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Ruling: Salary history no longer a valid defense

April 23, 2018


By Benjamin P. O’Glasser & Kalia J. Walker
Bullard Law, Portland based law firm

The Ninth Circuit has issued a significant decision regarding the federal Equal Pay Act (“EPA”) that should prompt employers to reassess their compensation policies. In Rizo v. Yovino, the Ninth Circuit held that employers cannot rely on salary history itself, either alone or in combination with other factors, as a “factor other than sex” to set salary and defend against alleged EPA violations. Rizo overturned longstanding Ninth Circuit precedent permitting this practice. Rizo conflicts both with other circuits and with guidance from the U.S. Equal Employment Opportunity Commission, which allow employers to consider pay history as one of many factors when setting salaries.

In Rizo, the Fresno County Office of Education hired a female math consultant, Ms. Rizo. Pursuant to its internal policy, the County set Ms. Rizo’s starting salary by simply taking her salary at her prior position, adding 5%, and placing her on the corresponding “step” of a salary schedule. The County’s policy did not permit or require, and it did not consider, any other factors in setting Ms. Rizo’s initial salary. Much later, during a lunch with coworkers, Ms. Rizo learned that she had been placed at lower salary step than some of her male co-workers in the same position.

In her lawsuit, Ms. Rizo claimed that the County violated the EPA. A pay difference between workers of different genders is permissible under the EPA if it is based on “(i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production; or (iv) a differential based on any other factor other than sex.” 29 USC § 206(d)(1). The County argued that Ms. Rizo’s prior salary was a “factor other than sex” that allowed it to pay her differently without violating the EPA. Previously, in the 1982 case Kouba v. Allstate, the Ninth Circuit had endorsed this approach.

In overruling Kouba, the Court looked to the statutory history of the EPA and reasoned that the EPA was designed to eliminate wage gaps. Therefore, it would be contrary to “the text and history of the Equal Pay Act” if employers were permitted “to capitalize on the persistence of the wage gap and perpetuate that gap[.]” That is, the Court reasoned that the EPA couldn’t remediate a history of gender-based pay differences if employers could look at historical pay in setting current pay. Accordingly, it limited the “any factor other than sex” defense to “legitimate, job-related factors such as a prospective employee’s experience, educational background, ability, or prior job performance,” but not prior salary.

The Court declined to address “whether or under what circumstances, past salary may play a role in the course of an individualized salary negotiation,” leaving this critical question for future decisions.

What does this mean for Ninth Circuit employers?

After Rizo, employers in the Ninth Circuit (AK, AZ, CA, HI, ID, MT, NV, OR, WA) cannot safely rely on prior salary to set starting wages for a new employee or to defend against allegations arising under the EPA regarding any difference in wages between male and female employees. For employees outside the Ninth Circuit, however, employers may still consider prior salary, among other factors, in setting their salary. However, even employers outside of the Ninth Circuit should examine their policies in anticipation that the Supreme Court may weigh in on this issue and clarify a nationwide standard.

As a result of the Rizo decision, employers should review existing compensation policies to ensure compliance with the EPA. Additionally, because the Ninth Circuit left considerable uncertainty as to what role, if any, prior salary can play in individual salary negotiations, employers should contact an attorney for guidance if prior salary is interjected into salary negotiations with a prospective employee.

Employers also should be attentive to related state law considerations:

– Washington: A month prior to Rizo, Washington amended its Equal Pay and Opportunity Act to state that “previous wage or salary history” is not a defense to claims under that Act.
– Oregon: Oregon’s Equal Pay Law of 2017 set limits on employer inquiry into wage history of job applicants. Oregon now bars inquiries into pay history prior to an offer of employment. In light of Rizo, it is now advisable to refrain entirely from such inquiry. The law also provides a framework that encourages employers to audit for and correct any pay disparities within the organization; employers’ liability is limited if such audits are completed. Rizo underscores the importance of such audits to ensure that pay disparities are detected and corrected, so that a pay differential does not become a “baked in” liability that is carried forward indefinitely.

If you have any questions about the changes to the EPA or related state laws, or if your organization would like assistance in assessing its practices, please contact Ben O’Glasser or Kalia Walker.

Content ©2018, Bullard Law. All Rights Reserved.

  
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