Past salary and pay equity in the 9th Circuit

If an employer's policy is to pay every new hire 5 percent more than that employee was earning at his or her prior job, is that employer lawfully setting salaries based on a "factor other than sex," or is the employer perpetuating existing pay disparities between men and women? Like many legal questions, the answer depends on who you ask.

According to the 9th U.S. Circuit Court of Appeals, an employer may base employee salaries solely on each employee's prior salary without violating the federal Equal Pay Act, provided that the employer can show that the policy "effectuates some business policy" and is used "reasonably in light of its stated purpose and its other practices." The 9th Circuit first reached this conclusion in 1982, when it decided Kouba v. Allstate Insurance Company, 691 F.2d 873 (9th Cir. 1982), and reaffirmed the same conclusion last month when it decided Rizo v. Yovino, 2017 DJDAR 3992 (April 27, 2017).

Aileen Rizo is an employee of the public schools in Fresno. When she discovered that she was paid less than her male counterparts, she filed a lawsuit alleging that her employer had violated the Equal Pay Act by paying men and women different wages for equal work. Rizo's salary, and the salary of her male peers, had been set by adding 5 percent to the employee's most recent prior salary and then placing the employee on the corresponding level of a salary schedule used for all employees in that position. She claimed, consistent with the position taken by the Equal Employment Opportunity Commission (EEOC), that this pay structure based solely on an employee's prior salary undermined the act by perpetuating existing systemic wage discrimination between males and females.

Rizo's employer, however, argued that the practice qualifies as a "factor other than sex" - a defense to Equal Pay Act claims - because the practice is objective, prevents favoritism, ensures consistency, encourages candidates to leave their jobs by offering a 5 percent raise, and is a judicious use of taxpayer dollars.

The district court sided with Rizo, reasoning that a pay structure based solely on prior salary is too likely to perpetuate discriminatory wage disparities between men and women. On appeal, however, the 9th Circuit vacated the district court's order and restated its holding in Kouba: A pay 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 9th Circuit's decision highlights the growing differences between federal pay equity laws and California's pay equity laws. Once considered nearly identical to the federal Equal Pay Act, California's Fair Pay Act has undergone amendments in recent years that have differentiated the state law from its federal counterpart, with the California law now providing additional protections for employees. Among other amendments to the Fair Pay Act, on Jan. 1, 2017, the state law was amended to specify that prior salary alone cannot justify a pay disparity. The state law also now requires equal pay for employees of different races and ethnicities, in addition to employees of different sexes.

This means there is likely to be a shift away from California plaintiffs relying on the federal statute and instead relying on the broader California statute. Indeed, if the facts of Rizo v. Yovino happened today in California, the employee would likely assert a claim under California's Fair Pay Act, instead of under the federal Equal Pay Act, because the plaintiff likely would view the standard under the state law as being more favorable than under the federal law.

Meanwhile, across the country, other states and cities have enacted their own equal pay laws, including measures that prevent employers from asking prospective employees about their pay histories. In 2016, Massachusetts became the first state to enact a law prohibiting employers from seeking or requiring a prospective employee's wage history, and in January 2017, Philadelphia became the first city to enact such a law. Also in January, New York Gov. Andrew Cuomo and New Orleans Mayor Mitchell J. Landrieu signed executive orders that place limitations on the use of prior salaries during government agencies' hiring processes. This trend is likely to continue, with more states and cities enacting their own pay equity legislation that goes beyond the protections provided to employees under federal law.

For employers who set their compensation structures many years ago and have not recently reviewed those structures, there may be lurking issues that employees could seize on to file suit under these new laws. Taking proactive measures, like reviewing compensation systems and pay structures, can help identify and resolve pay disparities before they come to light through a lawsuit. Often times, pay disparities are not the result of discrimination and can easily be explained. Doing the work before a company gets sued to understand and bolster those justifications could help make the employer a less attractive target, can improve employee morale, and could help minimize the reputational harm from an accusation that an employer pays men more than women within its organization. Of course, any such analysis should be done under the direction of counsel to help protect it from discovery in any subsequent lawsuit. In this case, an ounce of prevention really is worth much more than a pound of cure.