A growing number of local and state legislatures have approved legislation aimed at eliminating wage disparities based on gender and race through transparency measures such as requiring employers to post salary ranges in job ads.

Meanwhile, pay audits are suggested as a means for companies to discover and remedy gaps in pay. The recommendation often includes having attorneys conduct the audit so businesses can take advantage of the right to keep confidential the information discovered during the audit.  

As a result, having in-house counsel conduct the analysis sounds like a no-brainer but there can be pitfalls. Counsel must be careful not to waive the right to keep the information privileged. 

“The pay equity study is generally privileged if it is done at the direction of the attorney for the purpose of providing legal advice,” Andrew Turnbull, a partner in the Washington, D.C., office of Morrison Foerster, told Legal Dive. “With in-house counsel, there can sometimes be a question of whether that individual is wearing an ‘attorney hat’ or a ‘business hat.’ If the attorney is wearing more of a ‘business hat,’ then the pay equity audit may not be privileged.” 

Two types of privilege

When conducting a pay audit, there are two types of privilege that can be claimed by in-house counsel. The first is the commonly known attorney-client privilege. The second comes under what’s known as the work product doctrine. 

Attorney-client privilege relates to providing legal advice, which is confidential.

Attorney work-product privilege is different. It comes into play if there is “litigation on the horizon,” Turnbull said. The doctrine protects material prepared by an attorney for trial or investigation by regulators. 

Both types of privilege can provide shields for pay equity studies, Turnbull said. However, the right to keep the information private can be waived, either expressly or inadvertently. 

Protecting privilege

How can in-house counsel prevent the unintended waiver of privilege in a pay audit? There are several steps to take. 

First, document the purpose of the pay equity study at the beginning of the review.

The most critical aspect of maintaining the privilege is to make sure at the outset that the analysis is being directed by legal counsel for the purpose of providing legal advice to the company. 

“If you skip that step, you are at risk that the privilege won’t apply because it will be found that legal counsel is not directing the project and providing legal advice in conjunction with it,” said Mike Muskat, a partner in the Houston office of Muskat, Mahony & Devine. 

“We do see in some instances where HR might start running its own analysis or working with a vendor and they are doing some preliminary stuff,” Turnbull said. “If the privilege isn’t intact, these can be subjected to disclosure.” 

Failing to properly engage the privilege upfront is a common mistake, he said. 

Turnbull said his firm has an engagement letter they send out that explains the review is being conducted for the purpose of providing legal advice. 

Second, wear the legal hat. In-house attorneys sometimes provide legal advice and sometimes they provide business advice.

You want to avoid a situation where a court can find that the in-house counsel role was simply to provide business input for the project and not legal advice.

Wearing the business hat means that in-house counsel is involved in communications about issues within the company but not providing legal advice, Muskat said. 

An employer can have an in-house lawyer who is doing the pay equity analysis but is not contributing legal advice. The attorney is not offering information that is any different from that provided by HR. The information is practical and business-oriented, not legal. 

Turnbull said he is seeing, with some frequency, executives who are attorneys but haven’t practiced law in many years. “They are basically HR professionals,” he said. This can be dangerous, because their role isn’t “really to provide legal advice; they just happen to be attorneys.” Claiming privilege in such a situation can be difficult, he said. 

In some instances, courts have found that the attorney was wearing the business hat, Turnbull said. 

What they’re looking for is whether the person typically serves in a legal capacity. What is the nature of the communication? Was it to give business advice or to give legal advice? 

Sometimes a proactive pay equity analysis can be problematic. As part of a commitment to gender equality, some companies have launched a pay equity study. Because the study is to discover wage disparities and to show they’re good corporate citizens, it could lead to the view it wasn’t done to provide legal advice, Turnbull said. 

Third, create a privilege team and keep communications only within the group, and don’t share results outside it.

The team needs to be made as narrow as possible with as few people as possible, Turnbull said. If it expands over time, document the expansion.  

In-house counsel should then make sure that the information provided in the analysis is communicated only to people who have a business need to be involved in the project. If information is shared outside the group, privilege is put at risk. 

Muskat said it’s important the team be told not to communicate information outside the group. By giving that explicit instruction, you go a long way toward establishing that people receiving the communication must have a business need to know, he said. 

Sloppiness in terms of sending the pay analysis to other managers without including them in the privilege team is another common mistake, Turnbull said.

Fourth, create protocols for the privilege team. These typically include making sure that communications and documents related to the pay equity study are labeled as “privileged” and “confidential,” Turnbull said. 

Fifth, consider a non-privileged pay audit. Some state and federal agencies require pay studies as a condition for doing business with them.

For example, the Office of Federal Contract Compliance (OFCCP) in the Department of Labor doesn’t describe in any detail what the analysis must provide, Muskat said. The agency just requires that businesses conduct a wage analysis. 

This gives contractors a great deal of leeway. In such instances, in-house counsel can conduct a limited and non-privileged analysis for the purpose of complying with the requirement, Muskat said. The study is not as complex as a full-blown analysis that examines all the positions in the company for pay gaps.  

Sixth, consider handing the audit over to outside counsel. By doing that, both Muskat and Turnbull said, you provide solid proof that the pay audit is being conducted for the purpose of obtaining legal advice. 

U.S. Supreme Court considering privilege

The issue of privilege is also before the U.S. Supreme Court. In re Grand Jury is the first time in 40 years the court has taken up the issue of attorney-client privilege.

The case comes to the nation’s top court in response to a 2021 ruling from the U.S. Court of Appeals for the Ninth Circuit. The California appeals court ruled that a law firm had to turn over tax-related records because its corporate client had sought business, not legal, advice. 

The Supreme Court agreed to take on the legal matter to clarify the standard that federal courts should use in determining whether information is privileged. 

There are several possible tests, according to the Association of Corporate Counsel (ACC). Two standards are most often used. The “primary purpose test” under which the purpose of the communications determines whether attorney-client privilege applies is used in several federal circuits.

However, in a 2014 case written by Justice Brett Kavanaugh, the D.C. federal circuit held that privilege exists if solicitation of legal advice is one of the “material purposes of the communications,” what’s known as the significant purpose test. 

ACC and the U.S. Chamber of Commerce have urged the adoption of the “significant purpose test” in a friend-of-the-court brief. The standard “reflects the day-to-day realities that attorneys, particularly in-house counsel,” face in their dealings with their business clients, according to the advocacy organizations. 

“The notion that discussing one business topic too many, or for too long, would rob legal advice of privilege would compel lawyers and clients to segregate their conversations and censor themselves. And the costs of those practices would be that clients receive worse advice and meet their legal obligations less frequently and ably,” they argued. 

The court’s decision is expected later this summer.