Seyfarth Synopsis: Pending federal bill H.R. 7, titled the Paycheck Fairness Act, could import into federal law some significant changes that have already been enacted in a few states around the country. If enacted, it could significantly alter (some would say eliminate) a key affirmative defense of the Equal Pay Act. Specifically, rather than allowing a wage differential to exist due to any factor other than sex, employers, under H.R. 7, would be required to show that the wage differential is a matter of “business necessity.” This article will discuss the contours of this onerous requirement, assess the pertinent implications, and consider its prevalence in state law analogs.

This is the second post in our series that contemplates a possible future for equal pay litigation under a Biden administration through an examination of plaintiff-friendly developments already on the books in many states. In our first post, available here, we analyzed potential changes to the meaning of an “establishment” under the Equal Pay Act (“EPA”). In addition to that change, pending federal bill H.R. 7, titled the Paycheck Fairness Act, could import into federal law significant changes to a key affirmative defense that employer’s rely upon in defending EPA claims: the “factor other than sex” affirmative defense.

H.R. 7’s Limitation of the Catchall “Factor Other Than Sex” Defense

The Equal Pay Act prohibits employers from discriminating “between employees on the basis of sex by paying wages to employees in such establishment at a rate less than the rate at which [it] pays wages to employees of the opposite sex in such establishment for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions . . . .” The law recognizes four affirmative defenses, one of which is a catchall provision: “a differential based on any other factor other than sex.” In other words, an employer is not liable under the EPA if it can establish that a sex-based wage differential is due to a factor other than sex, as that defense has been interpreted by the federal courts. (Seyfarth’s annual publication, Developments in Equal Pay Litigation, provides a more extensive analysis of the EPA and current trends in EPA litigation.)

H.R. 7, however, proposes to change the “factor other than sex” defense by requiring the employer to also show that the factor: (1) is not based upon or derived from a sex-based differential in compensation; (2) is job-related and consistent with business necessity; and (3) accounts for the entire differential in compensation at issue. Each of these elements represents a critical change to existing law. This post discusses the introduction of the “job-related and consistent with business necessity” criterion, which is already a feature of some states’ laws.

That a wage differential must be due to a factor that is “job-related” is relatively uncontroversial and, in fact, is already how many federal appellate courts interpret the current version of the EPA. But that such a factor must also be “consistent with business necessity” threatens to impose a significantly more onerous burden on employers. Nevertheless, that requirement has already been added to a number of state laws over the past few years as part of a nationwide trend towards easing the path for plaintiffs in equal pay litigation.

For example, California, Illinois, Maryland, New Jersey, New York, Washington, and other states have already adopted a similar change. Under California’s equal pay statute, an employer must demonstrate that a wage differential is based on “[a] bona fide factor other than sex, such as education, training, or experience,” but “th[e] 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.” The California statute 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.” The New York statute, by comparison, provides that a factor is consistent with business necessity if the factor “bears a manifest relationship to the employment in question.” The majority of states that have enacted their own equal pay laws, however, offer affirmative defenses similar to those provided in the existing version of the EPA without reference to business necessity. (A complete, state-by-state list of critical equal pay statutory provisions is available in Seyfarth’s 50 State Pay Equity Desktop Reference.)

These laws are still relatively new and therefore lack a body of case law sketching the outline of these provisions. Questions that remain include how, for example, would an employer establish that the decision to pay one employee more than another, due to differences in education, experience, or any number of intangible factors, fulfills an “overriding legitimate business purpose?”

The imposition of such a requirement also further separates the legal framework from the evil the law is meant to prevent; namely, sex-based pay discrimination. Unlike Title VII sex discrimination claims, the EPA imposes a form of strict liability in that it does not require any intent to discriminate. Although this operates as a constraint on an employers’ ability to shape its compensation policies as it sees fit, it is at least one that is directed at ensuring that compensation differences are not based on sex-based criteria. The addition of a “business necessity” requirement further constrains an employers’ ability to make compensation decisions, but in a way that goes far beyond simply ensuring that they are not based on sex.

Proponents of the change argue that employers have no reason to worry because such compensation decisions would be consistent with business necessity so long as they are directed at legitimate business goals. But this ignores the realities of the working world, and especially the world of employment litigation. When it comes to differences in compensation, people tend to have very different ideas of what is fair and which business goals are legitimate ones to pursue. It is the leaders of a business who are tasked with making those decisions for the company. And in a competitive marketplace, they must be free to do so with as much leeway as possible, provided that they are not basing those decisions on discriminatory reasons. Imposing a “business necessity” requirement threatens to subject every compensation decision to judicial scrutiny, and ultimately, could replace employers’ business judgment with that of the federal courts.

The change could also vastly increase the expense and burden of employment litigation. Under the current law, an employer need only justify its pay decisions on the basis of some reason that is not based on sex. Determining what that reason is can often be accomplished through testimony elicited from the decision makers and an examination of the surrounding documentation. Under the proposed change, a court would have to analyze what “business necessity” means for a particular employer operating from a specific competitive position within a particular industry. It is hard to see how that could be accomplished without the use of substantial expert testimony, thus significantly raising the price and stakes of equal pay litigation.

Although the Biden administration will have the support of Democrats leading both houses of Congress, it is still too early to tell whether these proposed changes to equal pay litigation will make it to the top of their agenda, particularly in light of the numerous other crises they are currently facing. But even if those changes are never enacted at the federal level, various forms of the “business necessity” requirement already exist in several states, including some that are the most populous. Employers should be aware of what those states require in terms of justifying a sex-based pay disparity so they can prepare to meet those requirements. Those preparations might involve tracking developments in federal and state equal pay legislation and assessing how compensation decisions accomplish key business purposes.