New Law/Case: Using Prior Salary History

The Ninth Circuit recently issued is decision in Rizo v. Yovino, reversing a district court ruling holding that an employer violated the federal Equal Pay Act through its bright-line policy of paying new employees 5% more than their prior salary.  According to the district court (and the stated position of the EEOC), basing compensation on an applicant’s prior compensation only serves to further historical wage disparity between men and women, and therefore violates the Equal Pay Act.  The Ninth Circuit surprisingly (given its notoriously liberal bent) disagreed.

Factually, this case involved employees of the public schools in Fresno County (California).  Plaintiff, a female, was employed as a math consultant.  When she later discovered that certain male counterparts were being paid significantly more than her for the same work, she filed suit under the Equal Pay Act.  Prior to coming to work for Fresno County, Plaintiff was a teacher in Arizona and was paid $50K per year.  Fresno County had a set starting salary range for new math consultants of between $62K-$81K (based on 10 levels within that range).  The County’s policy was to pay the new hire 5% more than they were earning in their prior job.  However, 5% more than Plaintiff’s prior salary of $50K was less than the low end of the starting salary range the County used. As such, the County paid Plaintiff at the lowest end of its range, $62K (considered Level 1 of the range).  A few years into her employment, Plaintiff was having lunch with her male colleagues, when one of them (who had recently been hired) told her that his starting salary was at Level 9 of the range (a far greater salary than Plaintiff’s).  Plaintiff subsequently learned that all of her fellow math consultants (all of whom were male) were paid more than her.  Not good.

Plaintiff tried to resolve her outrage informally with the County by complaining internally about the pay disparity.  The County defended the pay disparity, explaining that all pay decisions had been properly made in accordance with the County’s standard operating procedure (i.e. pay the employee 5% more than his/her prior pay).  Plaintiff sued.

The district court agreed with Plaintiff that the pay practice was discriminatory and violated the Equal Pay Act.  The Ninth Circuit, however, reversed and issued a very wishy-washy holding, saying that use of prior salary is okay IF the employer demonstrates that its use of prior salary “effectuated a business policy” and that the use was “reasonable in light of its stated purpose as well as its other practices.”  Rather uselessly, the Court did not explain what this means or what type of evidentiary showing would suffice.  The County had offered four justifications for its policy:  (1) the policy is objective, in the sense that no subjective opinions as to the new employee’s value enter into the starting-salary calculus; (2) the policy encourages candidates to leave their current jobs for jobs at the County because they will always receive a 5% pay increase over their current salary; (3) the policy prevents favoritism and ensures consistency in application; and (4) the policy is a judicious use of taxpayer dollars.  Rather than opine on whether these justifications were sufficient to defend the use of prior salary and defeat the Equal Pay Act claim, the Ninth Circuit remanded the issue to the district court to decide.  Sufficed to say, this is not real helpful for employers who need clear rules they can follow in order to have any shot of avoiding being sued.

Now let’s discuss California Law! Effective January 1 of this year, prior salary alone cannot justify a pay disparity. Thus, regardless of the Ninth Circuit’s analysis of the issue under the federal Equal Pay Act, California employers should safely assume that any plaintiffs’ attorney who isn’t living under a rock will file a disparate pay claim in state court in California under California state law.  This means that it is not a good idea to use prior salary “alone” to justify pay disparities between similarly situated employees of different genders, ethnicities, or races.  Employers are also cautioned that even outside of California, several other courts (notably the Tenth and Eleventh Circuits) have held that prior salary alone cannot justify a pay disparity, and more and more states are enacting laws along similar lines, including laws that prohibit employers from even asking applicants to disclose their prior salaries.  Equal Pay Act claims are very likely to be an increasing focus of litigation in the coming years, so employers would be wise to review their pay practices now to protect against such claims.

Just another day in Paradise!

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