Federal Appeals Court Rejects Employer's Reliance on Employee's Salary History in Attempt to Defeat Equal Pay Claim

In a decision receiving nationwide media coverage, the U.S. Court of Appeals for the Ninth Circuit has held that an employer cannot defeat a federal Equal Pay Act claim by relying on an employee's prior salary, whether alone or in combination with other factors, to justify a wage differential between employees of the opposite sex.¹ This decision, along with other statutory developments curbing employers' reliance on salary history when setting pay, means that employers who rely on salary histories to set employee compensation levels do so at their peril. The decision comes at a time when equal pay issues are increasingly demanding the attention of employers across the country.

Equal Pay Act

The Equal Pay Act prohibits covered employers from discriminating between employees on the basis of sex by paying an employee less than an employee of the opposite sex for equal work on jobs requiring "equal skill, effort, and responsibility, and which are performed under similar working conditions."² The act provides four exceptions or affirmative defenses: "(i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production; [and] (iv) a differential based on any other factor other than sex."

Ninth Circuit's Rizo Decision

In Rizo v. Yovino, defendant Fresno County Office of Education hired plaintiff Aileen Rizo as a math consultant. To set her salary, the defendant relied on its "Standard Operating Procedure," which set a new hire's salary by increasing his or her prior salary by five percent. After learning that she was paid less than male colleagues for the same work, the plaintiff sued the defendant over the salary disparity. In response, the defendant admitted that relying on its salary schedule resulted in unequal pay between the plaintiff and male employees performing comparable work. Nevertheless, it asserted that it was not liable under the Equal Pay Act because its reliance on the plaintiff's pay history was a "factor other than sex" that permitted the pay differential.

The Ninth Circuit soundly rejected this argument. In doing so, it stated:

The Equal Pay Act stands for a principle as simple as it is just: men and women should receive equal pay for equal work regardless of sex. The question before us is also simple: can an employer justify a wage differential between male and female employees by relying on prior salary? Based on the text, history, and purpose of the Equal Pay Act, the answer is clear: No.

The court went on to state:

We now hold that prior salary alone or in combination with other factors cannot justify a wage differential. To hold otherwise—to allow employers to capitalize on the persistence of the wage gap and perpetuate that gap ad infinitum—would be contrary to the text and history of the Equal Pay Act and would vitiate the very purpose for which the Act stands.

The court concluded that the "any other factor other than sex" exception "is limited to legitimate, job-related factors such as a prospective employee's experience, educational background, ability, or prior job performance," and that "[p]rior salary, whether considered alone or with other factors, is not job related and thus does not fall within an exception to the Act that allows employers to pay disparate wages."

Notwithstanding its sweeping rhetoric, the court also was clear that its decision expressed only "a general rule" and does not "attempt to resolve its application under all circumstances." Indeed, the court expressly exempted "individualized negotiations" from its holding, although it did not clarify what those might look like. Unfortunately for employers, that question will need to be resolved in future litigation. In the interim, the defendant's counsel has indicated that the defendant will appeal the decision to the U.S. Supreme Court, allowing the Court to resolve conflicts between the Ninth Circuit's general rule, the Seventh Circuit's wholly opposite rule, and other circuits' rules that fall somewhere in between.

Significance of State Equal Pay Laws and Related Litigation

Concerns central to Rizo's holding are also found at the root of California's recently enacted law prohibiting employers from seeking an applicant's salary history. Specifically, as explained in a prior WSGR Alert, California Labor Code Section 432.3 prohibits employers from seeking salary history information or relying on an applicant's salary history in determining whether to hire the applicant or where to set his or her compensation. It allows an employer to rely on salary information to set compensation if the applicant provides such information voluntarily and without prompting.³

In addition, many states have their own versions of the Equal Pay Act. For example, California Labor Code Section 1197.5 (which had not been enacted in its current form when the Rizo dispute began) prohibits employers from paying "employees at wage rates less than the rates paid to employees of the opposite sex for substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions." (emphasis added).⁴ As does its federal counterpart, Section 1197.5 provides four exceptions, including a "bona fide factor other than sex, such as education, training, or experience" that must be "applied reasonably." The law expressly states that "prior salary shall not, by itself, justify any disparity in compensation," and any permissible factor or factors for the pay differential must "account for the entire wage differential."

Finally, the notoriety surrounding Rizo and the Equal Pay Act is likely to precipitate further equal pay litigation in California and elsewhere. For example, last year a group of Uber engineers sued Uber under California's Private Attorney General Act (PAGA) alleging, in part, that Uber "willfully violated California Labor Code § 1197.5 by intentionally, knowingly, and/or deliberately paying [Plaintiffs] less than white and Asian male engineers for substantially equal or similar work." Plaintiffs' attorneys recently announced that they reached a $10 million settlement with Uber to compensate for discrimination and harassment claims 420 women and people of color who worked as software engineers at Uber.

What Should Employers Do Now?

Equal pay disputes are likely to become a more permanent fixture on the employment litigation landscape with potentially catastrophic financial consequences for employers. A simple instance of a salary disparity existing between men and women may lead to costly pay equity litigation, as well as other related discrimination and harassment claims. While not the only ones at risk, start-up and small companies may be especially vulnerable to such pay disputes because of their relative lack of HR sophistication and infrastructure, as well as the ease of pursuing PAGA claims in California. Regardless, all employers will be well-served by getting ahead of this issue, and should consider the following actions:

1. Review and revise relevant hiring documents to ensure that they do not include salary history inquiries. Such documents may include job application forms, candidate in-take forms, standard interview templates, recruiter training materials, and any other documents that may request an applicant's salary history.
2. Make sure that, through training or otherwise, managers, decision-makers, and other personnel involved in the hiring process are fully informed regarding legal requirements and prohibitions surrounding salary inquiries and equal pay.
3. Confirm that outside recruiters understand and will comply with these requirements and prohibitions.
4. Carefully make inquiries as to salary expectations to avoid any appearance of inquiring indirectly about salary history. Employers also may wish to consider documenting that the inquiry addressed salary expectations only (and not salary history).
5. Especially where an employer has customarily taken into account salary history in connection with filling certain roles, consider how other factors such as prior experience, skill, effort, and responsibility can be weighed in making salary determinations. Similarly, in general, employers should seek to avoid making assumptions as to salary history in making hiring decisions.
6. Prepare a "pay scale" for the position at issue prior to considering applicants for the position or interviewing candidates, and ensure that the pay scale is readily available to any candidate requesting such information. Employers should similarly consider documenting those factors informing the pay scale for a particular role, as well as assessing whether those employees currently in the role are being paid consistent with that pay scale.
7. Consider conducting a pay equity study/analysis to better understand whether pay disparities between the sexes exist in the workforce, and whether they can be explained and defended in the event a dispute or lawsuit arises. Consult counsel to ensure that the attorney-client privilege protects the study and its results.