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New Restrictions on Using Earnings History to Set Compensation

Some jurisdictions have begun restricting the practice by many employers of considering applicants’ earnings history when setting compensation. Those in favor of such measures maintain that when employers consider prior earnings, “women often end up at a sharp disadvantage and historical patterns of gender bias and discrimination repeat themselves, causing women to continue earning less than their male counterparts.” A.B. 1676, Cal. Leg. (2016). Several federal appellate courts have discussed a related issue—whether the Equal Pay Act already prohibits sole reliance on prior earnings to explain a wage differential challenged under the Act. In this month’s column, we outline the circuit split on this issue, summarize recent measures in California, Massachusetts, and Philadelphia restricting the use of prior earnings, and provide guidance for employers seeking to maintain compliant hiring and pay practices.

Background

The Equal Pay Act prohibits employers from discriminating on the basis of sex by paying less in wages to employees than it pays those of the opposite sex for equal work on jobs requiring “equal skill, effort, and responsibility, and which are performed under similar working conditions.” One exception is when the wage differential is “based on any other factor other than sex.” 29 U.S.C. § 206(d)(1).

Courts are split on whether the EPA prohibits wage differentials based solely on prior earnings, as a “factor other than sex.” In Wernsing v. Department of Human Services, 427 F.3d 466, 468-70 (7th Cir. 2005), the Seventh Circuit recognized that “[i]f sex discrimination led to lower wages in the ‘feeder’ jobs, then using those wages as the base for pay” would violate the EPA. But, in affirming summary judgment for an employer, the court held that plaintiffs must prove, rather than assume, that prior wages were discriminatory, noting that the plaintiff in that case had not offered expert evidence, or cited any economics literature, to support an argument that the organizations from which her employer hires discriminate in wages on the basis of sex. The court also rejected the argument that the “factor other than sex” must be an “acceptable business reason,” holding that the EPA only requires employers to have a reason “other than sex,” not necessarily a “good” reason.

In Taylor v. White, 321 F.3d 710, 719-20 (8th Cir. 2003), the Eighth Circuit similarly declined to prohibit sole reliance on prior earnings in all cases, concluding from the EPA’s legislative history that this practice “may serve legitimate, gender-neutral business purposes, such as the retention of skilled workers who may be needed in the future to perform higher level work.” Accordingly, courts should conduct a “case-by case analysis” to “search for evidence that contradicts an employer’s claims of gender-neutrality.”

By contrast, both the Sixth and the Eleventh Circuits concluded that sole reliance on prior salary to justify a wage differential violates the EPA. See Balmer v. HCA, Inc., 423 F.3d 606, 612 (6th Cir. 2005), overruled on other grounds by Fox v. Vice, 563 U.S. 826 (2011); Irby v. Bittick, 44 F.3d 949, 955 (11th Cir. 1995). Drawing on a district court’s analysis, the Eleventh Circuit explained in Irby that “[i]f prior salary alone were a justification, the exception would swallow up the rule and inequality in pay among genders would be perpetuated.”  Under that circuit’s precedent, based on the EPA’s legislative history, “the ‘factor other than sex’ exception applies when the disparity results from unique characteristics of the same job; from an individual’s experience, training, or ability; or from special exigent circumstances connected with the business.” Glenn v. Gen. Motors Corp., 841 F.2d 1567, 1570-71 (11th Cir. 1988). In the same vein, the Tenth Circuit concluded in an unpublished decision that although the EPA precludes sole reliance on prior salary to justify a pay disparity, employers may consider prior salary in conjunction with applicants’ qualifications and experience. Angove v. Williams-Sonoma, Inc., 70 F. App’x 500, 508 (10th Cir. 2003). 

In summarizing this circuit split, a California district court found that although the Ninth Circuit held in Kouba v. Allstate Insurance Company, 691 F.2d 873, 876-77 (9th Cir. 1982), that “the Equal Pay Act does not impose a strict prohibition against the use of prior salary,” the circuit did not decide whether prior earnings alone can justify a salary differential under the EPA. Instead, after concluding that employers must have an “acceptable business reason” for using a factor that causes a wage differential between male and female employees, Kouba held that “the employer must use the factor reasonably in light of the employer’s stated purpose as well as its other practices.” The court believes this standard accommodates employer discretion while also protecting against the risk of employers using prior salary “to capitalize on the unfairly low salaries historically paid to women.” The California district court followed the Sixth, Tenth, and Eleventh Circuits and, in denying summary judgment to an employer, held that basing compensation solely on prior wages carries too high of a risk that “it will perpetuate a discriminatory wage disparity between men and women,” and thus this practice, even if supported by a legitimate, non-discriminatory business reason, violates the EPA. Rizo v. Yovino, 2015 WL 9260587, at *8-9 (E.D. Cal. Dec. 18, 2015).

