United States: Ninth Circuit Holds Prior Salary Cannot Justify Wage Differences

Enacted in 1963, the Equal Pay Act prohibits differential payments between male and female employees doing equal work except when made pursuant to a seniority system, a merit system, a system which measures earnings by quantity or quality of production, or a fourth, catch-all exception for "a differential based on any other factor other than sex." 29 U.S.C. § 206(d)(1). These exceptions are affirmative defenses which the employer must plead and prove.

In Rizo v. Yovino, 2018 U.S. App. LEXIS 8882, an en banc panel of the Ninth Circuit considered whether an employee's prior salary was a permissible "factor other than sex" under the Equal Pay Act. Prior Ninth Circuit precedent held that "the Equal Pay Act does not impose a strict prohibition against the use of prior salary." Kouba v. Allstate Insurance Co., 691 F.2d 873, 878 (9th Cir. 1982). Under Kouba, employers were prohibited from using a factor which "causes a wage differential between male and female employees absent an acceptable business reason." Id., at 876.

On April 9, 2018, a bare majority of the 11 judge en banc panel of the Ninth Circuit overruled Kouba and held that "a legitimate 'factor other than sex' must be job related and that prior salary cannot justify paying one gender less if equal work is performed." Rizo v. Yovino, 2018 U.S. App. LEXIS 8882, at *15. Writing for the majority, the late Stephen Reinhardt announced a bright-line rule that "prior salary alone or in combination with other factors cannot justify a wage differential." Id., at *5-6. Five judges concurred in the result, but disagreed with the majority's holding that prior salary can never suffice to constitute a "factor other than sex" sufficient to justify a wage differential.

Background

Plaintiff Aileen Rizo was hired as a math consultant by the Fresno County Office of Education in October 2009. Fresno County had a formal procedure that determined a new hire's starting salary by taking the new hire's prior salary, adding 5%, and placing the new employee on the corresponding step of Fresno County's stepped salary levels. In 2012, Rizo learned that male colleagues had been hired as math consultants at higher salary steps, and filed a complaint alleging violation of the Equal Pay Act, and derivative claims for sex discrimination under Title VII and the California Fair Employment and Housing Act ("FEHA"), as well as a claim for failure to prevent discrimination under FEHA.

While it admitted that Rizo was paid less than her male counterparts for the same work, Fresno County moved for summary judgment, arguing the discrepancy was based on Rizo's prior salary, which was a permissible affirmative defense under the catch-all, "factor other than sex" exception. The district court denied summary judgment because a pay structure based exclusively on prior wages "is so inherently fraught with the risk ... that it will perpetuate a discriminatory wage disparity between men and women that it cannot stand." Rizo v. Yovino, No. 1:14-cv-0423-MJS, 2015 WL 9260587, at *9 (E.D. Cal. Dec. 18, 2015), vacated, 854 F.3d 1161 (9th Cir.), reh'g en banc granted, 869 F.3d 1004 (9th Cir. 2017). Recognizing that denial of Fresno County's motion for summary judgment was tantamount to deciding liability in Plaintiff's favor, the district court certified its denial for interlocutory appeal.

A three-judge panel of the Ninth Circuit vacated the denial of summary judgment on the basis that prior salary alone could constitute a "factor other than sex" under Kouba as long as use of that factor "was reasonable and effectuated some business policy." Rizo v. Yovino, 854 F.3d 1161, 1166 (9th Cir. 2017).

The Ninth Circuit unanimously reversed the three-judge panel's decision en banc and overruled Kouba. The majority relied on the legislative history of the Equal Pay Act and principles of statutory construction to conclude the exception for "'any other factor other than sex' is limited to legitimate, job-related factors such as a prospective employee's experience, educational background, ability, or prior job performance." Rizo v. Yovino, 2018 U.S. App. LEXIS 8882, at *14. Allowing prior salary to justify a wage differential, in whole or in part, would "perpetuate rather than eliminate the pervasive discrimination at which the Act was aimed." Id., at *15. The majority reasoned that the Equal Pay Act was enacted to eliminate systemic discrimination in pay between men and women, and to allow consideration of salary history based on this discrimination would simply perpetuate the very pay gap that prompted the Equal Pay Act in the first place.

The majority drew a careful distinction between "job-related" factors and "business-related" factors, reasoning that "[n]ot every reason that makes economic sense – in other words, that is business related – constitutes an acceptable factor other than sex. To the contrary, using the word 'business' risks conflating a legitimate factor other than sex with any cost-saving mechanism." Id., at *32. It went on to find that prior salary history is not "job related," because it "is not a legitimate measure of work experience, ability, performance, or any other job-related quality." Id., at *34. So, while salary history bears a "rough relationship to legitimate factors other than sex, such as training, education, ability, or experience," an employer seeking to defend a wage differential under the catchall exception for "any factor other than sex" must "point directly to the underlying factors for which prior salary is a rough proxy, at best, if it is to prove its wage differential is justified under the catchall exception." Id., at *35.

Takeaways For Employers

The trend towards full or partial bans on the use of prior salary history in determining salary levels has gathered momentum in the past few years. For example, California, Massachusetts, Delaware, and Oregon have enacted full or partial bans on the use of salary history in applications. Municipalities, such as San Francisco, New York City, and Philadelphia, have also enacted bans on inquiries into an applicant's salary history. While stating that its holding was only a "general rule" that did not decide "whether or under what circumstances, past salary may play a role in the course of an individualized salary negotiation," the Ninth Circuit appears to have established a bright-line rule that use of an applicant's prior salary is impermissible under almost any circumstance.

This holding may be construed to greatly expand potential liability for employers because of the dramatic reversal of precedent. Since Kouba was decided in 1982, many employers are likely to have relied on its holding to structure their on-boarding systems, especially those in jurisdictions that have not otherwise enacted bans on inquiries into an applicant's salary history. Even those employers in California and Oregon that have already adopted changes to their application to avoid impermissible inquiries into an applicant's salary history, may need to re-examine their employees' pay differentials to determine if they factored prior salary history at all.

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