For life not eternity: What’s next for pay history?

Last year, the 9th U.S. Circuit Court of Appeals, en banc, broke ranks with its sister circuits and California state law in Rizo v. Yovino, 887 F.3d 453 (9th Cir. 2018), holding that prior salary history may never be considered by an employer in determining a new hire's initial compensation. As of Jan. 1, 2018, California Labor Code Section 432.3 had prohibited employers from inquiring about applicants' salary histories. Subsection (g) provides: "Nothing in this section shall prohibit an applicant from voluntarily and without prompting disclosing salary history information to a prospective employer." Subsection (h) reads: "If an applicant voluntarily and without prompting discloses salary history information to a prospective employer, nothing in this section shall prohibit that employer from considering or relying on that voluntarily disclosed salary history information in determining the salary for that applicant." Despite this clear statutory language, the 9th Circuit's decision in Rizo held that employers could never consider an applicant's prior salary history.

Last month, the U.S. Supreme Court vacated the Rizo decision for improperly relying on the vote and opinion of Judge Stephen Reinhardt, who died prior to publication of the case. Rizo, with its absolute bar on consideration of prior salary history, is of no precedential value pending rehearing and a new decision by the 9th Circuit.

The Slings and Arrows of Outrageous Fortune

The Fresno County Office of Education hired Aileen Rizo as a math consultant. The county determined her initial salary in accord with the county's standard operating procedure, which was to add 5 percent to the new hire's prior salary. After she was hired, Rizo learned she was paid less than male colleagues in the same position, and sued the county for violation of the federal Equal Pay Act. The U.S. Equal Pay Act provides that no employer shall discriminate between employees on the basis of sex, and each employee is entitled to equal pay for equal work, except where payments are made pursuant to (i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production; or (iv) a differential based on any other factor than sex (a catchall provision). The county sought summary judgment on its affirmative defense that the discrepancy in pay emanated entirely from its application of its standard operating procedure, which set salaries based upon previous compensation levels, and which constituted a "factor other than sex."

The district court denied summary judgment. It found that the county's standard operating procedure, even if motivated by legitimate and nondiscriminatory business reasons, could not constitute a "factor other than sex" because using prior salary history perpetuates historical market forces that undervalued women's work. A three-judge panel of the 9th Circuit reversed the district court. Following the 9th Circuit's long-established precedent in Kouba v. Allstate Insurance Company, 691 F.2d 873 (9th Cir. 1982), the panel held that pay differentials based solely on an applicant's prior salary history was not a per se violation of the Equal Pay Act if based on some business policy. On rehearing en banc, the 9th Circuit reversed, adopting and expanding the district court's holding and overruling Kouba. In a majority opinion authored by the late Judge Reinhardt, the 9th Circuit held that it is always impermissible for an employer to use prior salary history when setting initial wages, regardless of whether prior salary history is the sole factor or one of several factors considered in establishing an initial salary. The 9th Circuit concluded that any consideration of prior salary history could perpetuate the same gender-based assumptions about the value of work that the Equal Pay Act sought to address and remediate. The court further opined that employers cannot rely on "business-related" exceptions which risk conflating a legitimate "factor other than sex" with any cost-saving justification an employer might manufacture. Instead, the Rizo court held that "factor other than sex" applies only to "job-related" factors, which it left undefined but for a scant reference to undefined "unique characteristics" (e.g., an individual's training, ability and experience). Judge Reinhardt's Rizo decision left unanswered which circumstances, if any, might permit consideration of an applicant's past salary history in salary negotiations.

Judges Are Bound by the Mortal Coil

Judge Reinhardt died on March 29, 2018. The Rizo decision was published April 9, 2018, with the following notation: "Prior to his death, Judge Reinhardt fully participated in this case and authored this opinion. The majority opinion and all concurrences were final, and voting was completed by the en banc court prior to his death." But opinions are not official until published, and Judge Reinhardt died prior to publication.

On Feb. 25, 2019, the U.S. Supreme Court vacated the Rizo v. Yovino decision. Yovino v. Rizo, 2019 DJDAR 1445. The Supreme Court held that, for a decision to have precedential weight, it must be the majority decision by a majority of living judges, as votes may and often do change prior to publication. Allowing the decision to stand would result in a deceased person having exercised the judicial power of the United States and hence the decision needed to be vacated and remanded for rehearing en banc. As a result of the Supreme Court's vacation of Rizo, Kouba v. Allstate Insurance Company is no longer overruled and, for the time being, is viable and citable.

To Be or Not to Be

It is unlikely that on rehearing, the 9th Circuit will again issue the blanket prohibition on the use of prior salary history in initial compensation determinations. The rehearing panel is randomly assigned but newer appointees to the circuit have by and large been of a conservative ideological bent, unlikely to break with other circuits (much less 9th Circuit precedent) as Judge Reinhardt did. The 7th Circuit sits at the opposite extreme of Rizo, holding that prior salary is always a "factor other than sex." The 2nd, 8th, 10th and 11th Circuits have all concluded that prior salary history may be one of many factors considered by an employer in setting initial salary, it just cannot be the only factor. The Reinhardt decision goes far beyond its sister circuits.

The concurrences filed with Judge Reinhardt's opinion may provide insight into the court's decision on rehearing. Judge M. Margaret McKeown, joined by Judge Mary Murguia, agreed that prior salary history alone is not a "factor other than sex" but feared an absolute prohibition would chill voluntary discussions wherein an employee sought to use her prior salary to her benefit. Judge Consuelo Callahan, joined by Judge Richard Tallman, felt the majority opinion ignored the realities of business by holding prior salary history can never be considered. Lastly, Judge Paul Watford followed a different path to reach the same result as Judge Reinhardt, concluding that an employer may not rely on prior salary history to justify a pay disparity where the employee's past pay reflects sex discrimination, whether as the sole criterion or one of many factors.

Judge Reinhardt's maverick decision is consistent with, if broader than, California's public policy focused on shrinking the gender pay gap. California allows an employer to consider prior salary history in initial salary determinations if the employee "voluntarily and without prompting" raises the factor. Should Judge Reinhardt's absolute prohibition on using prior salary history be the 9th Circuit's decision upon rehearing, employers with operations in California -- and also Oregon, Washington, Idaho, Montana, Nevada, Arizona, Alaska and Hawaii -- should take action if they have not already, including pay equity audits, to ensure that any disparities in pay are not based on salary history.