California s New Fair Pay Law: What It Means for Your Business

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1 California s New Fair Pay Law: What It Means for Your Business by Christopher Olmsted, Esq. Ogeltree Deakins The California Fair Pay Act (FPA), a state law that codifies the principle that an employee is entitled to equal pay for equal work without regard to gender, has been amended with the passage of Senate Bill 358 (SB 358). The effective date of the amended law was January 1, The amendments change the law significantly, and employers should review pay practices to ensure that they meet the new standards. History of California Equal Pay Act California s Equal Pay Act (EPA) was originally enacted in Before SB 358 went into effect, the California EPA, codified at Labor Code section , provided that an employer may not pay an employee at rates less than that paid to employees of the opposite sex in the same establishment for equal work on equal jobs. Specifically, the law provided: No employer shall pay any individual in the employer s employ at wage rates less than the rates paid to employees of the opposite sex in the same establishment for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions, except where the payment is made pursuant to a seniority system, a merit system, a system which measures earnings by quantity or quality of production, or a differential based on any bona fide factor other than sex. The California EPA closely tracked the federal Equal Pay Act (EPA), 29 U.S.C Some state courts have relied on analogous federal precedential rulings to interpret the law. Only one California Supreme Court case, Jones v. Tracy School Dist. (1980) 27 Cal.3d 99, 111, interpreted the EPA. In Jones, the California Supreme Court relied on language of the federal statute and federal case law in holding that the California statute limits back pay to the limitations period and provides for an attorneys fee award. Unlike some other anti-discrimination laws, both the state and federal Equal Pay Acts do not require a showing of intent to discriminate. To establish a prima facie case, a plaintiff must show that the employer paid an employee of one gender more than an employee of the other gender in the same establishment for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions. The California EPA as originally drafted did not contain a prohibition on retaliation against a worker for asserting equal pay rights. As discussed below, the amended law adds a retaliation provision. The law applied, and continues to apply to all California employers, regardless of size or number of employees. The law covers all employees except outside salespersons and certain 1

2 employees participating in a national service program. See Labor Code SB 358 Amendments SB 358 makes several changes to the Labor Code section Most notably, the bill permits an employee to prove that he or she received lower wages for substantially similar work, clarifies the employer's burden to demonstrate that a wage disparity is based on some legitimate factor other than sex, and prohibits employers from interfering with employees ability to discuss and share information about their wages. The effect is to make it much more difficult for employers to defend against such actions. Equal Changed to Substantially Similar Before it was amended, the EPA required employers to pay employees of the opposite sex equivalent wages for equal work on jobs the performance of which requires equal skill, effort, and responsibility. SB 358 changes equal work to substantially similar work when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions. The new substantially similar standard resembles language found in federal regulations interpreting the federal EPA. Those regulations provide that the jobs need not be identical to constitute equal work ; they need only be substantially equal. See 29 CFR ; see also Hein v. Oregon College of Ed., 718 F2d 910, 913 (9th Cir. 1983). According to federal law, equal skill depends on factors such as experience, training, education and ability required to perform the job. Hein, supra. Equal effort means the physical or mental exertion needed to perform the job. 29 C.F.R Equal responsibility means the degree of accountability required in the performance of the job, with emphasis on the importance of the job obligation. 29 CFR In the past, some California courts have relied on the federal regulations to interpret the California EPA, so this revision may not be a significant departure from existing law. Legislative analysis noted that this change is designed to prevent an employer who is subject to a wage discrimination challenge under the FPA from defeating a claim by simply arguing that the jobs performed by persons of opposite sex were not "equal" in every way. The amended law does not define substantially similar, but plaintiffs attorneys are certainly expected to contend that minor differences are not enough to justify substantial pay disparities. Same Establishment Eliminated The pre-amendment law required that wage discrimination claims be based on a comparison of the wages of male and female employees in the same establishment. SB 358 eliminates that requirement. The effect is that an employee may draw distinctions between his or her pay and the pay of opposite sex employees performing substantially similar work at other work sites to show pay disparity. Legislative commentary pointed out that under existing law, if a female manager at a department store discovered that a similarly situated male manager at a branch across town earned higher wages, she could not invoke the protection of the FPA because she and the male manager did not work at the same establishment. Of course, geography itself may explain a pay differential. Some locations are busier or more profitable than others. The supply of talented job candidates may be tighter in one region than 2

