California’s Fair Pay Act Will Likely Impact Employers Beyond the Golden State

January 22, 2016Articles Corporate Counsel

Since 1949, gender-based wage discrimination has been prohibited by California law. Similar provisions exist under the Federal Equal Pay Act as well. Despite these laws, women’s wages continue to lag those of their male contemporaries. Because of those inequities, in October, California Gov. Jerry Brown signed into law the state's new Fair Pay Act. Although intended to address those disparities, the language of the new statute promises to create even more litigation in this area. In fact, of all the new employment laws going into effect, this may be the one that employers should take most seriously in 2016. And it’s likely to have an impact felt well beyond the borders of the Golden State.

The law significantly modifies existing statutes, placing new burdens on employers and exposing them to substantially more legal risk. Described by many as the most demanding equal pay law in the country, this new law goes beyond requiring equal pay for equal work. Instead, employers are now required to provide equal pay to any employee for “substantially similar” work.

Apparently realizing that standard was vague, the legislature defined it for us. “Substantially similar” work is to be viewed as a composite of skill, effort and responsibility AND performed under similar working conditions. Ask any lawyer and you will hear that this is a pretty vague standard to prove in a courtroom. As a result, the bar to file an equal pay claim now seems dramatically lower.

While the law provides exceptions, it places the burden on an employer to prove that any pay gap between workers is due to non-discriminatory factors such as a seniority system, a merit system or a system that measures earnings by quantity or quality of production. Employers can also rely on “bona fide factor(s) other than sex,” but only if they can also prove that the factor is job related. To demonstrate that, an employer needs to show that the wage differential (1) is not based on or derived from a sex-based differential in compensation; (2) is related to the job at issue; and (3) is consistent with business necessity, defined as an “overriding legitimate business purpose.”

Moreover, employers must show that each factor relied upon is “applied reasonably” and that one or more of the relied upon factors account for the entire pay differential. And, an employee can defeat that entire defense by showing that some alternate business practice exists that would not produce the wage differential.

The new law also expressly removes geographic location as a criterion for the differential. In the past, employers could justify wage disparities due to employees working in different offices or on different shifts. No longer are those automatic.

In fact, this provision promises to impact not only California employers, but those with operations in multiple states. By removing geographic location as a criterion for a pay disparity, the law opens the argument that an employee’s pay must be compared to all employees doing substantially similar work for that company, anywhere. Employers should expect that California employees will attempt to compare their compensation to all other employees doing substantially similar work, regardless of what state they may work in. While officially the law only impacts California employees, if a company has operations in multiple states, they could face claims by California employees that out-of-state employees are paid more. For example, if an employer’s male employees in New York are making more than female employees doing substantially similar work in California, they may need to address that issue, either by adjusting compensation or otherwise being able to explain the disparity.

So how do employers comply with the new law and avoid being that new test case, with all the potential exposure to damages for wage differentials, liquidated damages, attorney fees, interest and reinstatement, both individually and in a class setting? Two words: be proactive.

As soon as possible, employers should conduct a review of their compensation practices to assure that they are in defensible compliance with the new law. That review should encompass several things. Employers should conduct an audit of employee pay equity, including identifying opposite sex pay disparities for similar work. They should look at compensation policies and procedures, including all job descriptions and employee handbooks. They should also review evaluation protocols. In connection with each of these, employers should remain mindful of the law’s three-year record retention requirements if you are modifying policies.

In addition to record reviews, employers should provide internal training to all members of management who make decisions regarding employee pay and compensation. Good written policies and procedures can quickly come undone if not implemented correctly.

Another way to protect your company from litigation connected to equal pay claims is to obtain counsel to assist with the above audits, reviews and training. The review work involved will most likely involve sophisticated statistical analysis followed by interpretation and discussions or deliberations of the results. By engaging counsel to assist, you can minimize the risk that such information becomes discoverable in litigation. Using counsel to train management can also help clarify understanding of the new rules and avoid inadvertent misstatements to employees or potential new hires.

One further thing you should do to avoid litigation is to refrain from asking potential new hires about their salary history. You can avoid that possible misstep by analyzing proposed rates for new hires in the industry or field, compared to other similarly situated employees.

By taking the steps above, employers can best position themselves to avoid the litigation that is sure to arise over the vagueness created by the substantially similar standards of the Fair Pay Act. Having non-sex based explanations for any differences will be of great benefit in preparing a defensible position for any disparities.

Should an employer find itself in litigation on this issue, damages can be substantial. As above, in addition to paying the wage differential, employers are exposed to an identical amount as liquidated damages, plus attorney fees and interest. Moreover, retaliation claims under the new law can result in reinstatement. While a single plaintiff case would be expensive, addressing this issue on a class basis might prove catastrophic for a smaller company.

So what can we take away? Employers should check all policies and understand what legitimate factors can be used (education, training, experience, etc.). They should re-evaluate their compensation system and, if necessary, correct disparities or be prepared to explain them with those factors. Management should be trained, or re-trained, to assure compliance. Finally, do not prevent employees from discussing their compensation with others.

Perhaps most important, be sure counsel has reviewed or participated in the plan so as to minimize the impact. Despite the confusion it created, expect that similar laws will begin to pop up elsewhere. The near unanimous vote in California, by both Democrats and Republicans, and the support ultimately coming from the state’s Chamber of Commerce, has pushed equal-pay advocates to call for similar laws across the nation.

Reprinted with permission from the January 22, 2016 issue of Corporate Counsel. (c) 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.