On April 9, 2018, the U.S. Court of Appeals for the Ninth Circuit issued its much watched decision regarding whether an employee's prior salary can be used as a justification for wage differentials between men and women under the federal Equal Pay Act. In Rizo v. Yovino, the Ninth Circuit, sitting en banc, held that an employer cannot consider an employee's prior salary, either alone or in combination with other factors, in establishing initial wages. The Rizo decision thereby overruled a 36-year-old precedent set forth in Kouba v. Allstate Ins. Co.
Enacted in 1963, the Equal Pay Act prohibits gender-based wage discrimination between men and women. The Act stands for one simple principle: that men and women should receive equal pay for equal work regardless of sex. With this general principle in mind, Congress crafted four statutory exceptions to permit differentials in pay for equal work in certain circumstances. The exceptions are: (1) a seniority system; (2) a merit system; (3) a system that measures earnings by quantity or quality of production; or (4) a differential based on any factor other than sex. The fourth exception is considered a "catchall" provision. It was this catchall provision that was relied upon by employers to justify the use of prior pay in setting initial wages that resulted in pay disparities between male and female employees.
By examining the text, legislative history, and purposes of the Equal Pay Act, the Ninth Circuit in Rizo held that the catchall provision — "any other factor other than sex" — only applies to legitimate, job-related factors, just like the first three exceptions to the Act. The Rizo court further concluded that prior salary is not a valid assessment of "work experience, ability, performance, or any other job related quality." Therefore, it does not constitute a "factor other than sex." In reaching its decision, the Ninth Circuit noted that its holding is limited to the context of initial wage setting. It did not address whether prior pay can be a permissible factor in individualized salary negotiations.
To determine the scope of the catchall provision, the Ninth Circuit relied extensively on the legislative history of the Equal Pay Act and concluded that Congress intended this exception to be a more inclusive standard so as to account for the realities of different industries, but only insofar as the factors are job-related. Accordingly, employers can continue to rely on a wide variety of bona fide job-related systems to set pay, but they may not consider sex directly or indirectly in establishing wages. Examples of permissible job-related factors that fit within the Act's catchall exception include bona fide job classification and wage incentive programs, hours worked, job hazards, physical requirements, and the like. Despite the broad application of the catchall provision, the Ninth Circuit held that justifications that are "business-related" do not constitute "factor[s] other than sex" even though they make economic sense and thus are good for businesses. In sum, a legitimate factor under the catchall provision must be job-related, rather than one that simply accomplishes some type of "business policy."
Finally, the Ninth Circuit found that the Equal Pay Act essentially imposes strict liability on employers. Once an employee demonstrates that the employer pays male and female employees different salaries for the same work, the employee does not need to prove that the employer acted with discriminatory intent. Rather, the employer must demonstrate that one of the four statutory exceptions applies; otherwise, it has no defense to an Equal Pay Act claim.
Litigation over pay equity has increased substantially over the years, particularly in a state like California with the more restrictive California Fair Pay Act. The Ninth Circuit's decision in Rizo will certainly add fuel to equal pay litigation. Employers in all jurisdictions — particularly in the Ninth Circuit, which covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington — are encouraged to evaluate their pay systems and hiring practices to ensure compliance with Rizo. Your Lewis Brisbois employment attorneys are available to counsel you on pay practices.
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