Dodge was paid $56,000 at his former job. Mack was being paid $10 an hour plus tips. Dodge was trained in quality management certification processes. Mack had no such training.
The Court of Appeals rejected all of those factors and held that none of them constituted valid “factors other than sex.” For example, the Court held that while Dodge’s prior salary might have been a valid reason when he was hired as sales manager, it did not necessarily justify being maintained when he was transferred to the general salesperson position. Likewise, although Dodge had familiarity with the community and the Harley Davidson ridership group, there was no evidence that this was “necessary to perform the job.”
The fact that there was never any evidence that the dealership intended to differentiate between Mack’s salary and Dodge’s salary because Mack was a female was not a relevant fact according to the Court’s analysis.
HR Takeaways from the Harley Davidson Decision
Human Resource professionals should pay close attention to the impact that the Harley Davidson decision has on the potential for wage disparity claims to arise from the workforce. Steps should be taken to address this increased risk. Some examples of the key takeaways from the decision include the following:
Wage Discrimination Claims Will Seldom be Barred by Timeliness
As a result of the Harley Davidson decision, wage disparity claims by active employees who are still receiving paychecks will never be barred by timeliness. In recognition of this fact, it becomes important for employers to maintain records of the decision process that initially established salary levels of all active employees, even if those decisions occurred years ago.
Conduct Routine Audits of Wage Levels
Even if non-discriminatory at the time they were established, salary levels can become unlawfully disparate over time. If periodic audits are not conducted, employers could fail to realize how disparate their pay practices have become. The Harley Davidson decision makes it clear that intent is irrelevant – if the pay practices are unlawfully disparate, then liability will result regardless of the best intentions. Only periodic audits, for example, annually or biannually, will in many cases identify the potential exposure before it becomes a serious claim by a disgruntled worker.
Analyze Factors Used to Distinguish Wage Levels
The Harley Davidson Court took a very narrow view of what “factors other than sex” were appropriate to set different wage levels. While some of those factors might have been successful if the employer in that case had supplied more actual evidence to establish their validity and how they were tied to actual sales performance, the message of the case remains clear – don’t assume that just any differences in background, experience, qualifications or prior salary will automatically qualify as a valid basis for wage disparities. HR professionals should carefully itemize the factual differences and evaluate whether they truly support the wage differential in a realistic, not theoretical manner.
Be Cautious During Job Transfers or Demotions
Demoting or transferring employees from one position to another can create a ripe environment for a wage disparity claim, particularly if the employer elects to automatically maintain the same wage rate. When the employee arrives at a new job classification, his salary level from the former job classification will now be compared to employees in the new job classification, and, particularly if it’s a demotion, there is a good chance that a pay disparity could be created as a result of the demotion or transfer. HR professionals need to keep an eye out during these transitions to minimize exposure to pay disparity claims.
Termination Challenges Can Turn Into Other Claims
Ms. Mack’s initial goal was to challenge her discharge from the dealership. She may not have even considered the possibility of a wage disparity claim (since she had known about the pay differences for 5 years and never challenged or complained about it). However, once she retained counsel, her attorney investigated whether there were other claims that could be asserted in addition to the termination claim. As it turned out, the wage discrimination was the stronger claim (her discharge claim was dismissed). The Court’s decision did not result in Mack being reinstated, but it did result in an award of back pay along with recovery of her attorneys’ fees. HR professionals who are reviewing termination decisions must keep in mind that a challenge to the decision may open up other cans of worms, so it is important to review all aspects of the employment relationship when evaluating the legal risk associated with a termination decision.
Consider Results-Driven Compensation – But Document the Basis
One of the defenses to wage disparity claims is when the difference in compensation is the result of the different performance of two employees, either based on production or quality. Thus, the installation of performance-based compensation formulas constitutes a potential protection against wage disparity claims (as well as hopefully motivating superior performance). However, such programs must be well documented to avoid claims that the program is simply camouflage for hidden discrimination. Thus, performance incentive programs that rely solely on subjective evaluations of performance are more prone to legal attacks than those relying on objectively documented results.
The decision in Rice Lake Harley Davidson should be a wake-up call for Wisconsin employers who have not yet instituted formal, continuing procedures to guard against pay disparity, whether such disparity is intentional or unintentional. The defenses to such disparity are becoming fewer and fewer, and only well-documented factors will serve to avoid legal exposure should a claim be pursued. Even very small employers, such as the Rice Lake dealership, are subject to the increasingly stringent rules. Finally, apart from the potential for legal exposure, it is simply the right thing to do.
More information about the Harley Davidson case, or about conducting internal wage audits, may be obtained by contacting our Employment Law Team.