In 2021, the governor of Illinois signed Senate Bill 1480 and Senate Bill 1847 into law. The two bills amend the state’s Equal Pay Act of 2003, requiring submission of an equal pay registration certificate (EPRC). This means any private or publicly traded company with more than 100 employees in Illinois must submit demographic and pay data, as well as an Equal Pay Compliance Statement, to the Illinois Department of Labor (IDOL) before March 24th, 2024. Each employer will receive a notice from IDOL with a specific submission deadline.

Companies that fail to submit an EPRC will be subject to certain monetary fines. Additionally, if the data submitted indicates that the company is paying unequal wages between employees of different gender or racial backgrounds, IDOL may initiate an investigation, which can be challenging and time-consuming for companies to deal with.

While the requirement to submit employee data is nothing new—companies already need to do this for EEO-1 reporting purposes—the Equal Pay Compliance Statement is unique to the state of Illinois. In fact, it radically changes the pay equity framework because companies need to proactively certify to the state that they’re paying employees equitably regardless of gender, race, or ethnicity. Although the rules don’t explicitly mandate a pay equity audit, an audit is effectively necessary for the company to document and confirm their compliance with the equal pay requirements.

In this article, we’ll provide a brief overview of the requirements, then discuss how pay equity audits can help Illinois employers prepare to comply.

The Requirements in Brief

Which companies are subject to the EPRC?

Two criteria determine whether a company is subject to the EPRC.

First, the organization must be a non-government entity with 100 or more employees who (i) physically worked in Illinois and (ii) who worked outside of Illinois but reported to management based in Illinois on December 31st of the calendar year immediately preceding the reporting deadline. For example, for companies that have a filing deadline in 2023, the 100-employee threshold is based on headcount as of 12/31/2022.

The other criterion is that the organization must be required to file an Annual Employer Information Report EEO-1 with the Federal Equal Employment Opportunity Commission.

New companies meeting the employee threshold must obtain an EPRC within three years of starting operations.

What information is submitted to IDOL?

Companies must submit demographic and wage data for covered employees during the calendar year immediately prior to the submission deadline. For example, for companies that have a filing deadline in 2023, employee data from January 1, 2022 through December 31, 2022 must be reported.

Demographic data consists of gender, race, and ethnicity information as well as an employee’s job title, county, and EEO-1 job classification.

Wage data is meant to capture a comprehensive view of how much each employee is paid during the calendar year—including base salary, earned bonuses and commissions, deferred compensation, and stock-based compensation. According to IDOL’s guidance on the rule, pay data as reported on an employee’s W-2 Box 5 should have the most complete information for the purposes of EPRC data reporting.[1]

Businesses must also provide the hire date, termination date, and hours worked by each employee. This allows IDOL to normalize pay for part-time employees, as well as those that have only been employed for part of the year.

What is an Equal Pay Compliance Statement?    

The Equal Pay Compliance Statement is what differentiates the Illinois requirements from other state laws on pay equity. To summarize, this requires an officer of the company to certify that:

• The company is in compliance with state and federal equal pay laws

• The average pay for female (or minority) employees isn’t consistently below the average pay for male (or non-minority) employees within each EEO-1 job category. This assessment needs to take into account valid factors that can explain pay differences between employees. These include length of service, requirements of specific jobs, experience, skill, effort, responsibility, working conditions of the job, education or training, job location, use of a collective bargaining agreement, or other mitigating factors

• Decisions regarding an employee’s job classification, as well as retention and promotion opportunities, are made without regard to gender

• Corrective action is taken when pay and benefit disparities are identified

The certification must also explain the approach used in determining compensation and benefits, as well as how often these decisions are evaluated.

How often must companies submit EPRC requirements?

All covered employers must go through a recertification process every two years after their initial submission.

Performing A Robust Audit To Comply with Illinois’ Pay Equity Requirements

As noted above, the proactive certification under the Equal Pay Compliance Statement is quite strict and expansive. In order to certify compliance with equal pay laws and that pay doesn’t differ based on gender or racial factors, the company needs to have a process to validate that this is in fact the case. This is where a robust pay equity audit comes in.

A pay equity audit aims to assess the existence of gender or racial pay gaps

A pay equity audit uses statistical modeling tools to assess whether any structural pay disparities are driven by gender, race, ethnicity, or other protected class status, after taking valid factors into account (e.g., role, experience, performance, location).

