June 28, 2017
Compliance Matters
Ninth Circuit Rules That Employers May Be Able to Use Prior Salary History When Setting Pay 
California employers are covered under both federal and state so-called "equal pay" legislation.  While there are considerable similarities in these laws, the federal law only requires equal pay among the genders for "equal" (i.e., the same) work in the same location. California's equal pay counterpart is much more onerous because it requires employers to pay equal pay for "substantially similar" work wherever the work is performed. In previous issues of Compliance Matters, we reviewed the California equal pay legislation. [ LINK]

A couple of weeks ago, the Ninth Circuit U.S. Court of Appeal issued an important decision that discusses the defenses available to employers under the federal Equal Pay Act. Note that this case is not binding on a California state court asked to rule on the meaning of California's equal pay law. However, the federal court's reasoning may be persuasive when defending a state law equal pay claim.

Under the federal Equal Pay Act, employers cannot pay wages to employees "at a rate less than the rate at which he pays wages to employees of the opposite sex" for jobs that require "equal skill, effort, and responsibility." One defense to the Equal Pay Act is that any pay differential that may exist is due to a "factor other than sex."
In Rizo v Yovino , a female math consultant for public schools in Fresno County brought suit under the federal Equal Pay Act and the federal and state anti-discrimination statutes when she discovered that the County paid her less than her male counterparts for the same work. The County conceded that it paid Rizo less than comparable male employees, but argued that this was lawful because it was based on "any other factor other than sex." The "other factor" cited by the County was Ms. Rizo's prior salary; i.e., the County determined Ms. Rizo's new pay by considering her most recent prior salary and then placed her on the salary step that most closely corresponded to her prior salary.
The Ninth Circuit first noted that while the federal law on the subject does not strictly prohibit the use of prior salary in determining wages, neither does prior salary on its own automatically qualify as a legitimate factor other than sex. The Court explained that under its previous ruling in a case called Kouba v. Allstate Insurance Co. ,  an employer could have a pay differential based on prior salary only if it showed that this factor "effectuates some business policy" and that the employer "uses the factor reasonably in light of the employer's stated purpose as well as its other practices."
In Rizo, the County offered four such business reasons for using its pay scale: (1) the policy is objective, (2) the policy encourages candidates to take jobs at the County because they will receive a 5% increase over their current salary, (3) the policy prevents favoritism and ensures consistency, and (4) the policy is a judicious use of taxpayer dollars. The appellate court sent the case back to the trial judge to evaluate whether the County's use of  prior salary was "reasonable in light of the employer's stated purpose."

What This Means For You

Rizo affirms that a pay differential based on the employer's use of prior salary may  be the basis for a defense to a claim under the federal Equal Pay Act. However, an employer must provide business reasons for using prior salary, and the employer must use prior salary reasonably in light of its stated reasons and practices. While the Rizo Court did not explain how courts should go about evaluating an employer's business reasons, the Ninth Circuit previously stated in its Kouba decision that  a court must "mold its inquiry to the particular facts that unfold at trial." This means that there is no easy-to-follow litmus test for employers, and that the requisite evaluation of business reasons and the reasonableness of those reasons will depend on the particular facts of each case.
That said, employers that decide to use prior salary when setting the pay of a new employee should do so with several business reasons in mind.  Additionally, California employers should take note that the state's lawmakers are currently considering legislation that would outlaw asking job applicants about prior salary history or using prior salary as a basis for determining current salary. The logic behind this piece of legislation is that pay statistics show that the wage market is inherently biased, and using prior salary to determine current salary perpetuates the gender bias that went into the prior salary determination.
Another note of caution. While Rizo explains that employers may be able to use prior salary as a factor other than sex to justify a current compensation structure under federal law, it remains to be seen whether California's state court judges will be so flexible when evaluating a pay structure under California's equal pay law. Indeed, California's equal pay law specifically says that "[p]rior salary shall not, by itself, justify any disparity in compensation." Labor Code section 1197.5(a)(3). Thus, California employers should have a well-articulated reason behind all pay setting decisions that is not based solely upon prior salary.   
If you have any questions about the matters discussed in this issue of Compliance Matters, please call your firm contact at (818) 508-3700 or visit us online at www.brgslaw.com .

Richard S. Rosenberg
Katherine A. Hren
Justin T. Youngs
Ballard Rosenberg Golper & Savitt, LLP 

15760 Ventura Blvd.
Eighteenth Floor
Encino, CA 91436
(818) 508-3700

6135 Park Drive South
Suite 510
Charlotte, NC 28210
Matthew Wakefield:
(704) 846-2143 


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