Last week, Governor Brown signed into law Assembly Bill 2282, which was introduced in February 2018. The bill is another amendment to California’s Equal Pay Act, which has now been amended three times since January 1, 2016, when the Fair Pay Act expanded the law to apply to employees performing “substantially similar work” and limit the factors employers can rely on to justify pay disparities. The changes to the law take effect on January 1, 2019.
The new amendments are primarily intended to clarify the obligations imposed on employers by Assembly Bill 168, which took effect on January 1, 2018. AB 168 prohibited employers from asking job applicants for salary history information, and it also required employers to provide “applicants” with the “pay scale” for a position based on a “reasonable request.” Since AB 168 took effect, employers have struggled to interpret these requirements, including whether “applicants” included current employees, what information had to be included when providing the “pay scale,” and what constituted a “reasonable request.” AB 2282 addresses these questions by providing more details about employers’ obligations. Specifically, the new amendment provides:
- An “applicant” is an individual seeking employment, not a current employee.
- “Pay scale” is a salary or hourly wage range, and does not include bonuses or equity compensation.
- A “reasonable request” is a request made after an applicant has completed an initial interview with the employer.
The amendment also states what was previously understood: The ban on inquiring about an applicant’s pay history does not prohibit inquiries about an applicant’s “salary expectations.”
Finally, the new amendment drives home that employers cannot rely on prior salary – ever – to justify a pay disparity between employees performing substantially similar work. Existing law said employers could not rely on salary history information of an applicant as a factor to determine what salary to offer the applicant. Existing law also said employers could not use prior salary “by itself” to justify any disparity in compensation. The amendment removes the “by itself” limitation, and also adds a new sentence that says: “Prior salary shall not justify any disparity in compensation.” However, the amendment provides a slight exception for current employees, by providing: “Nothing in this section shall be interpreted to mean that an employer may not make a compensation decision based on a current employee’s existing salary, so long as any wage differential resulting from that compensation decision is justified” by the statutory factors of a seniority or merit system, a system that measures earnings by quantity or quality of production, or a “bona fide factor” other than gender, race or ethnicity, such as education, training or experience.
What This Means
This amendment provides employers with some additional clarity by better defining their obligations to provide pay scale information to applicants. The amendment also makes it clear that employers cannot rely on prior pay in initial salary setting, and cannot include prior pay even as one consideration in justifying a pay disparity between employees performing substantially similar work. Even though employers may make compensation decisions based on an existing employee’s current salary, employers still must be able justify any resulting wage differential based on factors enumerated in the statute. This means that employers must rely solely on these statutory factors, and never on prior pay, when explaining starting salaries or any pay differential between employees performing substantially similar work. Considerable uncertainty remains, however, over how narrowly courts will construe the statutory factors, especially a “bona fide factor other than gender, race or ethnicity,” which requires employers to prove an “overriding legitimate business purpose” and that the factor has been “applied reasonably.” It will take time for these questions to be answered by the courts.
The Ninth Circuit Rules That Employers Cannot Rely On Prior Pay To Justify A Pay Differential Between Men And Women
On Monday, the Ninth Circuit issued an en banc opinion in Rizo v. Yovino, holding that an employer may not rely on prior pay as a defense to a gender pay equity claim under the federal Equal Pay Act (“EPA”). This is a significant decision as it reverses Ninth Circuit law established over 35 years ago and creates a split between federal circuits on this issue, which opens the door to review by the United States Supreme Court. The practical impact of the decision is immediate: Employers defending gender pay equity claims cannot rely on prior pay as even part of the justification for a pay differential between men and women.
Aileen Rizo was hired by the Fresno County Office of Education in 2009. The County set Rizo’s starting salary based on its policy of placing new employees within the County’s salary schedule at a step corresponding to their prior salary plus 5%. Rizo filed an equal pay claim in 2012 after learning she was earning less than male colleagues performing the same work. The County sought summary judgment on the ground that prior salary fell under the EPA’s “any factor other than sex” defense and as such, was a permissible basis for setting compensation under the EPA. The County’s summary judgment motion was denied, and the County obtained permission to file an immediate appeal. On appeal, a three-judge panel of the Ninth Circuit reversed the trial court’s denial of summary judgment, concluding that under a 1982 Ninth Circuit decision, Kouba v. Allstate Insurance Co., prior salary constitutes a “factor other than sex” under the EPA, as long as the employer’s consideration of prior salary was reasonable and effectuated some business policy.
The Ninth Circuit then granted Rizo’s petition to rehear the appeal en banc. On rehearing, an 11 judge en banc panel of the Ninth Circuit reversed course, overturned Kouba v. Allstate, and held that prior salary is not a “factor other than sex,” and therefore cannot be used to justify a pay differential between the sexes, independently or as one of several factors.
The Court’s en banc opinion was authored by Stephen Reinhardt, known as “the liberal lion of the Ninth Circuit,” who passed away on March 29, 2018 at the age of 87. In the majority opinion, Judge Reinhardt concluded “unhesitatingly, that ‘any other factor other than sex’ is limited to legitimate, job-related factors such as a prospective employee’s experience, educational background, ability, or prior job performance.” He observed that since the 1963 EPA was intended to eliminate long-existing, endemic sex-based pay disparities, it was “inconceivable” that Congress would create an exception for basing new hires’ salaries on those very disparities. Accordingly, the Court held: “Prior salary, whether considered alone or with other factors, is not job related and thus does not fall within an exception to the [Equal Pay] Act that allows employers to pay disparate wages.”
In response to an argument made in a concurring opinion, the Court noted that its decision expressed a general rule, and did not resolve its application under all circumstances. The Court specifically stated that it was not deciding whether or under what circumstances past salary might play a role in the course of an individualized salary negotiation, and expressly reserved questions relating to individualized negotiations to future cases.
What This Means
This is a significant development for all California employers. First, the case was decided under the EPA, which applies to employers nationwide. However, California’s Fair Pay Act, which took effect on January 1, 2016, was designed to be substantially tougher than the EPA. To accomplish this, the California legislature expanded coverage to employees performing “substantially similar work” instead of “equal work,” and also narrowed the “catch-all defense.” In contrast to the “any factor other than sex” language under the EPA, the defense under California law is limited to “a bona fide factor other than sex.” Under California’s formulation of this defense, an employer must prove the “factor other than sex” is job-related, consistent with business necessity, and not based on or derived from a sex-based factor. Given these more stringent requirements, it is not hard to see how a California court would adopt the Ninth Circuit’s reasoning and conclude that prior pay cannot constitute a “bona fide factor other than sex.”
Second, the Ninth Circuit did not just prohibit the use of prior pay as the sole justification for a challenged pay disparity. (California law already prohibits an employer’s reliance solely on prior pay.) The Court went one step further and held that prior pay, “whether considered alone or with other factors” could not be used to justify a pay differential. This could mean that an employer who uses prior salary along with valid job-related factors such as education, past performance, experience and training, could lose an equal pay claim because it failed to justify the entire pay disparity based on legitimate factors. In this regard, the Ninth Circuit’s interpretation of the EPA is more restrictive than other circuit courts that have addressed this issue.
Use of prior pay as a factor in setting compensation is already under attack. California is one of several states that prohibit an employer from even inquiring about an applicant’s prior pay. With the Ninth Circuit’s decision in Rizo and California’s nascent Fair Pay Act, employers are well-advised to avoid using prior pay in setting compensation, and to review the pay of existing employees whose starting pay was set based on prior pay, preferably as part of a broader, privileged audit of pay practices.