What Employers Need to Know About the Recently Amended California Fair Pay Act
Recent amendments to the California Equal Pay Act have renamed the Act the California Fair Pay Act, broadened its reach, made it easier for current and former employees to prevail on claims of alleged violations, and added criminal penalties for willful violations. As amended, the Fair Pay Act now generally prohibits both union employers and non-union employers from paying to any exempt or to any non-exempt employee a wage rate less than the wage rate paid to one or more employees of the opposite sex or of another race or ethnicity for "substantially similar work."
When such a wage differential is shown, it becomes the employer’s burden to demonstrate it is based on factors other than "sex, race, or ethnicity." In other words, when such a wage differential is shown, it is the employer’s burden to show it has not violated the law. Further, willful violations of the Fair Pay Act are now criminal acts punished by fines, by imprisonment, or both. The requirements of the Fair Pay Act and its most pertinent recent amendments are discussed in more detail below.
The Recent Amendments to the California Fair Pay Act
Effective January 1, 2016, the Legislature renamed the "Equal Pay Act" the "Fair Pay Act" by amending the Labor Code. These amendments made it easier for current and former employees to bring claims alleging payment of wage rates less than the wage rates paid to employees of the opposite sex for "substantially similar work" rather than the previous and more difficult standard of "equal work," stating in part, "[a]n employer shall not pay any of its employees at wage rates less than the rates paid to employees of the opposite sex for substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions...." The Legislature did this by making it the employer’s burden to prove that a wage differential between employees of the opposite sex is based on factors other than gender.
Effective January 1, 2017, the Legislature amended the Fair Pay Act to likewise prohibit paying any employee wage rates less than the rates paid to any employee of another race or ethnicity for substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions...."
When such a wage differential is shown, it is the employer’s burden to demonstrate the wage differential is based on one or more of the following factors: a seniority system, a merit system, a system that measures earnings by quantity or quality of production, or "[a] bona fide factor other than [sex, race, or ethnicity], such as education, training, or experience." The last factor "shall apply only if the employer demonstrates that the factor is not based on or derived from a [sex-based, race-based, or ethnicity-based] differential in compensation, is job related with respect to the position in question, and is consistent with a business necessity." The employer must also demonstrate "[e]ach factor relied upon is applied reasonably," and demonstrate that "one or more factors relied upon account for the entire wage differential." Notably, "[p]rior salary shall not, by itself, justify any disparity in compensation." The employer may be found liable if it fails to meet these burdens.
The California Fair Pay Act is more stringent than its federal counterpart entitled the Equal Pay Act. Although the United States Court of Appeals for the Ninth Circuit recently held in Rizo v. Yovino, 854 F.3d 1161 (9th Cir. 2017) that employers can rely on prior salary as a factor in setting the salary of a new employee, the court was interpreting the federal Equal Pay Act, not the more stringent California Fair Pay Act. In most instances, a pay disparity claim brought against a California employer will be brought under the more stringent California Fair Pay Act and may seek civil penalties under the California Private Attorneys General Act of 2004.
When an employer is liable for a prohibited wage differential, the employer must pay the affected employee "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 will be entitled also to an award of attorneys’ fees and litigation costs.
In addition, employers are prohibited from 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." The Fair Pay Act goes on to state "[a]n employer shall 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, the Fair Pay Act states an employer is not required to disclose to an inquiring employee the wages of another employee.
If an employer is found liable for any such discharge, discrimination, or retaliation, the affected employee "may recover in a civil action reinstatement and reimbursement for lost wages and work benefits caused by the acts of the employer, including interest thereon, as well as appropriate equitable relief."
In any event, employers are required 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" and to keep such records for at least three years.
Available Civil Penalties
In addition to the damages and other remedies provided for by the California Fair Pay Act, the civil penalty provisions of the California Private Attorneys General Act of 2004 ("PAGA") also apply. Specifically, under PAGA a current or former employee who is "aggrieved" by a violation of the Fair Pay Act can seek in addition to damages and liquidated damages civil penalties on behalf of himself or herself and on behalf of all other similarly "aggrieved" (i.e., affected) current and former employees. The recoverable civil penalties are $100 per employee per pay period for an initial violation and $200 per employee per pay period for each subsequent violation, plus attorneys’ fees and litigation costs.
Criminal Penalties for "Willful" Violations
As if the civil consequences of violating the Fair Pay Act are not bad enough, the Fair Pay Act has been amended, also, to impose criminal penalties against any person who willfully violates the California Fair Pay Act.
Reducing Risks of Fair Pay Act Claims
What should employers do to reduce their risk of exposure to claims based on the Fair Pay Act?
- Employers should review the wage rates of all employees to determine whether any employees are paid wage rates less than the wage rates paid to employees of the opposite sex or to employees of another race or ethnicity for "substantially similar work." Here, the actual tasks performed by an employee should be examined as courts will look past job titles and job classifications. In other words, it is not enough to merely compare the wage rates paid to employees who hold the same position, job title, or job classification. The key phrase is "substantially similar work."
- Employers should review the criteria being used to determine the wages of new hires and the wages of existing employees. Objective, gender neutral and race and ethnicity neutral criteria are preferable to subjective criteria.
- Employers should 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.
- Employers should maintain all required records for at least three years, preferably four years.
- Employers should 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 effectively 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.
- Employers may consider conducting an audit of payroll practices, which may be arranged through counsel to effectuate attorney-client privilege, to determine whether pay differentials exist.
The old saying that an ounce of prevention is worth a pound of cure is doubly true when it comes to California’s increasingly and relentlessly employee friendly employment laws.