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The last two years have brought significant changes to the nation’s employment landscape. Perhaps the most lasting change is the increase in remote and/or hybrid work. With this evolution, employers face numerous questions surrounding compensation. Can employers continue to consider the rising cost of gas for their commuting employees and not their remote employees? Can employers incentivize their employees to come back to the office by increasing the compensation of those who elect to return? These questions must be analyzed not only through the lens of the employer’s overall compensation philosophy but a legal lens as well.

Our legal lens must start with the federal Equal Pay Act of 1963 and consider legislation passed at the state level. Over the past few years, several states have passed rules addressing equal pay. In Colorado, for example, Equal Pay for Equal Work details the legal factors an employer may rely on when a pay disparity is identified. The Equal Pay Act of 1963, on the other hand, allows for a “differential based on any other factor other than sex.” Though not all states have a rather restrictive and identifiable list of legally justifiable factors like Colorado, more recent pay equity laws generally include language that restricts an employer’s ability to set different pay rates for employees performing the same or substantially similar work.   

Throughout the history of case law, the geographical location of where the work is performed has been a legally defensible factor for pay differences between employees. For Colorado, this is evidenced by the state Legislature’s inclusion of “the geographic location where the work is performed...” as one of the factors that can justify a pay disparity in the Equal Pay for Equal Work Act. Legislatures understand that the costs of living in different areas of the country or a particular state may need to be factored in when setting pay rates. We have heard of instances of employers relying on this factor. For example, it has been reported that tech companies have revisited the compensation for employees who relocated from Silicon Valley or other large cities to areas with a far lower cost of living expense now that most of those positions will remain remote. 

An employer is likely legally justified in paying an employee working in New York City a higher wage than an employee performing the same work in Cleveland. But what is an employer to do when their remote employees and office employees reside in the same geographic location? As mentioned above, this factor has largely come into play when employees are not living or working in the same metro area. Paying employees who perform substantially similar work differently because one is remote and the other comes into the office would likely be impermissible under the Colorado Equal Pay for Equal Work Act because the geographic location of the employees is the same. However, we have no way of knowing how specific Colorado courts will be when defining “geographic location.” There could potentially be an argument that the geographic location is different if the office employee is working in downtown Denver versus the remote employee working in a surrounding suburb. Presently, case law has not clarified how narrow a geographical location is legally justifiable, so there is likely some risk to employers if they were to make such distinctions.

Employers should also be cognizant of the potential discrimination claims that could arise from paying remote employees less than those who come into the office. If an employee were not able to come into the office due to a disability or some other reason related to a protected status or action, this could give rise to a claim under antidiscrimination statutes.

From a legal standpoint, employers should, at a minimum, review the compensation of their remote employees compared to those performing work in the office to determine if any disparities exist. If those employees are all performing work within the same geographical location, employers may need to confer with their counsel as to whether there are other legally justifiable factors to explain the pay disparities identified. Employers should also take the time to re-visit or, in some cases, establish an overall compensation philosophy. Having such a philosophy in place makes compensation decisions much easier for employers when there is a change to the employment landscape. 

If you need assistance with a proactive pay equity analysis, please contact aaps@employerscouncil.org. If you are interested in revisiting or establishing a compensation philosophy, please contact compensation@EmployersCouncil.org.