On October 6 2015 Governor Jerry Brown signed into California law the Fair Pay Act, which some have called the most stringent pay equity law in the country. Although similar in some respects to the federal Equal Pay Act, the bill departs from and expands on its federal counterpart in several ways that are potentially problematic for employers.

Key provisions

The Fair Pay Act provides as follows:

"2(a) An employer shall not pay any of its employees at wage rates less than the rates paid to employees of the opposite sex for substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions, except where the employer demonstrates:

(1) The wage differential is based upon one or more of the following factors:

(A) A seniority system.

(B) A merit system.

(C) A system that measures earnings by quantity or quality of production.

(D) A bona fide factor other than sex, such as education, training, or experience. 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. For purposes of this subparagraph, 'business necessity' means an overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve. This defense shall not apply if the employee demonstrates that an alternative business practice exists that would serve the same business purpose without producing the wage differential.

(2) Each factor relied upon is applied reasonably.

(3) The one or more factors relied upon account for the entire wage differential."

The act expands pay equity claims in California to encompass allegations based on unequal pay for "substantially similar work". This is significantly broader than the standard under the federal Equal Pay Act, which requires a plaintiff to prove a disparity "for equal work" – a requirement that has enabled employers where warranted to defeat claims under the federal act at the summary judgment stage. In contrast, California courts will be less likely to grant summary judgment for employers based on the broader (and vaguer) 'substantially similar work' standard.

Disconcertingly, the California act ignores the existence of different labour markets within the state, requiring equal pay for substantially similar work even if the work location is not the same. Thus, plaintiffs may try to argue that the employer is required to raise a rural wage rate to the same level as its urban counterpart in order to prevent a Fair Pay Act claim. Even more problematic, the literal terms of the Fair Pay Act might permit a claim based on pay disparities between California workers of one sex and those of another who are working for the same employer outside the state. While it could be argued that the statute should not be given extraterritorial application, nothing in the act's language expressly prevents such an interpretation.

Nor are plaintiffs required to prove disparate impact. Unlike under Title VII, employers may be subject to equal pay claims whenever an employee of one sex (eg, female) is paid less than an employee of the other (eg, male) without regard to whether there is any evidence that the employer generally pays females less than males.

Although there are exceptions for pay disparities based on various legitimate business reasons, the legislation places the burden of proof on the employer and uses dangerously vague operative terminology, as follows:

  • Of concern is the affirmative defence in Section 2(a)(1)(D), which applies when the pay disparity is based on "a bona fide factor other than sex, such as education, training, or experience". An employer can rely on this defence only by proving 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 business necessity". The statute does not define these terms, leaving the door open for plaintiffs to argue that compensation differences based on market-related factors (eg, disparities in compensation that the employees received from their last employers) are impermissible because they are derived from a "sex-based differential".
  • The defence also defines 'business necessity' as an "overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve" – which is a standardless standard.
  • While this defence indicates that education, training and experience may qualify as bona fide factors, even these factors are not presumptively lawful under the Fair Pay Act, since employers must still prove that they are validly job related and consistent with business necessity "with respect to the position in question".
  • Even if an employer does prove this defence, the Fair Pay Act still allows the plaintiff to prevail by demonstrating that "an alternative business practice exists that would serve the same business purpose without producing the wage differential", with no requirement that plaintiffs show that the alternative business practice:
    • was known to the employer;
    • serves the same business purpose as well, as efficiently or as effectively; or
    • could have been implemented by the employer without excessive cost or disruption to its business.
  • The Fair Pay Act's affirmative defences require that "[t]he one or more factors relied upon [by the employer to justify the pay disparity] account for the entire wage differential" (Section 2(a)(3)). The provision suggests that plaintiffs can overcome an affirmative defence by showing that there exists an unexplained residual disparity in pay, even though 90% of the disparity is based on legitimate defences. In other words, the statute conclusively presumes that any unexplained disparity must be caused by sex discrimination.
  • An employer relying on these defences still must prove that its system has been "applied reasonably" (Section 2(a)(2)), and that its system (or systems) "account for the entire wage differential" – another standardless standard, unlikely to be resolvable on summary judgment.

Comment

The act is expected to increase litigation regarding gender pay equity and to brighten the public spotlight regarding the issue. This legislation follows the enactment of other state statutes, such as the New York Fair Pay Act. In addition, a number of companies have recently publicised gender-related initiatives.

Companies should proactively (and in an attorney-client privileged manner) examine the status of their gender pay equity, if they have not already done so. In general, a company's equity status is not uniform, but rather often varies based on factors such as region, seniority, grade level and division. If inequities exist, it is important that companies also strive to identify the root cause of those inequities. Although the California statute is vague, it provides an interesting rubric that can be applied to data as a test defence. If inequities exist that are not based on bona fide factors other than gender, there are both macro-level and micro-level remediations that companies can undertake. In addition, a proactive review of pay equity will help companies to prevent litigation and to prepare for any litigation that is filed. Unfortunately, many plaintiffs' attorneys are waiting in the wings to bring gender equity suits because those claims play well in the press and have the potential for significant damages.

For further information on this topic please contact Geoffrey D DeBoskey or Erica C Parks at Sidley Austin LLP by telephone (+1 213 896 6000) or email (gdeboskey@sidley.com or eparks@sidley.com). The Sidley website can be accessed at www.sidley.com.

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