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November 30, 2015

Nation’s Most Stringent Equal Pay Law to Take Effect in California in the New Year

Earlier this year, Governor Jerry Brown signed legislation amending the California Equal Pay Act (“SB 358”), which has been called the nation’s most stringent equal pay law and takes effect January 1, 2016.

Since 1949, California has prohibited gender-based wage differentials. SB 358 amends Labor Code section 1197.5 to make it easier for current and former employees to allege payment of wage rates less than those paid to employees of the opposite sex, and changes the standard from equal pay for equal “skill, effort and responsibility,” to equal pay for “substantially similar work.”  SB 358 also eliminates the requirement that the work be performed at the “same establishment” to demonstrate a wage gap.

When such a wage rate gap is shown, it will be the employer’s burden to demonstrate the wage differential is based on one or more of the following factors: 

  1. a seniority system, 
  2. a merit system, 
  3. a system that measures earnings by quantity or quality of production, or 
  4. “[a] bona fide factor other than sex, such as education, training, or experience.”  

The last factor applies only if the employer demonstrates that the factor is: 
(a) not based on or derived from a sex-based differential in compensation, 
(b) job related with respect to the position in question, and 
(c) consistent with a business necessity.  

“Business necessity” means an “overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve.”  This defense will not apply if the employee demonstrates that an alternative business practice would serve the same business purpose without producing the same differential.

The employer must also demonstrate each factor [i.e., 1 – 4, above] relied upon is applied reasonably, and that the factors relied upon account for the entire wage differential.  If the employer fails to meet this burden, the employer may be found liable for wage discrimination.

SB 358 amends the Labor Code to provide that an employer in violation “is liable to the employee affected in the amount of the wages and interest thereon, of which the employee is deprived by reason of the violation, and an additional equal amount as liquidated damages.”  In other words, where a violation occurs, the employer will be liable for the amount of the wage differential with interest, plus liquidated damages equal to the amount of the wage differential.  An employee who brings a successful civil action is also entitled to an award of attorneys’ fees and litigation costs.

Labor Code section 1197.5 requires every employer to “maintain records of the wages and wage rates, job classifications, and other terms and conditions of employment of the persons employed by the employer”, SB 358 increases the retention period for such records from two years to three years.

SB 358 amends the Labor Code to prohibit discharging, discriminating against, or retaliating against any employee “by reason of any action taken by the employee to invoke or assist in any manner the enforcement of this section.”  Further, an employer may not “prohibit an employee from disclosing the employee’s own wages, discussing the wages of others, inquiring about another’s wages, or aiding or encouraging any other employees to exercise his or her rights under this section.”  In a nod to employees’ rights to privacy, an employer is not required to disclose to an inquiring employee the wages of another employee.

The Equal Pay Act applies to exempt and to non-exempt employees alike.  Employees have two years to file equal pay claims, or three years if the employee can establish a willful violation by the employer.  Employees have one year to file a retaliation or discrimination claim under SB 358.
SB 358 is likely to be warmly received by plaintiffs’ attorneys.  It creates a new type of wage and hour claim that can be filed on an individual or class basis and provides another means for employees who have been disciplined or who anticipate being disciplined to allege discrimination or retaliation.

What should employers do to reduce their risk of exposure to claims?  

  • Review the wage rates of all employees to identify instances of employees of one sex being paid rates less than the rates paid to employees of the opposite sex for “substantially similar work.”  The actual duties performed by an employee should be examined as courts will look past job titles and job classifications. 
  • Review the criteria used to determine the wages (including bonuses and other forms of compensation) of new hires and the wages of existing employees.  Objective, gender-neutral criteria are preferable to subjective criteria.  
  • Do not discourage employees from disclosing or discussing the amount of their wages or other working conditions and avoid to the extent possible even the appearance of discrimination or retaliation against employees who do.  
  • Review policies to ensure they do not prohibit employees from disclosing their own wages to other employees, asking about other employees’ wages, discussing the wages of others, or aiding or encouraging other employees to exercise their rights under the Act.
  • Ensure equal employment opportunity and anti-discrimination policies expressly prohibit wage discrimination.
  • Maintain all required records for at least three years, and preferably four years (claims of unfair business practices under Business and Professions Code section 17200 for violations of wage and hour laws may be filed up to four years from the alleged violation).  
  • Consider requiring employees to sign arbitration agreements as a condition of employment.  Thanks to some recent decisions applying the Federal Arbitration Act, a good arbitration agreement can prevent wage and hour class actions altogether and require current employees to resolve whatever employment related claims they might have by arbitration and not by a lawsuit filed in court.  
  • Maintain accurate, up-to-date written job descriptions for all positions.
  • Consider auditing pay practices to determine whether pay differentials exist.  Although pay disparities are allowed under the new law if they are based on certain factors that are unrelated to gender, such as education, training, or experience, employers must be prepared to affirmatively demonstrate that these factors account for the entire pay differential.  
  • Carefully document all decisions related to pay, performance, and promotion, and provide timely and effective performance evaluations.  Employers should also train their managers to be aware of and comply with federal and State equal pay laws.

The old saying that “an ounce of prevention is worth a pound of cure” is particularly apt when it comes to California’s increasingly employee-friendly employment laws.

Should you have any questions, comments, or concerns about this new law, please do not hesitate to contact one of the authors or attorneys with whom you regularly work.

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