Recently, the gender pay gap has become the subject of increased scrutiny and media attention as a growing movement works to bring an end to gender-based wage differentials. On April 9, 2018, there was an interesting development in this vein. The Court of Appeals for the Ninth Circuit, sitting en banc, held, in Rizo v. Yovino, that an employee’s salary history is not “a factor other than sex” that can be considered under the Equal Pay Act when setting salary. Therefore, an employer cannot consider prior salary, either alone or in combination with other factors, in setting pay.[1] In light of the attention this subject is receiving, companies need to keep the issue of wage disparity in mind, not only as they hire new employees, but as they engage with their shareholders and in M&A activity.

The Growing Movement and Its Impact on Companies

The Ninth Circuit Decision comes on the heels of the passage of a number of laws by cities and states, such as New York City, Massachusetts and California, which generally prohibit employers from inquiring about the salary history of job applicants or relying on the salary history of a job applicant when determining his or her salary amount. To highlight this trend, in 2017 alone, 42 state legislatures introduced legislation aimed at ending gender-based pay gaps.[2] Further, as has been reported, and as we are finding as we prepare our 16th Annual Corporate Governance & Executive Compensation Survey, companies are increasingly facing shareholder proposals demanding information on gender pay and steps being taken to address any gaps. Finally, activity has not been limited to the United States, as a recent government directive in the U.K. required employers with more than 250 employees to report their gender pay gap as of April 4, 2018.

Although it goes without saying that employers need to be aware of the rules regarding salary history in the hiring process, the focus of investors on the issue of pay disparity means that those involved in shareholder engagement should prepare to address questions. Further, in M&A transactions, both buyers and sellers may face unanticipated problems if issues of pay disparity are not addressed early in the deal process.

Practice Pointers

The following are some suggested actions companies should consider in order to guard against potential external challenges to pay practices:

  • Consider asking job candidates what they would like to earn, rather than what they have previously earned.
  • Be prepared for shareholder engagement. Consider annual pay gap audits to identify and address any hidden problems, and consider disclosing these efforts in your annual proxy. Educate your board members on this issue. Satisfying investors early can serve to avoid an unwanted shareholder proposal.
  • Sellers in an M&A deal should take into consideration hiring and pay practices when making compliance representations, as those can be breached if the seller has unequal pay practices or questions candidates about their current salaries. In addition, confer with outside counsel to ensure all current laws are being considered.
  • Buyers in an M&A deal should consider asking questions about pay practices during due diligence, including inquiries about standard practices for determining pay, whether the company has conducted a review of its gender-based pay disparity and any initiatives designed to identify or close any gender-based pay disparity.
  • Buyers in an asset deal should ensure adequate protections are in place so that salary history of seller’s employees is not improperly used by the buyer to set wages. The rules differ from jurisdiction to jurisdiction, so those in charge of hiring need to be aware of all relevant laws.