Practical Tips in the Wake of Recent Changes to the Federal and California Equal Pay Acts and the Ninth Circuit’s Rizo Decision

07.19.2018

For decades, the California and federal Equal Pay Acts have prohibited employers from paying their employees less than employees of the opposite sex for equal work. In recent months, employers' obligations under both Equal Pay Acts have undergone change through the courts and the California Legislature. On April 9, 2018, in Rizo v. Yovino, 887 F.3d 453 (9th Cir. 2018), the Ninth Circuit Court of Appeal reversed several decades of precedent by holding that employers may not rely upon an employee’s prior salary as an affirmative defense to a claim brought under the federal Equal Pay Act. In addition, the California Legislature recently amended the California Equal Pay Act. Below, we discuss these recent developments and offer some recommendations and guidelines.

Summary of Rizo Decision
The Fresno County Office of Education hired Aileen Rizo as a math consultant in late 2009. According to the County’s written policies, Rizo was placed on a County salary level and step based on her prior salary. Subsequently, Rizo learned that her male colleagues had been hired at a higher salary level despite working the same job. In response to Rizo’s complaint regarding the pay differential, the County argued that a recent review of the past 25 years of salary-step placement revealed that women were placed at higher compensation levels than men upon hire.

Rizo did not find this explanation satisfactory, and brought several claims against the County in federal district court, including a claim under the federal Equal Pay Act. The County argued that its reliance on prior salary constituted a lawful “factor other than sex,” the “catch-all” defense available under the federal Equal Pay Act. The district court disagreed, finding a pay structure premised on prior salary violated the federal Equal Pay Act. The County appealed the ruling, relying on the Ninth Circuit’s holding in Kouba v. Allstate Insurance Co., 691 F.2d 873 (9th Cir. 1982). The three-judge appellate panel in Rizo agreed that Kouba controlled, and that Kouba permitted the County to base salary decisions in whole or in part on an employee’s prior salary. However, upon request by Rizo, the Ninth Circuit granted rehearing before the court’s entire panel, and decided to rule in Rizo’s favor and overrule its holding in Kouba.

In Rizo, the Court noted that the “clear intent and purpose” of the federal Equal Pay Act supported Rizo’s position that compensation cannot be based on prior salary. The Court held that at the time of the federal Equal Pay Act’s passage, “an employee’s prior pay would have reflected a discriminatory marketplace that valued the work of one sex over the other.” Second, the court held that basic principles of statutory interpretation supported Rizo’s reading of the federal Equal Pay Act’s catch-all defense. The court held that since the other, “specific” affirmative defenses pertained to job qualifications and/or experience, “it follows that the more general exception should be limited to legitimate, job-related reasons as well.” Third, the court held that the legislative history of the federal Equal Pay Act favored Rizo, as it revealed the “catchall exception was added… in direct response to employers’ concerns that their legitimate, job-related means of setting pay” would be found unlawful. Fourth, the court observed that other federal appellate courts had interpreted the federal Equal Pay Act as prohibiting reliance on prior salary. Based on all of these factors, the court found that the “catch-all” defense of the federal Equal Pay Act permitted use of “job-related” rather than “business reasons,” as “not every reason that makes economic sense… constitutes an acceptable factor other than sex.” For these reasons, the Court found that Kouba should be overruled and held that employers may not rely upon an employee’s prior salary as an affirmative defense to a claim brought under the federal Equal Pay Act.

Court Decisions After Rizo
Two district courts have acknowledged the Ninth Circuit’s pivotal shift in Rizo on this issue. In Higgins v. Northwest Farm Credit Services, 2018 WL 2050132, 2018 A.D. Cases 155,339 (D. Idaho May 2, 2018), Higgins filed numerous claims against her employer, including an allegation of pay disparity under Title VII. While this claim differed in some respects from one brought under the federal Equal Pay Act, the district court noted that both statutes used the same affirmative defenses, such that Rizo was persuasive authority. Given this, the court scrutinized the job-related differences between Higgins and her male counterparts, and found that her employer’s decision rested on a “legitimate” job-related reason, namely prior experience (or lack thereof). By contrast, the district court in Duncan v. Texas Health and Human Services Commission, 2018 WL 1833001, 2018 Fair Empl. Prac. Cas. (BNA) 135,077 (W.D. Tex. April 17, 2018) considered a wage disparity claim under the federal Equal Pay Act. In dictum, the court cited to Rizo and other circuits for the principle that “employers may not seek refuge under the [catch-all] exception where the [employer’s] sole justification for a pay disparity is an applicant’s prior pay,” yet observed that this was still an “open question in the Fifth Circuit.”

Presently, Rizo is the controlling law on this issue in the Ninth Circuit. However, the defendant in the Rizo matter asked the United States Supreme Court for an extension to file a writ of certiorari in this matter. The request was granted and the defendant currently has until August 23, 2018 to seek review of this decision with the United States Supreme Court. Therefore, it is possible that the holding in the Rizo decision will be reviewed by the United States Supreme Court.

Amendments to the California Equal Pay Act
Over the past several years, the California Legislature has passed the California Fair Pay Act. The bill made changes and additions to the California Equal Pay Act to broaden the statute’s scope and limit an employer’s ability to rely on past salary history as a defense to a claim under the California Equal Pay Act.