Illinois’ equal pay laws uses a framework of “substantially similar work” wherein comparable work is assessed based on similar levels of skill, effort, responsibility, and working conditions. In other words, employees performing substantially similar work should receive the same pay, and any differential must be explained by valid factors such as seniority, performance, or training.

The primary output of a pay equity audit is to assess whether there’s evidence of a structural gender or racial pay gap and, if so, quantify the magnitude of this gap. This can be done at an aggregate level (e.g., for all US employees or for all employees in Illinois). It can also take a more granular view (e.g., for each employee cohort that performs substantially similar work).

When we perform these analyses, we recommend doing both aggregate and granular cuts of data. The aggregate analysis captures a larger employee headcount, which improves the robustness of the statistical modeling. A granular view aims to determine if there are any pockets of concern that a population-level analysis may not reveal.

Companies with multistate operations should be aware that state laws outside of Illinois may be different and could be more or less stringent. Additionally, state pay equity laws are rapidly evolving. In our experience, best-in-class HR functions take a comprehensive approach to pay equity in which they engage an economic consultant like us along with outside legal counsel to advise on state and national law evolutions. In tandem, the company and their advisors review changes in the law and emerging best practices in the pay equity science. They also coordinate the necessary analyses to occur at the right times during a calendar year.

To learn more about the various elements of a pay equity audit, request a copy of our handbook, What to Expect from a Pay Equity Study.

Leverage pay equity modeling data to determine retention or promotion inequities

Traditional pay equity audits focus on flagging pay disparities. An emerging best practice is to repurpose the pay equity analysis and apply similar statistical modeling techniques to identify if there are potential job classification, retention, or promotion disparities based on gender or race. This is important as companies also need to certify this as part of the Equal Pay Compliance Statement.

In a promotion equity study, the goal is to account for valid factors that might affect an employee’s likelihood of promotion, such as their time in the role, performance rating, and scope of responsibility. This is tested against actual promotion decisions. The model will then assess whether the promotion probabilities are impacted by an employee’s gender or racial backgrounds.

The reason advanced modeling techniques are critical is that simpler analytics fail to capture the nuance in job classification, retention, or promotion decisions. Take promotion as an example. Suppose a company has 50 employees in analyst roles, where there 25 female and 25 male employees. If 10 employees got promoted, 9 males and only 1 female, a surface-level analysis may suggest that promotion decisions are in favor of male employees. However, if the majority of male employees have been in the role for three years, while most female employees have less than a year of tenure, then this fact could help explain the variance.

Similar to a pay equity audit, the analysis can be done at the aggregate company level or at a more granular level per employee cohort.

For more on how a promotion equity analysis is performed, read our article, “Promotion Equity – Linking Pay Equity to Diversity and Inclusion.”

Take corrective action on issues identified by the pay equity audit

Another component of the Equal Pay Compliance Statement is to certify that corrective action is taken once pay and benefit disparities are identified. A pay equity audit can facilitate this process. Aside from quantifying pay disparities, another outcome of the analysis is to identify employees whose pay differs most from what the statistical model predicts (these are also referred to as outlier employees).

A core principle of a statistical pay equity analysis is that although HR information system data can point to potential issues, ultimately the data is a simplification of true employment and pay situations.

Therefore, when such outlier employees are identified, we recommend the company perform a hands-on forensic analysis. This involves reviewing each outlier employee and determining whether there are factors not captured in the statistical model that explain the employee’s pay.

When we help companies with these types of analyses, we provide a tool with a list of employees that have large pay disparities for further review. The company may then involve a cross-functional group, including the compensation team in partnership with HR business partners or business unit executives, to review each outlier employee. For example, an employee may have just recently been promoted to a new, highly specialized role and doesn’t yet have all of the requisite skills and industry know-how compared to the rest of their colleagues. This skill disparity may not be captured by existing fields in the HRIS data, but is a valid business factor that can explain the pay differential.

On the other hand, the forensic review may reveal employees with no discernible reason to merit their lower pay. For this population, a pay adjustment is necessary to remediate the disparity. While the statistical model will have a recommended pay range, the amount of the compensation adjustment is still a subjective decision that the company needs to make. These decisions need to be aligned with the organization’s compensation philosophy and take financial budgets and risk management into account.

