Pay Equity Litigation Update:  Third Circuit Upholds Philadelphia Ordinance Banning Inquiries Into Job Applicants’ Pay History

Seyfarth Shaw LLP

Seyfarth Synopsis: Many states and cities have recently enacted laws prohibiting employers from inquiring about an applicant’s salary history or seeking that information from the applicant or the applicant’s current or former employer. Those salary history bans have sometimes been challenged in Court by business groups on constitutional grounds. On February 6, 2020, the Third Circuit upheld the validity of Philadelphia’s law.

On February 6, 2020, in Greater Philadelphia Chamber of Commerce v. City of Philadelphia, No. 18-2175, 2020 WL 579733 (3d. Cir. Feb. 6, 2020), the U.S. Court of Appeals for the Third Circuit reviewed a district court decision to enjoin the Inquiry Provision and uphold the Reliance Provision of the 2017 Philadelphia Wage Equity Ordinance (the “Ordinance”). Those provisions prohibit employers from inquiring into or relying upon job applicants’ prior wage history in establishing future pay. The Ordinance was challenged on constitutional grounds by the Greater Philadelphia Chamber of Commerce (the “Chamber”), based on the argument that the Ordinance infringes upon employers’ freedom of speech. On appeal, the Third Circuit affirmed the district court’s decision to uphold the Reliance Provision, reasoning that the Chamber is not entitled to First Amendment protection under such provision because it regulates conduct instead of speech. The Third Circuit, however, vacated the district court’s decision to enjoin the Inquiry Provision, holding that such provision passes constitutional muster under intermediate scrutiny because, while the speech concerns lawful activity, the City has a substantial interest in bridging the pay gap, the Ordinance directly advances that interest, and the Ordinance is not more extensive than necessary to serve the interest.

Case Background

Greater Philadelphia Chamber of Commerce v. City of Philadelphia involved the Chamber’s constitutional challenge to a Philadelphia ordinance enacted by the City to address potential disparities in pay affecting women and minorities. The Ordinance consisted of two provisions: the “Inquiry Provision” and the “Reliance Provision.” The Inquiry Provision prohibits an employer from asking about a prospective employee’s wage history, and the Reliance Provision prohibits an employer from relying on wage history at any point in the process of setting or negotiating a prospective employee’s wage. The Ordinance was initially passed by the City Council in December 2016 and was scheduled to go into effect on May 2017. 

The Ordinance, however, was stalled upon the Chamber’s April 2017 filing of a lawsuit and motion to preliminarily enjoin the Ordinance based on the claim that neither the Inquiry Provision nor the Reliance Provision could survive a First Amendment challenge under either strict or intermediate scrutiny. Without identifying which level of scrutiny should apply to the Inquiry Provision, the district court invalidated such provision, holding that it violated the First Amendment because it could not withstand even the less stringent analysis under intermediate scrutiny. Chamber of Commerce for Greater Philadelphia v. City of Philadelphia, 319 F. Supp. 3d 773, 785 (E.D. Pa. 2018). The district court, however, ruled that because the Reliance Provision targets conduct rather than speech, no First Amendment analysis was required and such provision was upheld. Id. at 801, 803. On appeal, the Chamber argued that the district court erred in refusing to enjoin the Reliance Provision and that both provisions should have been reviewed under strict scrutiny. The City argued that the district court erred in enjoining the Inquiry Provision.

The Third Circuit’s Decision

Upon review of the district court’s decision to enjoin the Inquiry Provision but uphold the Reliance Provision, the Third Circuit initially set out the corresponding burdens in First Amendment cases seeking injunctive relief: 1) the moving party must first make a colorable claim that the law restricts some form of speech; 2) the government must then justify its restriction on speech under whatever level of scrutiny is appropriate; 3) if the government succeeds in showing constitutionality, the motion for preliminary injunction fails because there is no likelihood of success on the merits; and 4) if the government cannot establish constitutionality, the challenger must still demonstrate irreparable harm (which is generally presumed where the moving party’s freedom of speech is being infringed). See Greater Philadelphia Chamber of Commerce v. City of Philadelphia, No. 18-2175, 2020 WL 579733, at *10 (3d Cir. Feb. 6, 2020). The Third Circuit reviewed the district court’s preliminary injunction determinations for an abuse of discretion, an error of law, or a clear mistake in the consideration of proof, reviewed conclusions of law de novo, and reviewed findings of fact for clear error. Id. at *11.  

