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EMPLOYMENT LAW: Federal Court Lashes Out at Use of Prior Salary History for New Hires

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In January of this year, California AB 168 went into effect which prohibits employers of any size from asking job applicants about their prior salary history. The goal of the law is to narrow the gender wage gap by eliminating consideration of prior salary in the hiring process. The underlying assumption that drove this legislation was the belief that pay discrepancy between men and women has been pervasive and a long-term institution in all industries. Accordingly, by prohibiting an employer from considering prior salary history when determining the amount of compensation to provide a new employee, the institutionalized pay gap between men and women would no longer be perpetuated.

On April 9, 2018, the 9th Circuit, sitting En Banc (all judges sitting in decision), held in Rizo v. Yovino that prior salary history cannot justify a wage differential between male and female employees under the federal Equal Pay Act, a federal law similar to California’s AB 168.

Under the federal Equal Pay Act, an employer is prohibited from paying their male and female employees different wages for “substantially equal work.” Interestingly, the Act provides that if a plaintiff files suit and can demonstrate that such a wage disparity exists in the workplace, they need not prove that their employer had a discriminatory intent. However, in order to allow a degree of flexibility in wage rates, the federal Equal Pay Act includes four statutory exceptions to providing unequal pay, each of which may be used as an affirmative defense against claims for violations of the Act:

1) a seniority system

2) a merit system

3) a system which measures earnings by quantity or quality of production

4) a differential based on any other factor other than sex.

In Rizo v. Yovino, Aileen Rizo was hired as a math consultant by the Fresno County Office of Education. Rizo’s salary upon joining the County was determined by a standardized formula that included taking the new employee’s prior salary, adding 5%, and placing the new employee in a corresponding salary schedule/ “step” category.

After working for the County for approximately three years, Rizo learned that her male colleagues that were hired after her were paid more and placed on higher “steps” of the salary schedule. Rizo filed a complaint regarding the pay disparity, alleging that the discrepancy was based on her sex. In response, the County argued that all salaries had been set in accordance with the standardized formula, considering each individuals prior salary history before employment with the County and without any consideration of the sex of the employee.

Rizo then filed suit against the County claiming a violation of the Equal Pay Act, along with other claims of sex discrimination. The County then brought a dispositive motion as to Rizo’s claims contending that consideration of Rizo’s prior salary was a “factor other than sex,” an affirmative defense under the Equal Pay Act. Agreeing with the County, the trial court granted its dispositive motion.

However, on appeal, the 9th Circuit concluded that a “factor other than sex” is limited to legitimate, job-related factors such as a prospective employee’s experience. In pointing to the original purpose of the Equal Pay Act, the 9th Circuit stated “[i]t is inconceivable that Congress, in an Act the primary purpose of which was to eliminate long-existing ‘endemic’ sex-based wage disparities, would create an exception for basing new hires’ salaries on those very disparities…” specifically, prior salary history and found such an allowance to be “wholly inconsistent with the provisions of the Equal Pay Act.” In essence, through the holding in this case, the 9th Circuit established that the federal Equal Pay Act has the same motivating interests as California’s AB 168.

The 9th Circuit did not set a blanket rule that the use of prior salary history is a per se violation of the Equal Pay Act and conceded that it may be reasonable in individualized salary negotiations. However, the language in the ruling was so strongly opposed to the use of prior salary history that it seems a risky proposition for any employer to use prior salary history in determining an employee’s pay. Moreover, in California consideration of prior salary is all but prohibited; although an applicant is permitted to volunteer their prior salary if they so choose. However, in considering California’s aggressive stance against gender wage disparity, in combination with the 9th Circuit ruling, a safer practice for all employers is to set a pay range for positions and consider relevant factors such as education and prior experience when setting a new employees’ wages within the specified pay range.

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