Last week, both houses of the New Jersey Legislature passed a sweeping equal pay bill that Governor Phil Murphy is expected to sign promptly. When passed into law, it will be one of the most strict equal pay statutes in the country.

The legislation—the “Diane B. Allen Equal Pay Act”—would be effective July 1, 2018, and would prohibit employers from compensating any employee “who is a member of a protected class” at less than the rate paid to employees who are not members of the protected class “for substantially similar work, when viewed as a composite of skill, effort and responsibility.” The Act would allow employers to pay different rates of compensation only if the differential is made pursuant to a “seniority system” (which is not defined), a “merit system” (which also is not defined), or the employer makes a five-prong showing that includes:

  1. That the differential is based on non-protected factors, such as training, education or experience, or the quantity or quality of production;
  2. That such factors “do not perpetuate” compensation differentials based on protected characteristics;
  3. That each factor “is applied reasonably”;
  4. That such factors “account for the entire wage differential”; and
  5. “That the factors are job-related with respect to the position in question and based on a legitimate business necessity” and that “there are [no] alternative business practices that would serve the same business purpose without producing the wage differential.”

Compensation comparisons “shall be based on wage rates in all of an employer’s operations or facilities.” Further, employers would be prohibited from reducing the compensation of employees to comply with the Act.

The Act—broad, ambiguous and demanding—is virtually certain to increase equal pay litigation in New Jersey if and when it becomes law. With other states and localities likely to follow suit, employers should proactively evaluate their compensation structures to determine whether and why there are compensation differentials among similarly situated employees.