Ninth Circuit Rules Equal Pay Act Bans Any Consideration of a Candidate’s Prior Compensation in Setting Wage Differentials

Nelson Mullins Riley & Scarborough LLP

Nelson Mullins Riley & Scarborough LLP

Joining growing list of state and local jurisdictions banning everyone’s least favorite question—“how much do you make?”

On April 9, 2018, the Ninth Circuit Court of Appeals issued an en banc decision in Rizo v. Yovino holding that under the Equal Pay Act, an employer may not consider a candidate’s prior compensation when establishing prospective salary and wages.  The decision was released on the eve of Equal Pay Day--April 10, 2018—an observance started over thirty years ago by the National Committee on Pay Equity as a public awareness initiative to bring attention to the gender pay gap.  It represents a significant effort by the federal judiciary to take aim at pay inequities that experts contemplate cost women in the U.S. over $840 billion a year, with women on average still making approximately 80 percent of what their male counterparts earn.

Laws aiming at gender equality in employment compensation are not new, but they are gaining in reach and momentum. The Equal Pay Act—the federal law aimed at abolishing wage disparity between men and women--has been in place since 1963. The law requires that men and women may not be paid differently for equal work. The only exceptions are compensation differentials based on a seniority system, merit system, a system that measures earnings by quantity or quality of production, or a “differential based on any other factor other than sex.”  This last exception was the focus of the Ninth Circuit’s decision and the new holding by the Court that a candidate’s prior compensation may not be considered as a factor under this “catchall” category. The rationale by the Court, and the many women’s advocacy groups that closely followed and filed amicus briefs in the case, is that basing wage decisions on prior compensation perpetuates and capitalizes on previous discriminatory practices. 

The decision, representing the most liberal interpretation of the Equal Pay Act’s protections to date, not only bans an employer from basing wages on the candidate’s prior compensation, it stretches further in holding that, in the Ninth Circuit at least, such information cannot even be considered as one of a combination of factors in justifying wage differentials between male and female employees. 

To date, ten states and local jurisdictions have passed recent legislation banning inquiries into a candidate’s prior compensation and relying on such information in setting wage and benefits.  Many of the laws also ban retaliating against an employee for engaging in activities aimed at reducing pay gaps and protecting employees’ rights to openly discuss and seek information with their colleagues about their compensation amounts. Penalties range widely across the state and local jurisdictions, with some laws having little to no enforcement clause and others carrying stiff criminal and civil fines. 

California, Delaware, and Puerto Rico’s laws have all taken effect in 2017 and the first part of 2018. Massachusetts’s law takes effect on July 1, 2018, and Oregon’s law is partially in effect, with the remainder of its implementation and penalties being staggered over the next several years.  Locally, New York City and Albany County (NY) have both adopted prior compensation ban legislation impacting public and private employers operating in their jurisdictions. New Orleans (LA) and Pittsburgh (PA) have both implemented legislation banning city government agencies from perpetuating the gender pay gap via prior compensation inquiries; private employers in these jurisdictions are unaffected by the local legislation.  Philadelphia (PA) also passed a similar bill, however it has faced legal challenges from the local Chamber of Commerce, and its implementation has been put on hold pending that litigation in the courts. Several other jurisdictions have seen activity in their respective legislatures with similar bills being brought forward for pending or past consideration.

With the increase in state and local legislation, combined with the Ninth Circuit precedent-changing decision on the federal Equal Pay Act’s treatment of prior compensation inquiries, employers and search consultants must proceed cautiously in this changing landscape.  Past practices of seeking inquiries into a candidate’s current salary, requiring confidentiality in compensation agreements, and employment application and verification forms all need to be carefully scrutinized for compliance. Because the Equal Pay Act is a “strict liability” law, employers will be held liable even if they had no intention of discriminating against an employee, making cautionary planning even more important.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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