California joins Delaware, Puerto Rico, Oregon, Massachusetts, New York City, Philadelphia (pending legal challenge) and San Francisco as jurisdictions that soon will restrict the ability of employers to inquire about past or current compensation as part of the job application process.

On October 12, 2017, Governor Jerry Brown signed into law Assembly Bill No. 168, adding California to the growing list of jurisdictions that restrict inquiries into an applicant’s salary history. Effective January 1, 2018, California employers and their agents will be prohibited from asking about an applicant’s salary history, including prior compensation and benefits. The new law also requires employers to provide applicants, upon reasonable request, with a pay scale for the particular position. The legislation will be codified as California Labor Code Section 432.3.

A Growing Trend

California joins Delaware, Puerto Rico, Oregon, Massachusetts, New York City, Philadelphia (pending legal challenge) and San Francisco (operative on July 1, 2018) as jurisdictions that soon will restrict the ability of employers to inquire about past or current compensation as part of the job application process. The law follows a nationwide trend of pay equity and salary history ban legislation. The intent of these laws is to address gender pay gaps by ensuring that prior low pay does not compound over time.

California’s version of the law prohibits inquiries about and reliance on salary history information, unless disclosed by the applicant voluntarily and without prompting, including questions about past “compensation and benefits.” Without any legislative guidance or regulations at this time, employers would be prudent to consider stock options and deferred and variable compensation as part of the broad category of salary history information.

A unique feature among these laws is California’s requirement that employers provide applicants with the “pay scale” for the position upon request. Neither the definition of “pay scale” nor the level of detail required to be included in the “pay scale” notice is defined in the statute, and instead is likely left to the courts to determine on a case-by-case basis. What is clear is that employers must furnish position compensation information or provide an accurate salary range for the position if the pay scale is not preset. Although the plain language of Section 432.3 does not compel employers to turn over the pay scale for similar but different positions, employers should bear in mind California’s Fair Pay Act, which requires equal pay for substantially similar work.

Applies to All Employers in California

All businesses that employ even a single employee in the Golden State must comply with the legislation with respect to employees in California. This includes companies that have out-of-state headquarters and maintain only minimal contacts with California, such as a remote employee living and working in the state. State and local government employers must also comply.

There are no industry-specific exemptions at this time. The only exclusion in Section 432.3 is for salary history information that is available to the public under federal or state law, such as the Freedom of Information Act or the California Public Records Act. The statute’s reach is limited to applicants and does not prohibit a company from inquiring about the payment history for non-employee applicants such as independent contractors.

Voluntary Disclosure of Salary History

Employers may still rely on salary information that an applicant voluntarily discloses. Section 432.3 allows for an employer to consider an applicant’s salary history if the applicant voluntarily and without prompting discloses that information, and rely on that information in determining the applicant’s salary. Despite this exception, the statute specifically states that prior salary history cannot be used to justify any pay disparity among employees under California’s Fair Pay Act. Seniority systems, merit-based ranges and productivity-based formulas are generally lawful and will not run afoul under the Fair Pay Act.

Section 432.3 does not specifically allow for an inquiry into an applicant’s unvested or deferred compensation, a feature present in New York City’s salary history law. However, voluntary applicant disclosure about such benefits will open the door for an employer to lawfully negotiate these aspects of the compensation package with the applicant.

Recruiters

Employers may not employ recruiters or headhunters to solicit salary information for a particular candidate. Under the plain language of the statute, if a recruiter unknowingly requests the information and then, without prompting, provides it to the employer, the employer would be liable only if it relies on the information to set the applicant’s pay. Documentation is imperative in such situations. In any event, clear agreements with reputable recruiters can minimize the risk to employers posed by the potential non-compliance of recruiters.

Mergers & Acquisitions

A company that is taking on employees as part of a merger or acquisition with an existing company will need to consider Section 432.3 as it facilitates the transfer of workers from one entity to the next. If workers remain employees at all relevant times during the transaction, then the statute likely will not apply. But, if employees are terminated and rehired, thus becoming applicants at any point in the process, the workers may fall within the purview of the restriction on salary history inquiries. A structured employment plan as part of the deal will help avoid inadvertent and undesired consequences.

Salary Negotiations

Salary negotiation remains a lawful and necessary part of the interview and hiring process, though employers are advised to tread carefully. Hiring managers may ask about the applicant’s desired or expected salary, but not prior compensation history. Companies may also ask the applicant what he or she understands as the market rate for the position. Furthermore, employers will need to consider how they will respond to applicant requests for the position’s salary scale, which will necessarily require an assessment of the system used to set rates and compensate employees.

Internal Applicants

Because Section 432.3 only applies to “applicant[s] for employment,” employers are not prohibited from relying on a current employee’s past or current salary as part of an annual review. Again, employers must consider the outcomes of their compensation decisions, as the Fair Pay Act and discrimination laws still apply. If a current employee applies for an internal position within the company, the employee could reasonably be considered an applicant and Section 432.3’s restrictions would apply. In this regard, it is worth noting that while some of the other salary history bans recently enacted specifically do not prohibit consideration of a current employee’s compensation, the California law contains no such express exception.

Compensation and Fair Pay Audits

California’s salary history ban is another example of the developing regulatory trend toward less subjective and more transparent compensation models. As businesses of all sizes audit their compensation practices, they are advised to do so under the advice of legal counsel to ensure that the work product (and audit findings and conclusions) remains confidential and privileged. Failure to do so may result in a “no good deed goes unpunished” situation, where the employer’s attempts to bring its pay practices into compliance are subsequently used against the company in civil litigation or a proceeding before the Equal Employment Opportunity Commission.

A Departure from the Trend

In a brief departure from the pay equity trend, Governor Brown vetoed Assembly Bill No. 1209, also known as the Gender Pay Transparency Act, days after signing the salary history ban into law. The proposed California legislation would have required employers with 500 or more employees to provide to the Secretary of State specific information regarding gender wage differentials for exempt employees and board members. The governor noted in his veto message that, although gender pay issues are important, he worried the ambiguous wording of the statute could be exploited to encourage more litigation rather than pay equity.

Penalties and Litigation

Failure to abide by the dictates of this new statute could expose employers to statutory penalties under California’s strict Private Attorneys General Act (PAGA), which allows allegedly aggrieved employees and the attorneys that represent them to seek significant monetary penalties on behalf of the State of California. Attorneys’ fees are also available to the employee if the claim is meritorious. The statute of limitations for PAGA claims is one year, plus tolling during the notice period.

What This Means for Employers

Whether this new legislation will increase pay equity or litigation (or both) remains to be seen.

Strategies to ensure compliance with the salary history prohibition are wide-ranging and will depend on the industry and nature of the position. Before the law takes effect on January 1, 2018, employers are advised to review their policies and practices and, if necessary, reconsider the process through which employee wages are set. Of course, companies need to revise job applications to remove any “prior compensation” requests. Companies also must ensure their interviewers and hiring managers understand the ban. Companies should enter into agreements with recruiters and carefully consider the ramifications of transactions resulted in the hiring of new employees.