On October 6, 2015, California's Governor Jerry Brown signed the Equal Pay Act into law. The Equal Pay Act amends Labor Code 1197.5 to prohibit employers from paying women less than men for performing the same job. The law, based on the Paycheck Fairness Act that has died in Congress several times, is touted as the most sweeping legislation in the nation to date aimed at closing the wage gap.

Previously, employers were prohibited from paying employees at wage rates less than the rates paid to employees of the opposite sex in the same establishment for equal work, requiring equal skill, effort, and responsibility. The Equal Pay Act removed the "same establishment" requirement, which means that employees can now use any of the employer's employees at any establishment as a point of comparison when bringing unequal pay claims.

The new law also replaces the "equal work" standard with a more subjective "substantially similar work standard," further lessening the burden on employees. To bring a claim, an employee must now demonstrate that an employee of the opposite sex is being paid a higher wage for "substantially similar work, when viewed as a composite of skill, effort, and responsibility." This new standard for the comparative positions is much broader than under the previous law.

If there is a wage disparity for substantially similar work between a male and female employee, the employer will have the burden to demonstrate the wage differential is based on seniority, merit, a system that measures earnings by quantity or quality of production, or a bona fide factor other than sex. Under the new law, one or more of these factors must account for the entire wage differential.

Previously, Labor Code 1197.5 was silent on the definition of "bona fide factor other than sex." Under the new law, a bona fide factor must not be derived from a sex-based differential in compensation, must be related to the position, and must be consistent with a "business necessity," which is now defined as "an overriding legitimate business purpose" that must be effectively satisfied by the factor relied upon. Further, the business necessity defense is not available if the employee demonstrates that an alternative business practice could serve the same business purpose without producing the wage differential.

These new standards now make a successful defense to pay disparity claims much more difficult in California.

The new law also explicitly prohibits employers from preventing California employees from disclosing their wages, discussing the wages of others, asking about another employee's wages, or encouraging another employee to exercise his or her rights under Labor Code 1197.5.

Lastly, employers now must maintain records of wages, wage rates, job classifications and other terms and conditions of its employees for three (3) years, instead of two (2).

Planning Tip: These amendments will inevitably lead to a rise in equal pay litigation as plaintiffs' lawyers test the relaxed burden of proof. Employers with California workforces should:

  • Inventory jobs that are "substantially similar" using the new law's definition;
  • Conduct privileged audits to determine pay disparities on the basis of gender, and prospectively justify different wages for employees of different sexes on one of the permitted bases under the law;
  • Properly train managers who make compensation decisions about the impact of different raises or bonuses;
  • Remove confidential designations on wage policies or agreements; and
  • Update wage data retention periods to retain records for at least three years, if not the recommended four years following termination (the longest statute of limitations under California law).