April 16, 2018Client Alert

9th Circuit Decides Consideration of Prior Salary Violates Equal Pay Act

On April 9, 2018, in Rizo v. Yovino, the en banc 9th Circuit Court of Appeals ruled that an employer’s use of prior salary (whether alone or in combination with other factors) to justify a wage differential between a man and woman violates the Equal Pay Act. 

In order to prevail under the Equal Pay Act, a plaintiff must show that the employer has paid a male and female employee different wages for substantially equal work.  However, the statue provides employers with the following four exceptions: (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 factor other than sex.  The four exceptions act as affirmative defenses.

Rizo was a math consultant of the County Office of Education (Yovino was the Superintendent).  Rizo learned that her male counterparts hired after her made more money.  The differential resulted from the County’s standard operating procedure for setting initial salaries which considered an applicant’s prior salary in the equation.  Rizo asserted a claim under the Equal Pay Act as well as under California law.

Before the 9th Circuit, the County argued that its consideration of Rizo’s prior salary in setting her salary was a “factor other than sex” and therefore an exception under the Equal Pay Act.  The court had no trouble dismissing the County’s argument:

We conclude, unhesitatingly, that “any other 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.  It is inconceivable that Congress, in an Act the primary purpose of which was to eliminate long-existing “endemic” sex-based wage disparities, would create an exception for basing new hires’ salaries on those very disparities – disparities Congress declared are not only related to but caused by sex.

Rizo, at 13.

The Rizo court declined to rule on whether past salary might play a role in the course of an individualized salary negotiation (e.g., an applicant who will only accept the employment offer at a higher salary because of the need to match or exceed the prior salary), leaving that issue for subsequent cases.

What does Rizo mean for employers?

  • If you employ individuals within the 9th circuit (California, Oregon, Washington, Idaho, Montana, Nevada, Arizona, Alaska or Hawaii), you may not consider prior salary in setting salaries for applicants.  While the court did not specifically rule on the role of prior salary during individual salary negotiations, employers in these states should not ask about salary prior to an offer of employment and should be cautious about justifying salary differentials based on prior salary even in those contexts. A better approach could be to document the work experience, education, special skills or other factors unrelated to sex that justified the salary from the prior employer and use those factors as the basis for the salary offer.
  • Employers outside of the 9th circuit should also tread carefully.  Although the 8th  circuit (North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Missouri, and Arkansas) and the 7th circuit (Illinois, Indiana, and Wisconsin)  accept the use of prior salary alone as an "any factor other than sex" affirmative defense to Equal Protection Act claims, the 10th circuit (Oklahoma, Kansas, New Mexico, Colorado, Wyoming, and Utah) and the 11th circuit (Alabama, Florida, and Georgia) have ruled that an employer’s defense to an Equal Protection Act claim may not rely solely on the consideration of prior salary.  Given the current circuit splits, this issue is ripe for an appeal to the U.S. Supreme Court in the near future.
  • Employers need to also check state and local jurisdictions. A growing number now also ban salary history inquiries and/or consideration of prior salary in setting initial pay.
  • Even with the change in administration, combating compensation discrimination continues to be on both the EEOC’s and the OFCCP’s priority list. Indeed, in OFCCP audits, it is not unusual to be asked to justify the salary of one employee in a job title versus the other employees in the same title and discover that the managers most involved in setting salaries are no longer with the company. Oftentimes, looking at the records, the only obvious distinction is starting salary. Lack of documentation regarding initial salary decisions and subsequent increases now becomes more risky for employers in many jurisdictions.
  • Given the growing numbers of jurisdictions that restrict or outright ban the consideration of prior salary when making salary decisions, employers should consider analyzing their current compensation system (under attorney client privilege) for the role prior salary  may have played in determining new hire, promotion, or transfer salaries. Employers also should consider whether the information they may gain by asking for current or desired salary is worth the growing risk of a claim under federal, state, or local law in the jurisdictions where they do business.
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