3 another. The cost of living may be higher in certain metropolitan areas than in other areas. Numerous other factors could explain differences in pay from one location to the next. The amendment invites scrutiny of these nuances and will undoubtedly lead to greater complexities in equal pay claims. Employer s Burden of Proof Redefined The California FPA recognizes that an employer may justify pay differentials based on a seniority system, a merit system, a system that measures earnings by quantity or quality of production, or a differential based on any bona fide factor other than sex. SB 358 elaborates on what qualifies as a bona fide factor other than sex. The newly-added language specifies that this factor shall apply only if the employer demonstrates that the factor is not based on or derived from a sex-based differential in compensation, is job related with respect to the position in question, and is consistent with a business necessity. Each factor must be applied reasonably. The statute does not define a reasonable application. Notably, the one or more factors relied upon must account for the entire wage differential. A business necessity according to SB 385 means an overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve. The amendment includes the caveat that this defense will not apply if the employee demonstrates that an alternative business practice exists that would serve the same business purpose without producing the wage differential. This language clarifies that establishing a bona fide factor other than sex is the employer s burden of proof. Some federal courts already have held that employers bear this burden under the federal EPA. Employee Permitted to Disclose Wage Information The amended law gives employees the right to discuss their own wages and to ask other employees about pay. This is not a significant change to California law because Labor Code section 232 already prohibits an employer from conditioning employment on the demand that an employee refrain from disclosing the amount of his or her wages or discriminating against an employee for making such a disclosure. Neither the existing nor amended Labor Code requires an employer to disclose employees wages to other employees. Increased Record Keeping Requirements The law extends from two years to three years the employer s obligation to maintain records. The amended law provides: Every employer shall maintain records of the wages and wage rates, job classifications, and other terms and conditions of employment of the persons employed by the employer. All of the records shall be kept on file for a period of three years. New Anti-Retaliation Provision Added As noted above, the prior version of the law did not include an anti-retaliation provision. SB 358 amends the law to prohibit an employer from terminating or in any manner discriminating or retaliating against, any employee by reason of any action taken to invoke his or her rights under the law. 3

4 The amended law provides employees with the right to file a civil action seeking reinstatement and reimbursement for lost wages and work benefits, as well as appropriate equitable relief. The statute of limitations for such claims is one year after the retaliatory or discriminatory act. Risk Factors For Gender Based Pay Claims 1 Employers should seek to identify some of the policies, practices or lack of policies that create a potential risk for employers. Among other factors, these include: Lack of meaningful standards, guidelines or guidance Lack of management training Exercise of discretion Subjective decision-making Failure to document decisions Failure to communicate criteria and basis for decisions Failure to provide notice of promotion opportunities Failure to identify all potentially qualified candidates for promotion Homogenous race/gender of decision-makers Unfairness (perceived or real) in making grooming assignments Lack of training opportunities Favoritism buddies get better treatment Other issues of harassment, alleged discrimination in other areas anecdotal evidence may be used to support discrimination in pay and promotions Preventing Discriminatory Pay Decisions Not all pay decisions are created equal. Different types of pay decisions may require different types of process and policies. Typically, there are four general categories of pay decisions: (1) starting pay decisions; (2) annual increases merit or lockstep; (3) other types of potential increases; and (4) bonuses. For each of these types of pay decisions, there are steps employers can take to ensure that the decisions are made fairly and consistently without regard to protected characteristics, are based on legitimate business considerations and do not expose the company to the risk of a discrimination claim. This section provides some examples of practices employers can implement to achieve these goals, although not all of these ideas will work for all businesses. Consider implementing standard pay ranges or guidelines for each position or classification. The guidelines should be implemented for identified positions within the company and all individuals within those positions should be subjected to them. The guidelines should be designed based on objective, quantifiable factors such as geography, sales figures, or quantifiable experience. Depending on how the guidelines are created, those making decisions may be exercising some discretion as to where an individual s pay should fall within the guidelines. The guidelines should provide some guidance as to the types of relevant factors decision-makers may consider in exercising discretion. 1 The practical tips provided in the following sections were originally published in a white paper titled Pay and Promotion Gender Discrimination The Ticking Time Bomb, written by Ogletree Deakins attorneys Patrick Clark and Elizabeth Washko in