On September 30, 2016, the Governor signed Assembly Bill 1676, which provided that “prior salary shall not, by itself, justify any disparity in compensation.” While the bill does not go as far as the Rizo decision, as it only barred reliance on prior salary by itself, it does require that the employer provide an additional job related reason for the salary differential. At the same time, the Governor signed Senate Bill 1063, which amended Labor Code section 1197.5 to extend the Equal Pay Act’s protections beyond gender. Under this amendment, wage differentials are also prohibited for workers of different ethnicities or races who perform substantially similar work.

California’s latest revision occurred late in 2017, when the Governor signed Assembly Bills 46 and 168. Assembly Bill 46 made clear that California Equal Pay Act applied to public employers. Assembly Bill 168 added Section 432.3 to the California Labor Code, which prohibited employers from inquiring about or relying on an applicant’s salary history. This requirement bars the use of or request for salary information as a factor in determining whether to offer employment, or what salary to offer. This new statutory language goes beyond Rizo, as it applies not only to decisions about compensation, but also, to job interviews and decisions regarding job offers.

Practical Tips in Light of the Rizo Decision and Recent Legislation
The Ninth Circuit’s Rizo decision and the recent changes in legislation clearly prohibit the use of or reliance on an employee’s prior salary in setting compensation. Here are some tips for public employers:

These legislative changes and court holdings directly affect the hiring process. Employers should review their policies, procedures, and forms to omit requests for prior salary information.
Both Rizo and the changes to the California Equal Pay Act impact compensation-related decisions occurring after an employee’s initial hire. Both Rizo and the California Fair Pay Act require that managers or supervisors do not ask for or rely upon a worker’s prior salary when making compensation decisions during the course of a worker’s employment.
Both the federal and California Equal Pay Acts allow employees to bring claims and/or lawsuits for violations of the Equal Pay Act. If an employee prevails in such claims, the employee may recover the differential in wages and an equal amount in liquidated damages for a period of up to two years if the violation was not willful, and three years if the violation was willful. The employee can also recover interest and attorney’s fees. Therefore, attention should be paid to the documentation of justification for compensation decisions, so if sued, the employer can present evidence of its legitimate, business related reason for the salary differential which is not gender and/or race based, and is not based on past salary.
The Rizo decision offers unique challenges to public employers.
- The California Equal Pay Act allows for a wage differential to be based on seniority or a merit system. Unlike the private sector, public agencies often follow salary schedules, with detailed and uniform wage levels or steps. In fact, the public employer in the Rizo case employed such a system. While these salary schedules can be used to argue that a compensation decision is based on merit and/or seniority, public sector managers should ensure that prior salary is not considered when deciding where to place an employee in these uniform wage levels and steps and should ensure that it has a bona fide job related reason for the placement of an employee in a certain level and/or step.
- Attention should be paid to instances where employees in the same job description are placed at different wage levels and/or steps. In those instances, an analysis should be done to determine if the employees are performing substantially similar work and/or the reason for the different wage placement for employees that are performing similar work.
- Since wage schedules are often the result of collective bargaining and included in labor agreements, public employers may be tempted to argue that the wage placement was the result of the bargaining process. While bargaining obligations may constitute a business reason to justify certain salary placements, under Rizo, business reasons are not sufficient, and, in order to qualify for the exemptions under the federal and state Equal Pay Acts, the employer must present evidence of a job related reason for the placement at a certain wage level. As discussed above, wage differentials can be based on seniority and merit systems. Therefore, in bargaining, care should be taken to ensure that these salary schedules are tied to seniority or merit systems.
- Unlike the private sector, public employees’ prior salary information is publicly available and easily accessible, such as on Transparentcalifornia.com. Given Rizo’s clear ruling, public employers should be cautious to ensure this easily obtained information is not used during compensation-related decisions.
The Rizo court did approve the use or reliance on other “legitimate job-related factors” when setting compensation, or making other salary-related decisions. For instance, employers may consider an employee’s experience, educational background, ability, or prior job performance. Similarly, California’s Equal Pay Act allows for salary differentials that are based on a seniority system, a merit system, and other bona fide factors other than sex and race, such as education, training or experience. Therefore, action should be taken to ensure that compensation decisions are based on these legitimate job related factors.
- Employers should revise their policies and/or forms for hiring, performance evaluations, or other salary-related decisions to provide specific factors or types of information that will be used or considered, such as experience, education background, and training.
- When making compensation decisions, managers or supervisors should document the particular reason(s) or factor(s) that support their decision relating to compensation. This documentation is helpful to protect the employer in the event of a claim under either the federal or state Equal Pay Act, to show (among other things) that the decision was motivated by “legitimate” reasons other than prior salary.

Given the issues raised by Rizo and recent legislative action, we recommend that employers consider an audit of their pay practices. This audit can ensure that forms and policies omit reference to or use of prior salary, to comply with Rizo and Section 432.3 of the Labor Code. In addition, these audits can locate any wage differentials between genders, races and/or ethnicities and either ensure there is sufficient evidence to justify the wage differential or take action to correct any unjustified wage differential. Additionally, these audits will allow for a review of the bargaining, hiring, and compensation process to ensure practices that will avoid violations of the Equal Pay Act and allow for training of managers, supervisors, labor negotiators and other personnel involved in negotiations and pay-related decisions to ensure they follow practices compliant with the Equal Pay Act.

If you have any questions on these developments, or would like to conduct a compensation audit, please feel free to contact this Alert’s authors.