On Aug. 29, 2017, the U.S. Circuit Court of Appeals for the 9th Circuit announced it will reconsider en banc whether employer use of salary history to determine an applicant’s compensation as a new hire violates the federal Equal Pay Act (EPA). This announcement could signal a reversal of a recent appellate decision that employer consideration of salary history may comply with the EPA.

The case, Rizo v. Yorvino, involves a female employee, Aileen Rizo, whom the Fresno County, California school district hired in 2009 to train other math teachers. The 9th Circuit opinion sets out the following: When Fresno County hired Rizo, it used a salary schedule it called “Standard Operation Procedure 1440.” This schedule consisted of 10 salary levels for math consultants like Rizo. To determine the salary level in which a newly hired math consultant would be placed, Fresno County took the applicant’s most recent salary, added 5 percent to it, and then placed the new hire at the corresponding level within the Fresno County pay schedule.

Prior to being hired by Fresno County, Rizo was a math teacher at a middle school in Phoenix, Arizona, earning $50,630 per year (plus a stipend for her master’s degree). Rizo’s salary from the Phoenix school system, even with Fresno County’s 5 percent bump, placed her below level one on Fresno County’s pay schedule. The county therefore placed her on level one, with a starting salary of $62,133 per year, plus a stipend.

Rizo later learned that a male employee hired at approximately the same time was placed on level nine of the Fresno County scale, and that every other math consultant in the county earned more than she did. Accordingly, she sued the county under the EPA and other gender discrimination statutes. Fresno County later moved for summary judgment on Rizo’s EPA claim. The county conceded that it paid Rizo less than comparable male employees for the same work. It nonetheless argued that it could not be held liable under the EPA because the basis for the pay disparity — the county’s Standard Operation Procedure 1440 — was a “factor other than sex,” thus exempting the county from EPA liability.

The district court disagreed, holding:

A pay structure based exclusively on prior wages is so inherently fraught with the risk — indeed, here, the virtual certainty — that it will perpetuate a discriminatory wage disparity between men and women that it cannot stand….

However, a three-judge panel of the 9th Circuit reversed the district court in April 2017. This panel held that the district court impermissibly disregarded a 1982 9th Circuit case, Kouba v. Allstate Insurance Co., which held that salary history is a non-discriminatory factor other than sex. Thus, under Kouba, employers can base compensation on this factor alone, provided the employer can show that use of salary history “effectuates some business policy” and the employer uses this factor “reasonably.”

Rizo petitioned the 9th Circuit to reconsider this April 2017 decision. In her petition, Rizo argued that if salary history qualifies as a “factor other than sex,” “the exception would swallow up the rule and inequality in pay among genders would be perpetuated.” The majority of 9th Circuit judges seem to agree, as the court ordered that an 11-judge en banc panel will rehear this case.

This en banc order suggests that the 9th Circuit will reverse the Kouba and Rizo decisions. Such a decision would reverse 35 years of 9th Circuit precedent and bring the court in line with the 10th and 11th Circuits. If, instead, the en banc panel does not reverse, this will crystalize a circuit split, which could result in the U.S. Supreme Court considering the issue for the first time. Oral argument before the en banc panel is set for Dec. 11, 2017.

National Legislative Trend

The 9th Circuit’s decision to reconsider the salary history issue reflects a national trend among state and local legislatures. Several states and territories in recent years — including Delaware, Massachusetts, Oregon and Puerto Rico — have prohibited employers from asking applicants about salary history. Further, the California legislature is currently considering similar legislation. These state legislatures share the same concern as the district court in Rizo, that reliance on past compensation calcifies gender pay disparities. Several large cities have enacted similar legislation, including New York, San Francisco, Boston, Philadelphia, Pittsburgh and New Orleans.

Significance for Employers

  • The 9th Circuit encompasses one-third of the geography of the United States and includes one out of every five of the nation’s employees. Employers should therefore stay tuned to developments in the Rizo case, as the court could require employers to change their hiring practices for a substantial proportion of their jobs.
  • Employers in states and localities that have already outlawed consideration of salary history may need to change their hiring practices and procedures now. These employers also may need to conduct training to ensure that their hiring managers and human resources personnel do not violate applicable salary-history laws by asking prohibited questions on applications or during interviews.
  • Case law developments aside, the current legislative trend to prohibit the use of salary history in setting new-hire compensation appears to be gaining steam. Thus, employers outside the jurisdictions currently covered by such limits should watch for further legislative prohibitions.