Alerts and Updates

Can an employer justify a wage differential between male and female employees by relying on their salary history? Overruling Kouba v. Allstate Ins. Co., the en banc court in Rizo v. Fresno County Office of Education held the answer to that question is clearly “no.”

On April 9, 2018, on the eve of Equal Pay Day, the United States Court of Appeals for the Ninth Circuit answered what Judge Stephen Reinhardt posed as a simple question: Can an employer justify a wage differential between male and female employees by relying on their salary history? Overruling Kouba v. Allstate Ins. Co., 691 F.3d 873 (9th Cir. 1982), the en banc court in Rizo v. Fresno County Office of Education held the answer to that question is clearly “no.” Plaintiffs' attorneys are likely to rely heavily on the Rizo decision when litigating individual and class action gender-based pay discrimination cases.

Background

Aileen Rizo was hired as a math consultant by the Fresno County Office of Education in 2009. Rizo’s salary upon joining the county was determined in accordance with the county’s Standard Operating Procedure 1440 (SOP 1440), which dictates that a new hire’s salary is determined by adding 5 percent to their previous salary. Fresno County does not take employees’ experience into consideration.

During a lunch with colleagues in 2012, Rizo learned that her male colleagues had been subsequently hired in the same position at higher salaries. Rizo complained about the disparity and was told by the county that all salaries had been set in accordance with SOP 1440. Rizo filed suit, alleging that such a system violates the Equal Pay Act.

The county argued it was justified in paying Rizo less than comparable male employees for the same work because the discrepancy was based on her prior salary. In relevant part, the Equal Pay Act provides that employers can pay men and women differently for the same work only if such a payment is made pursuant to (i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity, quality or production; or (iv) a differential based on any factor other than sex. The county contended that an employee’s prior salary constitutes a “factor other than sex.”

The Court’s Decision

The Ninth Circuit majority disagreed, holding that prior salary alone or in combination with other factors cannot justify a wage differential. Instead, the court concluded that “'any factor other than sex' is limited to legitimate, job-related factors such as a prospective employee’s experience, educational background, ability, or prior job performance.”

To hold otherwise, as Judge Reinhardt wrote in the majority opinion just prior to his death on March 29, is “to allow employers to capitalize on the persistence of the wage gap and perpetuate that gap ad infinitum—[which] would be contrary to the text and history of the Equal Pay Act, and would vitiate the very purpose for which the Act stands.”

Judge Reinhardt referred to this holding as an “express[ion] of a general rule” and explicitly left open the question of whether, or under what circumstances, past salary may play a role in the course of an individualized salary negotiation.

While the majority opinion is controlling, we find it pertinent to address the opinions of the various concurring judges given the fluid approaches to this issue:

  • Judge M. Margaret McKeown (joined by Judge Mary Murguia) expressed concern with the forbiddance of considering prior salary altogether because it would chill voluntary discussions in situations when an employee chooses to provide it as a bargaining chip for higher wages.
  • Judge Consuelo Callahan (joined by Judge Richard Tallman) felt the majority’s holding that prior salary can never be considered “ignores the realities of business” and may “hinder rather than promote equal pay for equal work.” He pointed out that an applicant is presumably seeking a job that will pay her more and potential employers recognize that they will have to pay more if they want to hire her.
  • Judge Paul Watford reached the same result as the majority, but through an alternative reading of the statute, opining that if an employee’s past pay reflects sex discrimination, an employer cannot rely on it to justify a pay disparity, whether the employer considers past pay alone or in combination with other factors.

What This Means for Employers

The Second, Eighth, Tenth and Eleventh Circuits have all previously reached similar conclusions that prior salary alone cannot justify a compensation disparity. However, the Ninth Circuit’s majority decision has taken it a step further in its holding that prior salary alone, or in combination with other factors, cannot justify a wage differential. This holding, which would ultimately preclude employers from even considering past pay as a factor in setting initial wages, is directly at odds with the Seventh Circuit, which has held that prior salary is always a “factor other than sex.”

This Circuit Court split may result in Supreme Court resolution. In the interim, the Ninth Circuit’s decision will likely be used by plaintiffs’ lawyers to support gender equity claims, both under federal and state laws. This decision, coupled with the various salary history ban laws that have been instituted across the country (e.g., New York, Washington state, Delaware, California, Philadelphia (stayed pending litigation), San Francisco, Massachusetts and Oregon), emphasizes the importance of relying on job-related factors other than an individual’s past salary when determining their new pay. This decision is but one more reason why employers may wish, at a minimum, to refrain from asking about prior salaries on applications for employment, even if not prohibited by a state law. The question may invite the applicant to ask whether her salary was improperly considered.

This decision also serves as a reminder to employers that now is the time to conduct a pay equity analysis to ensure that any differentials have been lawfully made, are currently supportable and are lawful under the Equal Pay Act and state and local law equivalents. Indeed, in jurisdictions where salary history bans are now in effect, plaintiffs’ lawyers may contend that the state and local salary history laws support their argument that reliance on salary history constitutes sex-based discrimination in setting compensation. In conducting pay equity reviews, employers may want work with counsel so that their review may be conducted under attorney-client privilege.