Initially, the Third Circuit agreed with the district court’s decision to uphold the Reliance Provision because it is not subject to the First Amendment analysis. Specifically, the Third Circuit agreed that the Reliance Provision does not regulate speech, as it does not implicate the spoken or written word. Further, the Third Circuit agreed with the distinguishable nature of the case law relied upon by the Chamber, asserting that those cases involved the regulation of activities such as physical entry of data, written or verbal inquiries, and legal training and advice, all of which are related to a form of speech. Moreover, the Third Circuit quickly disposed of the Chamber’s other arguments challenging the Reliance Provision by maintaining that: 1) the provision leaves employers free to discuss an applicant’s value by his or her qualifications; 2) the provision does not impede on free speech as it is not triggered during negotiation of an employment contract but is triggered “at any stage in the employment drafting process”; 3) even if the provision is triggered by negotiations, its “incidental impact” on speech is not an unconstitutional violation of the freedom of speech; and 4) the Chamber relies on distinguishable cases which involve laborers’ abilities to advertise their availability for work, which is “prototypical speech that depends on spoken or written communication.” Id. at *12-*13.

Regarding the Inquiry Provision, which the Third Circuit recognized as easily regulating speech, the panel initially agreed with the district court in finding that the regulated expression is “commercial speech” because the affected communications occur in the context of employment negotiations, which propose a commercial transaction where “the economic motive is clear.” Id. at *14. Recognizing that “the Supreme Court has consistently applied intermediate scrutiny to commercial speech restrictions . . . particularly when the challenged speech involves an offer of employment,” the Third Circuit rejected the application of strict scrutiny. Id. This determination was further supported by the fact that the provision is viewpoint neutral, as it precludes all employers from inquiring into wage history, with no focus on any particular viewpoint or favoring any particular employee or job.

With the appropriate level of scrutiny identified, the Court analyzed the following factors under Central Hudson to determine whether the Inquiry Provision passed muster under intermediate scrutiny: 1) the speech concerns lawful activity and is not misleading; 2) the asserted governmental interest is substantial; 3) the regulation directly advances the governmental interest asserted; and 4) the regulation is not more extensive than is necessary to serve that interest. 

Regarding the first prong, the Third Circuit agreed with the district court that the regulated speech is not related to illegal activity because not all uses of wage history are illegal. For example, wage gathering is permitted in other contexts, such as for gathering market information. For the second prong, because the Chamber did not dispute the district court’s conclusion that solving the pay gap is a substantial government interest, the Third Circuit held that it agreed with the district court with no further analysis. 

For the third prong, the Third Circuit disagreed with the district court, holding that the provision directly advances the City’s interest in pay equity. In holding that the City failed to satisfy this prong of the analysis, the district court reasoned that the City did not produce sufficient evidence to establish that the Inquiry Provision would advance its interest in bridging the pay gap, primarily based on the belief that the City supported the Ordinance with “conclusory statements,” “various tidbits,” and “educated guesses.” Chamber of Commerce for Greater Philadelphia, 319 F. Supp. 3d at 797-98. The Third Circuit, on the other hand, found that the City Council relied upon sufficient testimony and studies to support the enactment of the Ordinance, as the evidence established that: 1) the wage gap is substantial and real; 2) numerous experiments have been conducted, which controlled for such variables as education, work experience, and academic achievement, still finding a wage gap; 3) researchers have long attributed the gap to discrimination; 4) existing civil rights laws have been inadequate to close the wage gap; and 5) witnesses who reviewed the data concluded that relying on wage history can perpetuate gender and race discrimination. See Greater Philadelphia Chamber of Commerce, 2020 WL 579733, at *18. Further, after analyzing Supreme Court authority and distinguishing cases relied upon by the district court and the Chamber, the Third Circuit concluded that the weight of authority supports the finding that the City Council made a reasonable judgment based on substantial evidence in enacting the Ordinance. 

Lastly, given that the district court did not reach the final prong of the intermediate scrutiny analysis, the Third Circuit independently determined that the Inquiry Provision is not more extensive than necessary because it is narrowly tailored to only prohibit employers from inquiring about the single topic of wage history, to preclude any discriminatory impact of prior salary levels. The panel further reasoned that employers are free to ask “a wide range of other questions,” including those related to qualifications, work history, skills and any other job-related questions relevant to performance or fit with the company and may still obtain market salary information from other sources. Id. at *27. Consequently, the Third Circuit affirmed the district court’s denial of a preliminary injunction as to the Reliance Provision and vacated the district court’s decision to enjoin the Inquiry Provision.

Implications For Employers

As we have previously written about (see, for example, here and here), an increasing number of states have signed salary history bans into law. The provisions of such laws vary from state to state, so it may be possible that other courts could come to a different conclusion concerning the legal validity of individual provisions of those state laws. But many state laws do in fact have in common the key provisions that were considered and upheld by the Third Circuit in this decision. The bottom line for employers is that state salary history bans are becoming an ever-increasing presence in the landscape of U.S. employment law that employers must carefully consider and address – and there is no sign that will change any time soon.

Jurisdiction matters in equal pay claims and employers are wise to understand the rules in the states in which they operate as they design and implement pay programs. Seyfarth’s 50-State Pay Equity Desktop Reference (available here) can help navigate this terrain.

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