When California’s Fair Pay Act goes into effect January 1, 2016, the state’s employers will be subject to the strictest equal pay law in the country. The new law is part of an increased effort on both the federal and state levels to ensure equal pay between men and women, across the county. Recently, both the U.S. Department of Labor and the U.S. Equal Employment Opportunity Commission have made pay disparity a top enforcement goal.

California’s Fair Pay Act, which amends the state’s equal pay act, has been called “the nation’s most aggressive attempt yet to close the salary gap” because it contains significant provisions that may place employers at a greater risk of equal pay claims. Previously, an employee had to show that s/he was being paid less than an opposite sex colleague who was performing “equal work”; but the law now requires the employee to show that the colleagues performed “substantially similar work.” Also, where employees used to be compared only with colleagues in the “same establishment,” employers are now potentially liable for pay disparities across the entire company for employees who work in and under “similar working conditions.” Therefore, employers need to be prepared for possible claims from employees who compare themselves with colleagues in a different division, business unit, or department, including colleagues in a different geographic location or part of the company.

The amended Act sets up a burden-shifting framework:

  1. First, there must be a showing of wage disparity between an employee and a colleague of the opposite sex, both performing substantially similar work.
  2. Then, the employer must meet an increased burden of proof by showing that the disparity exists because of a reasonable application of one or more of systems (e.g., seniority, merit, quantity/ quality of production). Employers may also show a “bona fide factor” other than sex (e.g., education, training, experience) that accounts for the entire wage gap.
  3. However, even if the employer demonstrates a job-related “bona fide factor,” the employee has an opportunity to prove that an alternative business practice exists that would serve the same business purpose without producing the wage gap.

Some other changes in the Act include:

  • Increased wage transparency – prohibiting employers from acts that stop employees from disclosing their own wages, disclosing or asking about the wages of others, or encouraging others to share information about their wages
  • Significant penalties for discrimination, termination and retaliation based on employees exercising their rights to wage transparency
  • Maintaining records of employee wages and job classifications for three years

To minimize the risks of equal pay claims, Reed Smith can assist in assessing what action is appropriate, including:

  • Auditing employee job duties, responsibilities and pay across the company
  • Reviewing all pay and compensation-related policies and procedures to ensure that the criteria for base compensation, bonuses, and raises is as objective as possible
  • Reviewing all policies related to confidentiality, discussion and discipline connected to disclosure of pay information
  • Providing internal training on how to cross-reference employee compensation across the company