5 For pay increases and bonuses, employers should consider implementing written policies for each type so managers know what their authority is and employees know what they may be eligible for. As with the discussion of guidelines above, employers should look to reign in discretion with ranges (either original ranges or ranges of potential increase amounts) and objective factors. Employers may want to consider conducting period pay analyses to determine whether employee pay matches expectations and performance and whether adjustments need to be made. For example, an employer could have an employee who was hired at a lower salary because of her limited prior experience who is performing exceptionally well but paid less than a lower performing employee who had higher starting pay because of experience. A pay increase process that provides for percentage increases over current pay may not bridge that gap, or it may take significant time to do so. Provide a good amount of reasonable communication to employees about pay increase and bonus opportunities and eligibility. This leads to a clearer understanding of how the process works. It also provides employees with some incentive to work harder to meet eligibility requirements for higher increases and for bonuses. Document pay decisions at the time they are made. At a minimum, the documentation should include: Date of the decision Names of the decisionmakers printed legibly The applicable pay range for the decision, if any The basis for any objective factors considered and relied upon An articulation of subjective factors considered and relied upon Any other bases for amount Employers should strongly consider provide training to decision-makers regarding how to make proper pay decisions that comply with company policies and the applicable law. This would include training on the applicable policies, procedures and guidelines, the relevant and appropriate factors to consider when making pay decisions, how to apply any guidelines and exercise discretion appropriately, how to tie various relevant factors to specific dollar amounts, the articulation of the bases for decisions, documentation of decisions, and communication of pay decisions to the affected employees. In Summary Final Practical Tips Review Pay Practices. As always, employers must avoid making pay decisions based on sex or any other protected category. Ensure that the company s pay scale is fair, consistent, and lawful. Consider implementing a written policy regarding pay policies. Train managers and supervisors regarding pay raise practices. Audit Pay Levels. Certainly there are legitimate reasons for differences in pay. Experience, training, skill, demand in a particular market, cost of living, seniority, and many other relevant factors can be taken into account. Consider implementing a structured compensation policy. Determine the rationale for pay differentials. It may be particularly problematic for an employer to hire an employee of one gender to replace an employee of the opposite gender at a lower rate of pay. Employers will need to carefully demonstrate that the wage differential is justified under one or more of the bona fide business 5

6 criteria. Keep Records. Review the Company s record-retention policies relating to pay and personnel records. Past pay decisions may be scrutinized if an employee files an EPA claim. Why was Employee-A given a 2 percent raise in 2013 while Employee-X, Employee-Y, and Employee-Z received a 4 percent raise? Employers will need records to support each such pay decision. In short, employers should ensure that they can show that their pay policies are structured in such a way that any pay differential between two similar jobs is based on job-related factors. This can be achieved by identifying substantially similar jobs and defining valid differentiators such as seniority, performance, education, training, experience, geographic variations, and the like. Given the complexity of this law, prudent employers will work to devise a system that ensures employees are paid fairly and without regard to gender. Newly Proposed Amendments to the Act On February 16, 2016, legislation was introduced in the Senate (Senate Bill No. 1063) that would expand the coverage of the Fair Pay Act to prohibit an employer from paying any of its employees at wage rates less that the rates paid to employees of another race or ethnicity for substantially similar work. The bill has not advanced. In the future, however, the proposed amendment to the Fair Pay Act could receive serious consideration in both houses of the California Legislature. Christopher W. Olmsted Ogletree, Deakins, Nash, Smoak & Stewart, P.C La Jolla Village Drive, Suite 990 San Diego, CA Telephone: Fax: christopher.olmsted@ogletreedeakins.com