The California Fair Pay Act (FPA), a state law that codifies the principle that an employee is entitled to equal pay for equal work without regard to gender, has been amended with the passage of Senate Bill 358 (SB 358), which Governor Jerry Brown signed yesterday.

California’s FPA was originally enacted in 1949. Before SB 358 went into effect, the California FPA, codified at Labor Code section 1197.5, provided that an employer may not pay an employee at rates less than that paid to employees of the opposite sex in the same establishment for equal work on equal jobs. The California FPA closely tracked the federal Equal Pay Act (EPA), and some state courts have relied on analogous federal precedential rulings to interpret the law.

SB 358 makes several changes to the FPA. Most notably, the bill changes terminology to permit an employee to prove that he or she received lower wages for “substantially similar” work, clarifies the employer's burden to demonstrate that a wage disparity is based on some legitimate factor other than sex, and prohibits employers from interfering with employees’ ability to discuss and share information about their wages. The effect is to make it much more difficult for employers to defend against such actions.

“Equal” Changed to “Substantially Similar”

Before it was amended, the FPA required employers to pay employees of the opposite sex equivalent wages for “equal work on jobs the performance of which requires equal skill, effort, and responsibility.” SB 358 changes “equal work” to “substantially similar work” when viewed as a composite of skill, effort, and responsibility.

The new “substantially similar” standard resembles language found in federal regulations interpreting the federal EPA. Those regulations provide that the jobs need not be identical to constitute “equal work”; they need only be “substantially equal.” Some California courts have relied on the federal regulations to interpret the California FPA, so this revision may not be a significant departure from existing law.

Legislative analysis noted that this change is designed to prevent an employer that is subject to a wage discrimination challenge under the FPA from defeating a claim by simply arguing that the jobs performed by persons of opposite sex were not "equal" in every way. The amended law does not define “substantially similar,” but plaintiffs’ attorneys are certainly expected to contend that minor differences are not enough to justify substantial pay disparities.

“Same Establishment” Dropped

The pre-amendment law required that wage discrimination claims be based on a comparison of the wages of male and female employees “in the same establishment.” SB 358 drops that requirement. The effect is that an employee may draw distinctions between his or her pay and the pay of opposite sex employees performing substantially similar work at other work sites to show pay disparity.

Legislative commentary pointed out that under existing law, if a female manager at a department store discovered that a similarly situated male manager at a branch across town earned higher wages, she could not invoke the protection of the FPA because she and the male manager did not work at the “same establishment.”

Of course, geography itself may explain a pay differential. Some locations are busier or more profitable than others. The supply of talented job candidates may be tighter in one region than another. The cost of living may be higher in certain metropolitan areas than in other areas. Numerous other factors could explain differences in pay from one location to the next. The amendment invites scrutiny of these nuances and will undoubtedly lead to greater complexities in equal pay claims.

Employer’s Burden of Proof Redefined

The California EPA recognizes that an employer may justify pay differentials based on a seniority system, a merit system, a system that measures earnings by quantity or quality of production, or a differential based on any bona fide factor other than sex. SB 358 elaborates on what qualifies as a “bona fide factor other than sex.” The newly-added language specifies that 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.” Each factor must be applied “reasonably.” The statute does not specify what is a reasonable application. Notably, the one or more factors relied upon must account for the entire wage differential.

A “business necessity”—according to SB 385—means an “overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve.” The amendment includes the caveat that this defense will not apply “if the employee demonstrates that an alternative business practice exists that would serve the same business purpose without producing the wage differential.”

This language clarifies that establishing a bona fide factor other than sex is the employer’s burden of proof. Some federal courts have already held that employers bear this burden under the federal EPA.

Employee Disclosure of Wage Information

The amended law gives employees the right to discuss their own wages and to ask other employees about pay. This is not a significant change to California law because Labor Code section 232 already prohibits an employer from conditioning employment on the demand that an employee refrain from disclosing the amount of his or her wages or discriminating against an employee for making such a disclosure. Neither the existing nor amended Labor Code requires an employer to disclose employees’ wages to other employees.

Practical Tips

Review Pay Practices. As always, employers must avoid making pay decisions based on sex or any other protected category. Ensure that your company’s pay scale is fair, consistent, and lawful. Consider implementing a written policy regarding pay policies. Train managers and supervisors regarding pay raise practices.

Audit Pay Levels. Certainly there are legitimate reasons for differences in pay. Experience, training, skill, demand in a particular market, cost of living, seniority, and many other relevant factors can be taken into account. Consider implementing a structured compensation policy. Determine the rationale for pay differentials.

Keep Records. Review your record-retention policies relating to pay and personnel records. Past pay decisions may be scrutinized if an employee files an FPA claim. Why was Employee-A given a 2 percent raise in 2013 while Employee-X, Employee-Y, and Employee-Z received a 4 percent raise? You will need records to support each such pay decision.

In short, employers should ensure that they can show that their pay policies are structured in such a way that any pay differential between two similar jobs is based on job-related factors. This can be achieved by identifying “substantially similar” jobs and defining valid differentiators such as seniority, performance, education, training, experience, geographic variations, and the like. Given the complexity of this law, prudent employers will work to devise a system that ensures employees are paid fairly and without regard to gender.