New Measures

California, Massachusetts, and Philadelphia have recently enacted legislation that expressly addresses the issue of employer use of applicants’ earnings history in setting compensation. Under California Labor Code § 1197.5(a)(1)(D), employers may not pay employees less than other employees of the opposite sex for substantially similar work, except when they demonstrate that the wage differential is based on one or more of certain factors, including a “bona fide factor other than sex, such as education, training, or experience.” Effective January 1, 2017, California employers may no longer rely solely on employees’ prior salaries to “justify any disparity in compensation,” codifying in the California Labor Code the Sixth, Tenth, and Eleventh Circuits’ interpretation of the EPA. § 1197.5(a)(3). New York Labor Law does not contain this explicit prohibition; however, the state’s Achieve Pay Equity Act, effective January 19, 2016, similarly limits the “catch-all exception” to the equal pay requirement to differentials based on a “bona fide factor other than sex, such as education, training, or experience.” N.Y. Lab. Law § 194(1)(d). It remains to be seen whether New York courts will consider prior earnings to fall within this exception.

Beginning July 1, 2018, Massachusetts employers are subject to even more restrictions. Under the Act to Establish Pay Equity, employees’ previous wage or salary histories will not be a defense to an action for wage discrimination on the basis of gender. The law also prohibits employers from asking an applicant, or her current or former employer, for the individual’s wage or salary history, and from requiring that an applicant’s earnings history meet certain criteria. But if an applicant volunteers her wage or salary history, the employer may confirm such information. Likewise, once the employer has negotiated and made an offer of employment with compensation, it may then seek out or confirm an applicant’s wage or salary history. The Massachusetts law broadly defines “wages” to include “all forms of remuneration for employment.”  Mass. Gen. Laws ch. 149, § 105A(a)-(b), (c)(2).  

A Philadelphia ordinance will similarly restrict employer inquiries into applicants’ wage histories. Effective May 23, 2017, Philadelphia employers may no longer inquire about or require disclosure of applicants’ wage histories, or condition employment or consideration for an interview or employment on disclosure of wage history. Employers also will no longer be able to rely on applicants’ wage histories in determining wages “at any stage in the employment process, including the negotiation or drafting of any employment contract.” The ordinance defines “wages” to mean “all earnings of an employee … including fringe benefits, wage supplements, or other compensation.” Similar to the Massachusetts law, there is an exception for when applicants “knowingly and willingly” disclose their wage histories. B. No. 160840, Phila. City Council (Pa. 2017).

A private right of action exists to enforce each of these measures. Philadelphia requires exhaustion of administrative remedies, unlike California and Massachusetts. Phila., Pa. Code § 9-1122(1). In California, employees may bring an action within two years, or three if the violation is “willful,” for wages due, including interest, and an equal amount of liquidated damages. California also provides a separate cause of action for an employee “who has been discharged, discriminated or retaliated against, in the terms and conditions of his or her employment because the employee engaged in any conduct delineated” in § 1197.5. The employee must bring the action within one year, and may recover reinstatement, reimbursement for lost wages and benefits, including interest, and “appropriate equitable relief.” § 1197.5(h)-(i), (k)(2)-(3). A Massachusetts employee has three years to sue for unpaid wages and an equal amount of liquidated damages. § 105A(b)-(c).  After exhausting administrative remedies, Philadelphia employees may recover “any relief [the court] deems appropriate,” including compensatory and punitive damages, and injunctive relief. Separate penalties in Philadelphia include up to $2,000 for each violation, and, for repeat violations, potential imprisonment for up to ninety days. § 9-1121, 1122(3). Each jurisdiction also authorizes recovery of reasonable attorneys’ fees and costs. § 1197.5(h); § 105A(b); § 9-1122(3). 

Practice Pointers

Legislators in New Jersey and Texas have proposed similar bills, and the Public Advocate for the City of New York proposed legislation in 2016 that would prohibit all city employers[1] from requesting applicants’ salary history. Employers should remain current on proposals in this rapidly evolving area of the law so they are prepared to make any necessary revisions to their hiring and pay practices. They also may wish to consider:

  • For national employers, using earnings history to set compensation in conjunction with other legitimate criteria, such as experience, except to the extent applicable to prospective employees in Massachusetts and Philadelphia, which, as noted above, restrict employers’ ability to request earnings history. If having multiple hiring and pay policies presents an administrative burden, employers may wish to consider adopting a uniform policy that conforms with Massachusetts and Philadelphia law. 
  • Educating and training those participating in hiring and compensation setting, including any third party involved in recruiting and verification of prior employment, on these new limitations and any corresponding changes in company policy. Because these new measures have anti-retaliation provisions, employers should also update their anti-retaliation policies and train employees accordingly.
  • Performing an analysis of the company’s workforce to determine whether any pay disparities exist between employees of the opposite sex performing the same job. Employers should involve counsel in this process to increase the likelihood that the attorney-client privilege and the work product doctrine will protect the analysis and any related communications and materials from disclosure.

Reprinted with permission from the April 4, 2017 edition of the NEW YORK LAW JOURNAL © 2017 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 - reprints@alm.com.

[1] Mayor de Blasio signed an executive order in 2016 prohibiting city agencies from inquiring into applicants’ pay history, and Governor Cuomo signed an order this year imposing similar restrictions on state entities.

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