Another decision point in the remediation phase is on the timing of the pay adjustment. The most common alternatives are:

• Make pay adjustments as part of the next regular merit cycle
• Establish a special off-cycle pay adjustment
• Phase in over multiple pay adjustment cycles

Ultimately, the decision will vary based on the facts of the situation and financial constraints that the company needs to work with. Keep in mind that achieving pay equity is a journey that takes time, effort, and cross-functional collaboration within the organization.

For more on the considerations when taking corrective action, see our article, “5 Key Questions for Pay Equity Remediation.”

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How can Equity Methods assist?

We help companies by performing a pay equity assessment, in collaboration with internal and/or external counsel. We also work to identify outlier employees and analyze potential root causes of pay disparities.
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Before the next recertification, review your job architecture on issues identified by the pay equity audit

Illinois employers need to recertify the EPRC every two years after initial submission. This timeframe provides sufficient opportunity for the company to implement policies and initiatives to improve the pay equity assessment process underlying the certification. One such initiative is to reevaluate the company’s job architecture. Many Illinois companies likely wouldn’t have been able to review their job architecture in time for the initial submission, so year two of compliance can be an important milestone.

A well-thought-out job architecture—including job levels, career paths, and pay structures—is a cornerstone to ensuring fair pay. Many small firms start out with a very simple job structure (if they have one at all), which may not scale as the company grows. This creates a situation where employees could be paid drastically different amounts even though the skill, effort, and responsibility required for the jobs are substantially similar. If this inadvertently creates a pay differential that consistently favors employees of a particular gender or racial category, this can get flagged in the EPRC.

The first step is to assess whether the company’s existing job architecture continues to serve the organization. It’s important to understand whether there are small refinements to make in certain areas, or whether it’s time to start overhauling the structure altogether. If the latter applies, it’s best to start soon, as this can be a lengthy, multi-month process.

A robust job architecture should have:

• A system of determining the value and complexity of jobs, that can then be organized and mapped into an overall hierarchy of levels and career paths

• A consistent framework for assigning job levels based on a transparent set of criteria

• A clear approach to determining pay for each employee based on relevant factors tied to the company’s compensation philosophy

There are many competing approaches on how to set up a job architecture. The goal is to pick one that works best given the company’s structure and compensation philosophy. Standing up a well-fitting structure is crucial. Without one, there’s more room for discretion in pay decisions, which increases the likelihood of disparities creeping in.

To learn more, see our article, “Five Reasons To Review Your Job Architecture Today.”

Wrap-Up

Pay equity laws are continuing to evolve across the country and the globe. While the US framework is largely predicated on a principles-based paradigm of equal pay for substantially similar work, many countries in Europe are taking a more prescriptive approach, requiring companies to provide data and report pay gaps.

For this reason, best-in-class HR functions engage in a thoughtful and frequent analysis to assess pay equity. They involve a cross-functional internal team headed by legal and compensation leaders. They also engage external legal counsel to advise on the evolving legal landscape and economic consultants to apply leading modeling practices that pair compliance with an ethos of continuous process improvement.

Illinois is the first state in the country to mandate an Equal Pay Registration Certificate that leans more toward the EU model while maintaining the methodological framework inherent to the US model. Nevertheless, the baseline steps to ensure compliance with the Illinois requirements remain the same as what we recommend for national or other statewide studies. That is, lay a solid foundation with a good job architecture and pay guidelines, perform ongoing pay equity audits, and take corrective action when issues are identified.

Now that many companies are farther along their pay equity journey, they’re prioritizing new themes in each subsequent annual study. Our clients, for instance, are asking us to carry out more robust root-cause analytics to disentangle the underlying drivers of recurring pay disparities. We’re also supporting companies with technology that lets them leverage insights from their annual pay equity study throughout the year as they make hiring decisions. Continued innovation in the pay equity space is boosting the value of this exercise by driving strategic improvements to the overall human capital function.

If you have any questions about the topics covered in this article, or about pay equity studies in general, please contact us.

[1] While IDOL points to W2 data for the EPRC data reporting requirement, statistical pay equity studies are a different matter. There, we would use the target or grant-date value of equity grants rather than the W2 value, as the latter incorporates effects from stock price movement and employee exercise decisions, which are not part of the company’s pay practices.