Employers Should Reconsider the Use of Prior Salary History when Determining Starting Pay

The federal Equal Pay Act has long prohibited employers from paying men and women different wages for substantially equal work. At the same time, employers have avoided liability for paying female workers less than their male counterparts where the employer bases the female worker’s salary on her prior salary history. Recent case decisions, however, illustrate that courts are becoming skeptical of employers who engage in this pay practice. These courts have concluded that using prior salary histories may not be a legitimate pay practice as it may not relate to job performance or ability and may perpetuate unequal pay disparities between men and women.

Rizo v. Yovino

On April 9, 2018, the United States Court of Appeals for the Ninth Circuit, sitting en banc (i.e. with all of its judges participating – an occurrence only reserved for important cases), held that an employer cannot justify different pay between men and women based upon prior pay histories.

In Rizo, the plaintiff was hired by the Fresno County Office of Education. Her employer set her starting salary based upon a formula that took into account her prior salary history. After conversing with her colleagues, Rizo realized that she was paid less than the men in her office. She filed a lawsuit under the federal Equal Pay Act.

Fresno County argued that it was allowed to set initial pay based upon prior salary histories, and cited previous case law adopting this position. The court disagreed, and issued an opinion that overruled prior inconsistent cases and established a new rule of law. “Prior salary,” according to the court, simply “is not a legitimate measure of work experience, ability, performance, or any job-related quality.” The court stated that to “hold otherwise – to allow employers to capitalize on the persistence of the wage gap and perpetuate that gap ad infinitum – would be contrary to the text and history of the Equal Pay Act, and would vitiate the very purpose for which the Act stands.”

The Rizo decision is the strongest holding from any appellate court on the use of prior salary histories under the Equal Pay Act, and bars the use of prior salary history, whether alone or in combination with any other criteria, in determining pay thresholds. The court’s ruling directly applies to states under the umbrella of the Ninth Circuit: Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington.

The City of Philadelphia’s Ordinance

Shortly after Rizo was decided, a federal court in Pennsylvania weighed in on whether a municipality could bar employers from asking about and using prior pay histories. In late 2016, the City of Philadelphia passed an ordinance that barred employers from: (1) asking an applicant about his or her prior pay history (the “Inquiry Provision”); and (2) relying upon prior pay history to determine a salary for the new employee (the “Reliance Provision”). The Chamber of Commerce for Greater Philadelphia filed a lawsuit alleging that both provisions were unconstitutional under the First Amendment.

On April 30, 2018, the United States District Court for the Eastern District of Pennsylvania held that the Inquiry Provision was an unconstitutional bar on free speech. However, the court held that the Reliance Provision was constitutional. Note: The court’s decision only applies to Philadelphia’s ordinance. Employers doing business in Philadelphia are prohibited from using prior pay history to determine starting salaries.

Bowen v. Manheim Remarketing, Inc.

On Feb. 21, 2018, the United States Court of Appeals for the Eleventh Circuit (which governs Alabama, Florida and Georgia) weighed in on the issue of prior pay histories under federal law. The court held that an employer’s reliance on prior salary and experience may not provide a bias-free basis for wage disparities.

In Bowen, Qunesha Bowen sued her employer, Manheim Remarketing, Inc., the world’s largest wholesale automobile auction company, for pay discrimination in violation of the Equal Pay Act and Title VII. Bowen worked for Manheim for three years before being promoted to arbitration manager. Her male predecessor was paid nearly 50% more than her in his first year as arbitration manager. And, after six years working as arbitration manager, Bowen still earned only as much as her male predecessor did during his first year in that role.

The Eleventh Circuit found that Bowen demonstrated a pay disparity between her and her male predecessor. Manheim attempted to defeat liability by showing it considered a “factor other than sex” when it relied on Bowen’s prior salary and experience to set her salary each year. However, the court held that after Bowen performed as an effective arbitration manager for many years, her prior salary and experience would not seem to justify treating her differently than her male predecessor. The court held that it was a question for the jury as to whether her pay disparity was justified.

Current or Pending Laws

Several states and municipalities across the country have implemented laws that ban employers from asking about or using an applicant’s prior pay history to set new wage levels. These places include California (whose law took effect in January 2018); Delaware; Puerto Rico; and New York City. Similar laws will go into effect in the near future, such as Massachusetts (July 2018) and Oregon (January 2019). And, there have been attempts in Illinois and Maryland to pass similar legislation.

Courts that Take the Contrary Position

Despite the above trend, certain courts maintain the longstanding position regarding prior salary histories; these courts hold that the use of prior salary histories is not discriminatory under the Equal Pay Act. For example, the United States Court of Appeals for the Seventh Circuit (which governs Illinois, Indiana and Wisconsin) recently stated: “a difference in pay based upon the difference in what employees were previously paid is a legitimate factor other than sex.” Lauderdale v. Ill. Dept. of Human Servs., 876 F.3d 904, 908 (7th Cir. 2017).

Meanwhile, the United States Court of Appeals for the Sixth Circuit has a slightly different take on the issue: it recently has held that an employer’s consideration of an applicant’s prior salary is allowed “as long as the employer does not rely solely on prior salary to justify a pay disparity.” Perkins v. Rock-Tenn Servs. Inc., 700 Fed. Appx. 452, 457 (6th Cir. 2017). These decisions contribute to the existing patchwork of laws across the country on the use of prior salary histories.

Takeaway for Employers

Prior salary levels should be handled carefully when setting incoming pay, given the emerging developments under federal law and the patchwork of state and local laws across the country. Using prior pay histories may leave an employer vulnerable in potential litigation under Title VII or the federal Equal Pay Act. The safest course for employers and human resources personnel is to avoid asking applicants about prior pay histories and eliminate any internal formulas that take these histories into account when setting starting pay. To remain competitive without running afoul of the law, employers should consult or commission a market analysis, or ask prospective employees “what it would take” to attract them to a position.