Never before has the Equal Pay Act (EPA) gotten so much attention. In fact, “pay equity” has become a term that every employer must understand. That’s because courts have begun examining the meaning of pay equity under the EPA, and legislatures are expanding the reach of pay equity and limiting employers’ inquiries into prospective employees’ salary history.
On March 14, 2018, a federal judge approved a $45 million settlement between Family Dollar Stores and a class of 37,000 female managers who claimed they were paid less than men in the same positions. The case began in 2008 when 49 female store managers sued the company over its pay practices. In addition to the monetary settlement, Family Dollar agreed to an audit of its pay practices and policies, including formal validation of its compensation practices by industrial organizational psychologists and labor economists. The terms of the settlement should inspire every employer to take its obligations under the EPA seriously.
Appeals Court: Catchall Defense Limited to Job-Related Factors
The EPA prohibits an employer from discriminating on the basis of sex by paying employees of one sex less than it pays employees of the opposite sex “for equal work on jobs the performance of which requires equal skill, effort and responsibility, and which are performed under similar working conditions”—hence, the saying “equal pay for equal work.” The EPA includes only four defenses to a claim of unequal pay:
- A seniority system;
- A merit system;
- A system that measures earnings by quantity or quality of product; or
- A differential based on any factor other than sex.
All are affirmative defenses for which the employer has the burden of proof.
The first three statutory defenses in the EPA are easily understood. If the pay gap is the result of a seniority or merit system, or a system that measures earnings based on an employee’s production, then it doesn’t violate the EPA. Each of the three defenses can be established through easily obtainable objective data on length of service or performance. The fourth defense is a catchall-type defense for pay differences based on legitimate business reasons that Congress didn’t anticipate. As a recent case illustrates, the catchall defense is being scrutinized by courts more closely.
In Rizo v. Yovino, the U.S. 9th Circuit Court of Appeals ruled that salary history alone or in combination with other factors doesn’t fall under the catchall defense to an EPA claim. In the case, the employer set starting pay based on a compensation scale that took into account prior salary. When a female employee filed an EPA claim, the employer relied on the catchall defense, contending the wage differentials she cited were legal because they were based on factors other than sex.
The 9th Circuit held that the “factor other than sex” defense is limited to job-related factors. Further, the court stated that past salary isn’t “a legitimate measure of work experience, ability, performance, or any other job-related quality.” To be a job-related factor, the court explained, a factor other than sex would have to involve a job applicant’s experience, educational background, ability, or past job performance.
The 9th Circuit noted that wage disparities from previous jobs could lead to “endemic” sex-based wage disparities. The court found it “inconceivable” that Congress “would create an exception for basing new hires’ salaries on these very disparities—disparities that Congress declared are not only related to sex but caused by sex.” That language would apply with equal logic to pay associated with promotions and job transfers.
The court did reserve for future consideration the question of whether past salary might play a role in “individualized salary negotiation.” However, it could prove difficult for an employer to justify a pay decision affecting an individual female employee that involves her lower salary history. That’s especially true in the cities and states where bans on inquiries about job applicants’ salary history have been enacted. The idea behind such bans is that relying on salary history to set starting pay may result in continuing pay disparities for which female job applicants never recoup the difference. Rizo v. Yovina, No. 16-15372 (9th Cir., 2017).
Pending Oklahoma Legislation
In addition to the renewed attention on the EPA in the courts, several states have passed laws making it easier for female employees to sue over gaps in pay with men. States across the nation, from New Jersey to Washington, are strengthening their existing laws requiring equal pay for equal work. Oklahoma also has pending legislation that would expand current law.
Senate Bill (SB) 1527 would make it illegal to discriminate between female and male employees “in any way” in “wages, benefits or other compensation” for work of “like or comparable character or work on like or comparable operations.” The bill provides for seven statutory defenses, including seniority; a merit system; a system that measures earnings by quantity or quality of production or sales; the geographic location in which a job is performed; education, training, or experience that is reasonably related to the particular job and consistent with business necessity; travel, if it is a regular and necessary condition of a particular job; and a differential based on any factor other than sex.
SB 1527 also prohibits an employer from reducing the pay of any employee to comply with its provisions. Further, the bill would protect employees who discuss their pay by making it unlawful to discharge or discriminate against any employee who inquires about, discusses, or discloses her own wages or the pay of another employee at the same company. SB 1527 would apply only to employers with 100 or more employees.
Next Steps for Employers
These developments make it imperative that you review your pay practices. You should begin by revising your job applications and interview questions to remove any references to applicants’ pay history. Next, review how raises are determined at your company, and consider establishing a formal pay scale and fixed wage increases. It’s incumbent that you be able to explain and justify all pay disparities.
Finally, you may want to consider a formal compensation audit to uncover pay gaps that may not be apparent, including the salary history of female employees. If there is an explanation for any gaps, the time to document it is before a charge or lawsuit is filed.
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