Why it matters

An employer can pay a female employee less than her male counterpart for the same work if he was paid more in his previous job and the employer used prior salaries as a factor in a reasonable business policy, the U.S. Court of Appeals for the Ninth Circuit recently ruled. Aileen Rizo, a math consultant with the public school system in Fresno County, CA, sued under the Equal Pay Act when she learned that her male counterparts were all paid more than she was. The employer defended the pay scale by pointing to its “Standard Operation Procedure 1440,” where initial salary level is set by the employee’s most recent prior salary, plus 5 percent. The county said the pay differential was based on a “factor other than sex,” i.e., Rizo’s prior pay. Although a district court denied summary judgment in favor of the employer, the federal appellate panel reversed and remanded the case for the district court to evaluate the business reasons proffered by the county. Notably, the case was brought prior to California’s enactment of the Fair Pay Act, which permits the use of salary history as a factor as long as any pay difference is also based on at least one other factor (such as job experience). But the case could have a continuing impact. As the decision broadens a circuit split on the use of prior salary as a factor in pay differential under the EPA—with contrary authority from at least two other circuits—Supreme Court review is a possibility.

Detailed discussion

While having lunch with her coworkers at the Fresno County School District one day, Aileen Rizo learned that a male math consultant who had recently been hired was paid more than she was. She then discovered that all her male counterparts were paid more than she was and filed suit under the Equal Pay Act (EPA). 

The employer conceded that it paid Rizo less than comparable male employees for the same work. But the county presented an affirmative defense that the pay differential was based on a “factor other than sex,” specifically, prior salary. The employer used a salary schedule known as “Standard Operation Procedure 1440” to determine the starting salaries of management-level employees. The schedule consists of 12 “levels,” each with progressive “steps” within. New math consultants receive starting salaries within Level 1, which has ten steps.

To determine the step within Level 1 on which the new employee will begin, the county considers the employee’s most recent prior salary and places the employee on the step that corresponds to his or her prior salary, increased by 5 percent. When Rizo began working for the employer, she was placed at Level 1, Step 1 for an annual salary of $62,133, plus a $600 stipend for her master’s degree. The new hire started on Level 1, Step 9.

The county moved for summary judgment but the district court denied the motion, ruling that to permit a pay structure based on prior salary would perpetuate a discriminatory wage disparity between men and women, even if it was motivated by a legitimate nondiscriminatory business purpose.

On appeal, the U.S. Court of Appeals for the Ninth Circuit reversed. The EPA permits wage disparity when it occurs based on “any other factor other than sex,” the panel said, including prior salary. However, an employer can maintain a pay differential based on prior salary only if it shows that the factor “effectuate[s] some business policy” and that the employer “use[s] the factor reasonably in light of the employer’s stated purpose as well as its other practices,” pursuant to a 1982 Ninth Circuit decision in Kouba v. Allstate Insurance Co.

In Rizo’s case, the county offered four business reasons for using Standard Operation Procedure 1440: The policy is objective, encourages candidates to leave their current jobs for the county (because of the automatic 5 percent pay bump), prevents favoritism and ensures consistency, and is a judicious use of taxpayer dollars. The district court did not evaluate whether these reasons effectuate a business policy or determine whether the county used prior salary “reasonably,” the Ninth Circuit said, and should do so on remand.

The panel was not swayed by an argument from the plaintiff (and the Equal Employment Opportunity Commission as amicus curiae) that permitting prior salary alone as a factor other than sex perpetuates existing pay disparities, undermining the purpose of the EPA. Prior salary should be used only in combination with another factor, Rizo and the EEOC told the court.

“[W]e do not see how the employer’s consideration of other factors would prevent the perpetuation of existing pay disparities if … prior salary is the only factor that causes the current disparity,” the court wrote. For example, a male and a female employee, each with the same education and number of years’ experience as the other, where the male employee was paid a higher prior salary than the female employee, would end up with the same result as Rizo if a new employer sets salaries by considering education, years of experience and prior salary.

“If prior salary alone is responsible for the disparity, requiring an employer to consider factors in addition to prior salary cannot resolve the problem that the EEOC and the plaintiff have identified,” the court said.

The panel remanded the case with instructions that the district court evaluate the four business reasons offered by the county to determine whether the employer used prior salary “reasonably in light of [its] stated purpose[s] as well as its other practices,” noting that the burden of persuasion rests on the employer.

To read the decision in Rizo v. Yovino, click here.