Pay Equity Update: Has the Death Knell Sounded for Prior Salary?

An increasing number of states and cities are enacting laws prohibiting employers from considering a candidate’s prior salary in setting compensation. These restrictions are typically included within pay equity statutes, and are focused on eliminating pay disparities that are based on gender and, increasingly, on race or ethnicity as well. While equal pay laws, including the federal Equal Pay Act, have historically prohibited employers from paying an employee of one sex less than an employee of the opposite sex for equal work, more and more states and municipalities are enacting expanded equal pay laws which extend protection to other groups, reject the standard of “equal” work in favor of the much more elastic standard of “comparable” work and impose restrictions on the use of prior salary in setting compensation. As these new laws come into effect, employers—especially those with operations in multiple jurisdictions—must carefully navigate this shifting landscape to avoid the inadvertent violation of these new rules.

What Is Pay Equity and What Is the Big Deal About Prior Salary?

“Pay equity” and the “gender pay gap” have become common in the general lexicon, as has the statistic that women today make, on average, roughly 80 cents on the dollar for each dollar that a man makes. One explanation for the persistent pay gap between male and female employees that has gained increasing traction in recent years is employer reliance on prior salary in setting compensation for new employees. If you assume, based on the statistics, that women generally are paid 80 percent of what men are paid at their current workplace, and that those women (who are already underpaid in this scenario) seek new employment, the new employer’s use of prior salary as a basis for setting the starting salary will simply perpetuate the disparity. The theory is that until the use of prior salary is abolished as a factor in setting compensation, true “pay equity” will never be achieved.

Expanding Protections Under Equal Pay Laws

California has perhaps the most stringent equal pay law currently in effect in the country. Under the California law, employers must compare pay among employees who are doing “substantially similar” work. In California, it is no longer a defense to a pay equity claim to show that the jobs are not the “same” or “equal.” In addition, an employer must be able to justify the entire pay differential based on bona fide factors that must be both job-related and consistent with business necessity, such as skills, education, training, experience, shift, or geography. New York’s pay equity law shares certain features of the California statute, and similarly requires that an employer justify pay differentials using certain limited job- related factors.

In addition to placing more stringent requirements on employers to justify pay differences between employees of different genders, some states are expanding their laws beyond gender to include race and ethnicity. California amended its equal pay law effective January 2017 to include protection based on race and ethnicity. Oregon went even further, and expanded its law in June 2017 to prohibit discrimination in compensation for work of “comparable character” on the basis of any protected class (including race, religion, sexual orientation, disability, and age). These changes are anticipated to take effect in January 2019.

Although the federal government recently suspended a pay data reporting requirement (read our recent advisory here), states are beginning to step in and require similar information. For example, lawmakers in California recently passed a bill (A.B. 1209) that would require employers with 500 or more employees in California to report on gender pay differentials. Covered employers would be required to report the mean and median pay for their male and female salaried employees and board members. Reporting would begin in July 2020 (and would be required every other year thereafter). The information would be posted on the California Secretary of State’s website. Numerous employer groups have opposed the law. Governor Brown must sign or veto the bill by mid-October. We will provide an update on this bill as additional information becomes available.

Some States and Cities Prohibit Inquiry Into Prior Salary

Massachusetts was the first state to enact a law prohibiting employers from asking job candidates about their salary history. The Massachusetts law, which takes effect on July 1, 2018, makes its unlawful to seek the wage or salary history of a prospective employee until after an offer of employment—that includes compensation—has been made. Oregon’s new equal pay law similarly prohibits an employer from seeking a candidate’s salary history; it takes effect in October 2017. Delaware enacted a new law in June that prohibits employers from asking applicants about pay history until after a conditional offer has been made. At that point, an employer may discuss compensation expectations with a candidate, but cannot require the candidate’s compensation history until after a firm offer that includes compensation has been made.

California does not prohibit requesting and using prior salary information in setting compensation; rather, the law prohibits an employer from relying on salary history “by itself,” and requires that any use of salary history be job-related. There is as yet no case law interpreting this provision, so California employers are advised to proceed with caution before setting a starting salary using prior salary history. Meanwhile, California lawmakers are considering legislation to flatly prohibit requesting and using prior salary in setting compensation.
Notably, several cities have joined the trend against the use of prior salaries: 

• New York City passed a law earlier this year that strictly prohibits an employer from asking about and/or using an applicant’s salary history in setting compensation. Our previous advisories on the New York City law are available here and here. 
• San Francisco also enacted an ordinance that prohibits employers from considering or relying on an applicant’s salary history in offering employment or setting pay. In addition, employers are prohibited from disclosing an employee’s salary to a prospective employer without the employee’s written authorization. 
• Philadelphia’s ordinance prohibiting employers from inquiring into salary history has been challenged in court on numerous constitutional grounds, including the First Amendment, and the law is currently stayed, pending the outcome of that lawsuit. Case information is available here. 

What About the Equal Pay Act?

The federal Equal Pay Act is silent on the use of prior salary in setting compensation, but has a broad catch-all affirmative defense that permits a pay disparity if it is based on “any other factor other than sex.” Recently, a three-judge panel of  the 9th Circuit, in Rizo v. Yovino,  held that a pay differential based on prior salary can be a “differential based on any other factor than sex,” and thus not a violation of the Equal Pay Act. The court also held that the burden was on the employer to prove that its decision to use prior salary as a factor in setting compensation was both reasonable and furthered some legitimate business policy. However, following pressure from the EEOC and employee advocacy groups, the 9th Circuit in late August agreed to rehear the case en banc. Information is available here. We will advise you of the outcome of the rehearing.

Practical Tips – What Should Employers Do Now

• Employers with operations in New York City, San Francisco, Oregon, Massachusetts, and Delaware should remove from their employment application forms any questions seeking wage data, and train managers, supervisors, and recruiting personnel not to ask questions about salary history.
• Employers should continue monitoring new laws in the cities and states in which they operate to ensure that they remain in compliance with evolving restrictions on the use of prior salary.
• Employers in California should seriously consider whether it even makes sense to ask for prior salary history. Even though the new statute permits employer inquiry into prior salary, once an employer has the information, it is vulnerable to a charge that it impermissibly used that information without business justification. The burden will be on the employer to prove that its use of prior salary was lawful.
• Employers should consider setting a salary range for each position, and then place applicants within the range using permissible factors, such as education, experience, training, etc., rather than using prior salary as a benchmark.
• Employers who currently seek information about and take prior salary into account in setting compensation for new employees (where still permitted to do so) should carefully evaluate whether and to what extent the use of that factor can be justified if challenged, and be able to articulate the business reason for using this information.
• Employers who wish to conduct an assessment of their compensation practices and potential pay equity issues are strongly encouraged to contact experienced employment counsel before beginning. Any assessment should be conducted in such a way so as to preserve the attorney-client and work product privileges in order to avoid the possibility of any analysis coming to light in future litigation. In addition, an employer must carefully consider what it intends to do with any information developed as a result of a pay equity analysis before embarking on such a process.