Compensation

Employee’s Poor Performance Leads to Reduction of Preferred Salary

by Adam R. Bennett

The U.S. Court of Appeals for the 6th Circuit— which covers Kentucky, Michigan, Ohio, and Tennessee—recently affirmed a lower court’s ruling that an employer didn’t violate the Equal Pay Act (EPA) even though it paid a man and a woman different wages for performing the same job.

Michigan

The appeals court rejected the man’s argument that he was paid too much compared to the woman because both employees voluntarily negotiated and elected the compensation scheme that proved to be more financially advantageous to the man.

Facts

From 2009 to 2013, “Martin” worked for Preferred Solutions, Inc., a Michigan-based company that provides staffing for corporate clients. Martin, along with his coworker, “Anita”, led Preferred’s healthcare information technology staffing group.

In their professional capacities, Martin and Anita performed the same job, had the same responsibilities, and earned a share of the profits they collectively generated for the company. Both were granted the opportunity to negotiate their pay with Preferred’s CEO, “Christina”.

Martin negotiated a deal in which he was paid 20% of the healthcare staffing group’s annual profits and no guaranteed salary. Christina offered Anita the same deal, but she opted instead for a guaranteed salary of $100,000 plus 10% of the group’s profits.

At the time Martin and Anita negotiated their salary deals, it was unknown who would make more money. However, Martin’s deal ended up being far more advantageous than Anita’s. Between 2009 and 2013, he out-earned her by more than $694,000.

Despite record earnings, the honeymoon period between Martin and Preferred eventually wore off, and his relationship with the company soured. His coworkers complained about his sales performance, alleging he “was not pulling his weight.” Christina claimed that he was insubordinate to a number of her requests.

For those reasons, in May 2013, Christina told Martin that she was modifying his compensation plan. From that point forward, the company would pay him the same salary it paid Anita—a $100,000 salary plus 10 percent of the profit pool.

The employment relationship between Martin and Preferred came to an end in December 2013 after he disobeyed a direct order from Christina about his supervision of a Preferred employee. Preferred terminated his employment at that time.

In response, Martin filed suit, alleging that Preferred violated the EPA by paying him more than his female counterpart for 3 years and then lowering his compensation to match hers. A lower court granted summary judgment (dismissal without a trial) in favor of Preferred. The court found that Preferred conclusively established that sex played no part in the pay difference between the employees. Martin appealed.

Court’s decision

The 6th Circuit addressed two issues. First, it considered whether Preferred violated the EPA when it paid Martin more than Anita between 2009 and 2013. Second, it considered whether the company violated the EPA when it modified Martin’s compensation plan so that he would make less money annually but be paid the same salary as Anita.

In addressing the first issue, the court laid out a three-step process for determining whether an employer has violated the EPA by practicing wage discrimination.

First, the employee must show the employer paid different wages to employees of different sexes performing equal work that requires “equal skill, effort, and responsibility, and [is] performed under similar working conditions.” The court determined that Martin had shown that from 2009 to 2013, he and Anita were paid a different wage for performing the same job.

Second, the employer may counter the allegation of wage discrimination if it can show that the wage differential is the result of a seniority or merit system, a system that measures earnings by quantity or quality of production, or any factor other than sex.

The court held that the pay differential was based on a factor other than sex. Both employees freely negotiated their compensation plans with Preferred, so even though the company paid Martin more for the same work, it was only because he opted for the more advantageous compensation plan, which Anita declined.

Third, the court must consider any evidence the employee provides to show that the employer’s defense is meant to disguise an actual motive that would violate the EPA. Because Martin was unable to prove to the court that he and Anita were at one time paid different rates for any reason other than their freely negotiated deals, the court held that Preferred didn’t violate the EPA when it paid him more than it paid her.

Addressing the second issue—whether Preferred violated the EPA by decreasing Martin’s salary—the court held that the company didn’t violate the law when it lowered his pay. The EPA forbids an employer from lowering an employee’s wages only if it does so to remedy an underlying violation of the Act.

Preferred didn’t lower Martin’s pay to correct an underlying EPA violation because it didn’t violate the law when it paid him and Anita different wages. Instead, the company lowered his pay because of his poor job performance.

Because it didn’t decrease his pay to correct an EPA violation, Preferred didn’t run afoul of the EPA by decreasing Martin’s salary to match Anita’s salary. Schleicher v. Preferred Sols., Inc., No 15-1716, 2016 U.S. App. LEXIS 14050 (6th Cir., 2016).

Takeaway

Outside of a few narrow exceptions, employers must generally pay employees of different sexes equal pay for performing equal work that requires equal skill, effort, and responsibility under similar working conditions. Although the pay arrangement in this case wasn’t discriminatory, if you fear that a discriminatory pay disparity exists at your company, it’s best to increase the employee’s pay to adjust for discrimination rather than decrease it. You may commit a separate violation of the EPA by decreasing an employee’s salary to adjust for discrimination.

Adam Bennett, a contributor to the Ohio Employment Law Letter, can be reached at abennett@porterwright.com or 614-227-1983.