After amending its Equal Pay Act to address gender-related wage differentials effective January 1, 2016, the California legislature enacted nearly identical language to also preclude wage differentials based on race or ethnicity, effective January 1, 2017. Specifically, the bill amends the Labor Code to prohibit employers from paying any of their employees at wage rates less than the rates paid to employees of another race or ethnicity for substantially similar work when viewed as a composite of skill, effort, and responsibility and performed under similar working conditions.

As with gender, if there is a wage differential, the employer bears the burden of demonstrating that the wage differential is based on one or more of the following factors:

  1. a seniority system;
  2. a merit-based system;
  3. a system that measures earnings by quantity or quality of production; or
  4. a bona fide factor other than race or ethnicity, such as education, training, or experience.

With regards to the last factor, the employer must show that the factor is:

  1. not derived from a race or ethnicity-based differential,
  2. is job-related to the position in question, and
  3. is consistent with business necessity (i.e., there must be an overriding legitimate business purpose that cannot be achieved through an alternative business practice).

Further, the employer must also demonstrate that each factor it relies on is applied reasonably and that the factors relied upon account for the entire wage differential.

When offering any explanation, employers must keep in mind that salary history alone will not suffice. The California legislature also amended the Equal Pay Act to specifically prohibit employers from attempting to justify any wage differential on the basis of past wages, reasoning that such a justification could potentially “institutionalize” prior discriminatory pay practices, stating “prior salary shall not, by itself, justify any disparity in compensation”. This is important to keep in mind, as employers who engage in wage audits often rely on historical wage records and tenure.

Finally, employers are also prohibited from discriminating against employees who report or assist in raising concerns about race or ethnicity-based wage differentials. Indeed, employees must be permitted to freely discuss and/or inquire about their wages.