SEC Issues Helpful Guidance on Pay Ratio With a Focus on Contractors, Determining Median Employee

October 28, 2016

As companies ramp up preparations for the upcoming Dodd-Frank pay ratio requirement, which will take effect for most companies starting in 2018, the SEC has released further guidance on several controversial aspects of the rule. The new Compliance and Disclosure Interpretations address five issues contained in the final rule, including details on how companies should determine the median employee and whether independent contractors count as employees and thus must be included in the pay ratio calculation.

  • Determining the Median.  The guidance reiterates the final rule's commitment to flexibility for companies choosing a compensation measure that will be used to identify the median employee, noting that "any measure that reasonably reflects the annual compensation of employees" may be used depending on the company’s facts and circumstances.  However, the use of annual or hourly rate alone, without consideration of actual hours or days worked, generally is not an appropriate approach.
  • Independent Contractors and Leased Workers. The final rule stated that companies must include in the pay ratio calculation anyone employed by the company whose pay is also determined by the company, but confusion remained as to the treatment of temporary workers and independent contractors. The new guidance states that if the company uses a staffing agency and only specifies the minimum level of compensation temporary workers must receive, those workers would not be considered "employees" for the purposes of the rule. In addition, self-employed independent contractors may qualify as an "unaffiliated third party" with self-determined pay, excluding them from being considered "employees."
  • Time Period When Measuring Pay. The guidance clarifies that when measuring pay for all employees in order to determine the median, companies are not required to use a full year of pay, nor are they required to include the determination date (a date within the last three months of the fiscal year) in the period for which pay is measured. This means that a company choosing October 1 as its determination date may use the previous 12-month period to measure pay, or even the period from January-October, if it would identify the median employee reasonably accurately. 
  • Furloughed Employees. The guidance reiterates that full-time employees who had periods of unpaid leave during the year may have their pay annualized, but does not clarify whether an employee who is furloughed as of the determination date should be considered an employee for pay ratio purposes.