Hunton Employment & Labor Perspectives

Imagine that you are a company with two openings for the same position.  After selecting the two most qualified candidates, you offer each candidate a salary equal to his or her prior salary, plus 5%, pursuant to your established policy for setting new hire salaries.  On its face, your policy has nothing to do with sex, but does it violate the Federal Equal Pay Act?  This was the issue addressed by the Ninth Circuit Court of Appeals in the recent decision Rizo v. Yovino, No. 16-15372, slip op. at 11–12 (9th Cir. Apr. 27, 2017).

When Aileen Rizo was hired by the public school system in Fresno, California, she was offered a salary equal to her most recent prior salary, plus 5%, pursuant to her employer’s established policy for setting new hire salaries.  Years later, while still employed by the school system, Rizo discovered that she was being paid less than her male counterparts, even though the male employees’ salaries had been set using the same established policy of adding 5% to their most recent prior salaries.  Rizo sued her employer, alleging that the pay differential between her and her male coworkers violated the Federal Equal Pay Act.  Her employer, on the other hand, argued that its policy of setting new hire salaries based on their most recent prior salaries qualified as a “factor other than sex”—a defense to Equal Pay Act claims—because the policy was objective, prevented favoritism, ensured consistency, encouraged candidates to leave their jobs by offering a 5% raise, and was a judicious use of taxpayer money.  The Ninth Circuit agreed with the employer and held that a wage differential based on prior salary, or any other facially gender-neutral factor, qualifies as a “factor other than sex” if the employer can show that the factor “effectuates some business policy” and is used reasonably.

The Ninth Circuit’s decision under federal law puts it at odds with the recently amended California state Fair Pay Act.  Once considered nearly identical to the Federal Equal Pay Act, the California law has seen amendments in recent years that have differentiated it from its federal counterpart and expand protections for employees.  One such amendment to the California state law that became effective on January 1, 2017, specifies that prior salary alone cannot justify a pay disparity.

California is just one of several jurisdictions to limit employers’ use of a prospective employee’s pay history when setting compensation.  As discussed in prior posts, in 2016, Massachusetts became the first state to enact legislation prohibiting employers from seeking a prospective employee’s wage history, and in January 2017, Philadelphia became the first city to enact such a law.  Also in January 2017, New York Governor Andrew Cuomo and New Orleans Mayor Mitchell J. Landrieu signed executive orders that limit government agencies’ use of prior salaries during the hiring processes.

Given the numerous changes in pay equity laws in the last few years, and the increased media attention around equal pay issues, employers may benefit from a privileged review of their compensation systems and pay structures. These reviews can help proactively identify, explain, and resolve pay disparities before they come to light through a lawsuit.