On January 29, 2016, the Equal Employment Opportunity Commission (“EEOC”) announced proposed rule changes that would require all employers with 100 or more employees and federal contractors to report employee wage data in a revised Employer Information Report, commonly known as the EEO-1. The notice of proposed rule was officially published in the Federal Register on February 1, 2016.

Pay inequality has been a focus of the Obama administration since 2008, and it consistently has been a hot button issue throughout his two terms. Thus it is no surprise that the proposed changes were announced on the seventh anniversary of the Lilly Ledbetter Fair Pay Act – the first official piece of legislation of the Obama administration that amended the Civil Rights Act of 1964 by clarifying that the statute of limitations period for unequal pay lawsuits starts over with the issuance of each new paycheck affected by discrimination.

Employers should be aware that the proposed rule, as written, would impose significant burdens on employers and perhaps subject them to more investigations and enforcement actions. The EEOC has always collected annual workforce demographic data by race, ethnicity, sex and job category from certain private employers, including federal contractors.  However, it now seeks to collect certain pay data to help the EEOC and Department of Labor identify pay discrimination and support employers’ compliance with federal discrimination laws.

The proposed changes to the EEO-1 requires employers to report the total W-2 earnings for each employee. Employers would use W-2 data to allocate wages paid to employees in one of the ten EEO-1 job categories into twelve pre-defined pay bands.  Specifically, employers would identify employees’ total W-2 earnings for a 12-month period, and report the number of employees that fell within each pay band, broken out by race, ethnicity, and sex.  The new EEO-1 would also require employers to report the total number of hours worked by the employees included in each pay band.

On its face, the proposed rule has significant ramifications for employers with more than 100 employees. Employers subject to the rule will necessarily have to modify their pay practices to ensure that the required information is properly maintained and recorded.  Furthermore, maintaining these records may be even more burdensome, from a practical business standpoint, in light of the EEOC’s reporting deadline of September 30th.  Employers will likely have to use W-2 forms from the prior year in order to fill out the form.

In addition to the added administrative burden is the aura of uncertainty as to how this information is going to be interpreted by the EEOC. While employers do not have to report specific salaries of its employees, the form does not provide any explanation for the subjective factors related to pay, such as performance, experience, education, and seniority with the company.  However, the EEOC claims that “statistical tests” – which have not even been developed yet – will be used as an initial check of the W-2 data to be collected and compared to aggregate industry or metropolitan-area data.

Collecting the pay data without any context whatsoever will likely lead to several instances of misinterpretation. An employer’s pay practices that are perfectly adequate and compliant with the law may be misconstrued as a discrimination.  The high likelihood of misinterpretation will certainly lead to more investigations and enforcement actions – many of which will have no merit at all.

The EEOC’s plan to enforce federal anti-discrimination laws based on its own analysis of wage data suggests that it will not subside its increased efforts to combat systemic discrimination. Accordingly, employers who are subject to EEO-1 reporting requirements should review their pay practices to identify and, if necessary, address any issues that may draw the EEOC’s attention.  The proposed rule is subject to a notice-and-comment period that ends on April 1, 2016. Employers concerned about the impact of the new rule on their business should submit comments to the EEOC before that time.