Equal pay ruling sets up circuit split for high court to resolve

As certain legislatures across the country enact restrictions on employer inquiries into wage or salary history in the hiring process, the 9th U.S. Circuit Court of Appeals in Rizo v. Yovino, 2017 DJDAR 3992 (April 27, 2017), recently ruled that, under the federal Equal Pay Act, employers can justify gender pay disparities based on differences in prior compensation alone so long as use of prior compensation was "reasonable and effectuated a business policy." As a practical matter for California employers, however, the ruling may do little to provide a defense to such practices, because they fall under the ambit of the California Fair Pay Act, which explicitly states that prior salary alone cannot justify a pay disparity.

Aileen Rizo was a math consultant for the Fresno County Office of Education ("the county"). Three years into her tenure, while having lunch with other, male math consultants, she learned that her male counterparts earned more than she did for the same work at the same location.

The disparity resulted from the county's compensation policy. When Rizo was hired in 2009, the county used a compensation structure that added 5 percent to an employee's prior salary. When Rizo left her prior job as a math teacher in Arizona, adding 5 percent to her prior salary resulted in a salary lower than Fresno County's "Level 1, Step 1" the lowest salary level. So the county offered her a salary at Step 1. At the time, she was likely happy with the significant pay bump. But as she later discovered, her male counterparts started at Steps 7, 8 and 9, based only on their prior salaries.

Rizo complained to the county, but she was informed that the salaries were properly set under the county's procedures. She brought suit under the Equal Pay Act, Title VII of the Civil Rights Act, and the California Fair Employment and Housing Act.

The county conceded that Rizo had established a prima facie case that she was paid less than comparable male employees for doing the same work. But it raised an affirmative defense under the Equal Pay Act - that the pay differential was based on a "factor other than sex." The district court had rejected this argument, finding that a pay structure based on prior salary would only perpetuate discriminatory gender-based pay disparities.

The 9th Circuit disagreed. Citing a 1982 9th Circuit decision, the court found that prior salary alone could be a "factor other than sex," so long as use of the prior salary was "reasonable and effectuated a business policy." The court vacated the district court's denial of the county's summary judgment motion and remanded for reconsideration.

While the decision has received significant attention from equal pay advocates, the 9th Circuit's decision was a narrow one. It rejected only a strict prohibition on the use of prior salary to make compensation decisions. Even with this ruling under the Equal Pay Act, employers using prior salary alone have an uphill battle - and bear the burden of proof - to show that they used prior salary reasonably and that the factor effectuates business policy. This will likely be the focus of litigation in Rizo on remand.

Importantly, Rizo's case was filed before recent amendments to the Fair Pay Act, which certainly would have affected the outcome under a state cause of action. The Fair Pay Act was enacted in 1949 and essentially mirrored the Equal Pay Act, but it was expanded significantly effective 2016 and again in 2017. One of its most recent amendments is directly at odds with the 9th Circuit's analysis of the federal law in Rizo: Under the Fair Pay Act, salary cannot be the sole reason for paying one employee less than another for substantially similar work.

Interestingly, the legislative history of that amendment cites the now-vacated district court opinion in Rizo, noting that compensation decisions based on prior salary perpetuate the "market's sex-based subjective assumptions and stereotyped misconceptions." An earlier version of the bill amending the Fair Pay Act went a step further by forbidding employers from asking about prior salary altogether before an offer of compensation. That ban was removed from the bill as a compromise.

An emerging trend under state and local laws has been to prohibit employers from using, or even asking about, prior salaries when setting compensation. For example, Massachusetts, Philadelphia and New York City have enacted laws prohibiting employers from asking applicants about prior salaries or wage history. Given the recent national attention to this issue, more legislators may push for similar bans in other parts of the country.

On the federal level, Rizo creates a circuit split on the issue of whether an employer's federal Equal Pay Act defense can be based solely on prior salary. See, e.g., Wernsing v. Dep't of Human Servs., 427 F.3d 466, 469-70 (7th Cir. 2005); Riser v. QEP Energy, 776 F.3d 1191, 1199 (10th Cir. 2015); Irby v. Bittick, 44 F.3d 949, 955-56 (11th Cir. 1995). So, the Rizo case could be a contender for Supreme Court review. With a newly comprised Supreme Court, the 9th Circuit's decision could survive.

Notwithstanding the Rizo decision and its chances for affirmance, there is no indication that California will pare back its limitations on the use of prior compensation. Thus, employers may be well advised to reexamine written policies and practices concerning compensation setting and ensure that pay is based on gender-neutral metrics such as experience, special skills and expertise, education history, and job responsibilities, particularly if the employer is (permissibly) asking applicants for prior salaries during the hiring process. Outside legal counsel should be consulted to help companies navigate issues of privilege, employee communication and remediation if necessary, as well as the retention of experts to analyze compensation data. To be sure, the use of prior compensation as the sole basis to justify pay differences remains somewhat perilous, notwithstanding the Rizo decision.