Employers May Not Use Pay History as Defense to Equal Pay Act Claims

by McGuireWoods LLP
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Earlier this week, just one day before Equal Pay Day, the 9th Circuit issued an en banc opinion in Rizo v. Yovino, holding that a prospective employee’s pay history cannot justify a wage disparity as a “factor other than sex” under the Equal Pay Act. This ruling diverges from rulings by other Courts of Appeal, setting up a possible showdown in the U.S. Supreme Court.

The Equal Pay Act (EPA) is a strict liability statute that requires employers to compensate men and women equally for equivalent work. However, the EPA provides that an employer can justify a difference in compensation if it can prove that, in setting employee compensation, it relied not on gender, but on one or more of the statutorily enumerated affirmative defenses: (i) a seniority system, (ii) a merit system, (iii) a system that measures earnings by quantity or quality of production, or (iv) a differential based on any factor other than sex. This last “catch-all” factor was the subject of the 9th Circuit’s analysis in Rizo.

At issue in Rizo is the salary-setting process for newly-hired employees in the Fresno County Office of Education. Aileen Rizo had previously worked as a math teacher in a neighboring county when Fresno County hired her as a math consultant. Fresno County relied on a standard operating procedure (SOP) to set compensation of incoming employees. The SOP consisted of a salary scale, whereby the county would add 5 percent to any newly-hired employee’s previous salary, and then place the individual within the appropriate corresponding salary scale. After learning that her male colleagues were placed into higher salary steps than she was upon hire, Rizo sued her employer for violating the federal Equal Pay Act, for sex discrimination under Title VII, and under California Government Code § 12940(a). She claimed the salary-setting procedure promoted and perpetuated gender-based pay disparities.

Before the trial court, the county conceded that it paid Rizo less than her male colleagues for performing the same work —– a per se violation of the Equal Pay Act. However, it asserted that her prior salary as a math teacher, which the county used in setting Rizo’s salary, constituted an affirmative defense, as it was a permissible “factor other than sex” under the statute. The trial court rejected the county’s arguments, and the county appealed to the 9th Circuit. A three-judge panel of the 9th Circuit reversed the trial court decision, relying on a 1982 9th Circuit decision, Kouba v. Allstate In’s. Co., that held that it was permissible for an employer to rely on an employee’s prior salary as a “factor other than sex.” Rizo requested a rehearing before a full (en banc) panel of the 9th Circuit, which the court granted.

The full 9th Circuit panel reversed the three-judge panel’s decision and effectively overruled Kouba. It held that allowing an employer to justify wage differentials between men and women based on prior salary history has the tendency “to perpetuate rather than eliminate the pervasive discrimination at which the [Equal Pay Act] was aimed.”  According to the opinion, the “any factor other than sex” affirmative defense must be “limited to legitimate, job-related factors such as a prospective employee’s experience, educational background, ability, or prior job performance.” The court, in conducting a thorough statutory analysis and review of the legislative history, explained that allowing employers to otherwise explain away their pay differentials based on salary history (which could be derived from a previous employer’s discriminatory pay practices), would frustrate the intent of the EPA, which was designed to eliminate endemic gender-based pay disparities.

The court also emphasized that a “factor other than sex” must be “job-related,” and noted that other federal courts — including the 2nd, 6th, 7th, 8th, 10th and 11th Circuits — have construed the EPA in the same manner. Notably, the court distinguished “job-related” factors from “business-related” factors, suggesting that the latter would allow “far too many improper justifications for avoiding the strictures of the Act.”

While the court rejected that salary history can be a defense to a claim under the EPA, it left the door open for the possibility that prior salary can be a consideration in salary negotiations. To that end, the court expressly stated that “[o]ur opinion should in no way be taken as barring or posing any obstacle to whatever resolution future panels may reach regarding questions relating to such negotiations.” This cliffhanger left wide open the question of how, if at all, employers can use pay history in individualized salary negotiations — a question lawyers and legal scholars inevitably must wrestle in the days ahead.

What’s Next

The county publicly announced that it intends to appeal to the U.S. Supreme Court. While the Supreme Court reviews a limited number of cases every year, at least one other Circuit Court that has examined the issue of whether prior salary history can be a “factor other than sex” under the EPA has reached a different conclusion than the 9th Circuit. Moreover, the 9th Circuit’s en banc decision was penned by Judge Stephen Reinhardt, who passed away shortly before the court published the opinion. Judge Reinhardt was the leader of the 9th Circuit’s liberal wing, and he frequently clashed with (and was reversed by) the conservative majority on the U.S. Supreme Court. Thus, there is a possibility of Supreme Court review.

The Practicalities

Pay equity will increasingly be a subject of litigation and the Rizo decision may accelerate that trend. Thus, employers in the 9th Circuit and beyond should make continuing efforts to address disparate pay issues. They should proceed with caution when relying on prior salary history in setting compensation of its prospective employees or, if possible, not consider it at all. If a disparity exists or arises between male and female employees who are performing the same work, employers must consider whether the disparity results solely from prior history, or whether the disparity results from a legitimate seniority system, merit system, a system that measures earnings by quantity or quality of production, or some other differential based on a job-related factor other than sex.  If the sole reason for the pay disparity is pay history, this likely will subject the employer to liability at least within the 9th Circuit.

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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