On October 6, 2015, California Governor Jerry Brown signed SB 358, dubbed the California Fair Pay Act ("the Act"), which is designed to address the gender wage gap in California and to increase transparency with respect to employee compensation. The measure, effective January 1, 2016, expands employer liability for sex-based wage disparities and makes it challenging to defend against equal pay claims.

Expanded Liability for Employers

The Act makes significant amendments to current law that are likely to increase the number of, and challenges in defending, sex-based equal pay claims. Existing law prohibits sex-based wage disparities between employees performing "equal work" in the "same establishment." SB 358 eliminates the "same establishment" and "equal work" requirements.

Effective January 1, 2016, employees can bring equal pay claims based solely on disparities between individuals performing "substantially similar work when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions" irrespective of their work location. Elimination of the "same establishment" requirement is particularly consequential, as inter-location pay disparities will likely arise for employers operating in multiple economic and labor markets. Such employers may be forced to defend the existence and amount of these disparities by pointing to operational needs that are difficult to quantify but no less real.

Under current law, an employer can defend against an equal pay claim if it demonstrates that the pay disparity is based upon: (1) a seniority system; (2) a merit system; (3) a system that measures earnings by quantity or quality of production; or a (4) bona fide factor other than sex.

SB 358 curtails employers' use of these defenses in two ways. First, an employer can prevail using the "bona fide factor other than sex" defense only if the "factor" is "consistent with a business necessity," which the law defines as "an overriding legitimate business purpose such that the factor relied upon effectively fulfills. …" Even if an employer shows business necessity, the employee still can prevail if he or she demonstrates "that an alternative business practice exists that would serve the same business purpose without producing the wage differential."

Second, to prevail on an equal pay claim, the employer would have to demonstrate that it applied the factor(s) creating the pay disparity "reasonably," and that the factor(s) accounted for the entire wage differential. It is unknown what the legislature means by "reasonably" in this context.

Does an employer "reasonably" apply a merit-based compensation system by paying higher wages based on years of experience if that results in a sex-based pay disparity? What about military experience for a non-defense-related occupation? Does "reasonableness" depend on the amount of additional compensation paid (e.g., an additional $5,000 for employees with more than five years of experience that creates a sex-based disparity and is considered "unreasonable")? Must there be a demonstrable relationship between the factor(s) creating the disparity and increased output or profitability for the factor(s) to have been applied "reasonably"? Read capaciously, the undefined term "reasonably" could potentially invite judicial and administrative micromanagement of employer compensation and evaluation systems.

Employees generally have two years to pursue an equal pay claim (three years for willful violations) and may do so in court or by filing a complaint with the Division of Labor Standards Enforcement. Prevailing employees can recover unpaid wages, liquidated damages, interests and attorneys' fees.

While various aspects of SB 358 appear to be ambiguous, employers are likely to face more frequent and burdensome litigation related to their pay practices.

Prohibition on Retaliation and Increased Recordkeeping Obligations

SB 358 prohibits discrimination or retaliation against employees for invoking or assisting others in invoking their rights under the Act. Employers may also not prohibit an employee from disclosing his or her wages, inquiring about the wages of others, or aiding or encouraging other employees to exercise rights under the revised law.

Finally, employers are required to maintain records of employee wages, classifications and other terms and conditions of employment for three, rather than two, years as required by existing law.

What This Means for Employers

Many employers have likely never conducted an internal analysis of wage equality. Employers with California employees may want to undertake an initial assessment to determine whether there appear to be sex-based wage disparities between individuals performing substantially similar work, regardless of work location. Proactive employers seeking to minimize exposure under the revised equal pay law should also consider the following steps:

  • If the initial analysis reveals a sex-based pay disparity, the employer should be able to articulate what factors other than sex account for the entire differential; that the employer applied those factors reasonably; and that those factors are consistent with business necessity. If an employer is unable to make this showing, it should consider adjusting compensation.
  • Train managers and human resources professionals regarding factors that can be considered in making compensation decisions and how to document the basis for such decisions.
  • Ensure that existing policies do not restrict employees' ability to discuss or inquire about compensation.
  • Update record retention policies to ensure maintenance of employee wage and other information for at least three years.
  • It is unknown if sex-based wage differentials between those performing "substantially similar" work need to be statistically significant to be actionable. Astute employers may wish to engage the assistance of occupational statisticians when assessing whether gender-associated differentials exist, particularly if the employer's workforce is very large.