In Rizo v. Yovino,1 the U.S. Court of Appeals for the Ninth Circuit recently examined whether an employer can justify a wage differential between male and female employees by relying on prior salary. The Ninth Circuit determined that prior salary—alone or in combination with other factors—cannot justify such a wage differential because prior salary is not job-related, and perpetuates the gender-based assumptions about the value of work that the Equal Pay Act was designed to end. In reaching this conclusion, the Ninth Circuit became the first appellate court to definitively address whether and how employers may consider wage history. Other federal appellate courts that have examined this question have typically concluded that while employers may not rely on an individual’s salary history alone to support a wage differential, they may do so if prior salary is considered among other factors.2

Background

The plaintiff worked as a math consultant for the Fresno County Office of Education. Upon hire, the plaintiff's salary was determined pursuant to the County’s Standard Operating Procedure 1440 (“SOP 1440”), which had been used informally by the County since the late 1990s. Consistent with SOP 1440, all new hires’ salaries were determined by taking an individual’s prior salary, adding 5%, and thereafter placing the new employee within the appropriate step in the County’s salary schedule. About four years after her hire, the plaintiff attended a lunch with her colleagues during which she learned that her male colleagues, who had been hired after her, were hired at higher salary steps. She reported the pay disparity to the County, which responded that, on average, SOP 1440 placed more women at higher compensation steps than males. The plaintiff disputed the County’s data in support of its argument.

The plaintiff thereafter sued the Fresno County Office of Education Superintendent claiming violation of the Equal Pay Act, sex discrimination under Title VII of the Civil Rights Act, and similar claims under California law.

The Equal Pay Act

The Equal Pay Act (EPA) provides that employers must provide equal pay between employees for equal work—work that requires “equal skill, effort, and responsibility” and is performed under “similar working conditions.”3 The EPA provides four exceptions to this general rule, where pay disparities are made pursuant to: (1) a seniority system; (2) a merit system; (3) a system which measures earnings by quantity or quality of production; or (4) a differential based on any factor other than sex. The fourth exception is commonly referred to as the “catchall” exception. To succeed on an EPA claim, a plaintiff must show that her employer has paid male and female employees different wages for substantially equal work. Once she does so, the employer is left to prove that the pay disparity should be excused due to one of the four statutory exceptions.

The Ninth Circuit’s Decision—Disparities in Pay Must be “Job-Related”

In defending against the plaintiff’s claims, the County alleged that the EPA’s fourth catchall exception, “any factor other than sex,” included consideration of an employee’s prior salary. In examining whether prior salary could be used as a factor in determining employee wages and lawfully fall within this exception, the Ninth Circuit concluded that the catchall exception is:

[L]imited to legitimate, job-related factors such as a prospective employee’s experience, educational background, ability, or prior job performance. It is inconceivable that Congress, in an Act the primary purpose of which was to eliminate long-existing ‘endemic’ sex-based wage disparities, would create an exception for basing new hires’ salaries on those very disparities—disparities that Congress declared are not only related to sex but caused by sex.

In reaching its conclusion, the Ninth Circuit analyzed the statutory text of the EPA, as well as its legislative history. The court likewise looked to other federal courts of appeal which examined the EPA’s catchall exception, and concluded that the majority of its sister circuits typically applied the exception only where the relevant factor at issue was determined to be “job-related.” Throughout its analysis, the court took care to note the distinction between “job-related” and “business-related” reasons. The Ninth Circuit sought to clarify that a “business-related” reason would not fall within the protection of the catchall exception because disparate pay between employees could not be defended based upon an employer’s concerns relating to mitigation of business risks, or cost-saving mechanisms—i.e., concerns that are not job-related.

Open Question: Application of Rizo to Individualized Salary Negotiations

Importantly, however, the Ninth Circuit created a conspicuous question as to the application of its holding. Although the court affirmed that Rizo announced a “general rule” that any pay structure that is based exclusively or in part on prior wages is indefensible under the EPA, the court simultaneously affirmed that it made no attempt to resolve the application of its general rule in all circumstances. More specifically, the court opined that it did not decide “whether or under what circumstances past salary may play a role in the course of an individualized salary negotiation.” Thus leaving open the question as to how the Rizo holding would apply to situations in which a candidate, during individual during salary negotiations, bases his or her salary expectation on prior pay.

Rizo In Perspective: The Larger Context

The Rizo opinion concludes by providing employers with two rules to abide by going forward: (1) if an employer seeks to use the EPA’s catchall exception to justify a wage differential, it must be able to prove that the “factor other than sex” on which it relies is job-related, rather than simply effectuating some business policy, and (2) an employer may not rely on prior salary to set initial wages, whether as a stand-alone factor or in addition to other factors.

In the short term, Rizo should remind Ninth Circuit employers to carefully review their compensation systems and eliminate considerations of prior salary being used to support compensation decisions, especially as EPA claims may be increasingly difficult to defeat at the summary judgment stage. Employers should also consider conducting internal pay audits to determine whether their pay practices comply with Rizo’s holding.

In the longer term, Rizo represents one step in a fast-growing national conversation regarding pay equity. The Rizo decision comes on the heels of a number of recent state law and municipal ordinances that similarly prohibit an employer from inquiring into, or considering, a job applicant’s wage history. For example, state laws in California, Delaware, Massachusetts, Oregon, and Puerto Rico prohibit an employer from relying on an applicant’s salary history in reaching compensation determinations.4 Similar local ordinances have passed in San Francisco, CA; Albany County, NY; New York City, NY; Westchester County, NY; and Philadelphia, PA.5 Washington State recently passed a law that significantly expands its existing gender pay law,6 and New Jersey is working to pass legislation that would likewise significantly expand its equal pay legislation.7

In contrast, Michigan recently passed a law barring local municipalities from enacting any “ordinance, local policy, or local resolution regulating information an employer or potential employer must request, require, or exclude on an application for employment or during the interview process from an employee or a potential employee,”8 thus effectively safeguarding Michigan employers’ ability to consider salary history in making compensation determinations. Wisconsin's governor also recently signed a bill instructing that no local ordinance may prohibit “an employer from soliciting information regarding the salary history of prospective employees.”9

Rizo, coupled with state legislation, suggests that the issue of pay equity will likely be playing an increasingly larger role in employment litigation in the years to come as courts and state legislatures grapple with how best to determine what information employers should be allowed to consider in making salary determinations.

Conclusion

It remains to be seen how the Rizo decision will impact individualized salary negotiations. However, what is clear is that Ninth Circuit employers, especially those in California, Oregon and Washington, should ensure that any distinctions in employee pay are based upon job-related factors—including, to name a few, an applicant or employee’s training, education, ability, and experience.