Prior Salary Cannot Justify Pay Disparities Under the Federal Equal Pay Act

In an important decision, the 9th Circuit overturned its long-standing precedent to rule that prior salary, whether alone or in combination with other factors, is no longer a defense to a claim of pay discrimination under the federal Equal Pay Act (“EPA”). Rizo v. Yovino, April 9, 2018. By imposing a flat prohibition against any use of prior salary in setting compensation, Rizo not only goes further than any other Circuit has to date, it also goes beyond the position taken by the U.S. Equal Employment Opportunity Commission, which has permitted the consideration of prior salary as part of a mix of factors in setting compensation.

And, while California, Oregon, and Washington have enacted state laws that address the issue of salary history in the equal pay context and impose varying levels of restrictions, (see additional advisories on this topic here, here, and here), none go as far as the Rizo court in proscribing any use of salary history in setting compensation. For that reason, Rizo is a game-changer. Employers in the 9th Circuit (which includes CA, OR, WA, AK, HI, NV, AZ, MT, and ID) can no longer point to prior salary as a justification for a pay disparity between male and female employees.

Aileen Rizo was hired as a math consultant by the Fresno County Office of Education in October 2009. Before working for Fresno County, Rizo had worked as a high school math teacher in Arizona. Her starting salary at Fresno County was determined in accordance with the County’s Standard Operating Procedure (“SOP”) by taking her prior salary, adding 5 percent, and then placing her on the corresponding step of the salary schedule, rather than relying on her prior job-related experience and education (which included two advanced degrees). When Rizo learned that male math consultants had been hired at higher salary levels based on their prior earnings history, she filed an internal complaint. The County rejected her claim, noting that all salaries had been objectively determined in accordance its SOP, and thus had nothing to do with her sex.

Rizo sued, alleging, among other claims, a violation of the EPA. The County argued that its practice was lawful because prior salary was a “factor other than sex,” and thus its use was permitted under the EPA’s catch-all defense. This argument was supported by the 9th Circuit’s earlier decision in Kouba v. Allstate Ins. Co., which held that the EPA did not impose a strict prohibition on the use of prior salary, and instead found that such use was lawful as long as it “effectuate[d] some business policy.”

In Rizo, the 9th Circuit squarely rejected Kouba, and concluded that the “any other factor other than sex” defense is “limited to job-related factors such as a prospective employee’s experience, educational background, ability or prior job performance,” and specifically does not include prior salary. In overruling Kouba, the Court noted that a “factor other than sex” cannot be one that simply “effectuates some business policy,” because reasons that may be good for business—i.e., paying lower salaries to women because “market forces” allow them to do so and it saves the company money—serve only to perpetuate “the very gender-based assumptions about the value of work that the Equal Pay Act was designed to end.”

What This Decision Means for Employers

Because other circuits have to varying degrees allowed the consideration of prior salary as a factor in setting compensation—indeed, the 7th Circuit has held that prior salary is always a “‘factor other than sex’” and thus without more can be used to justify a pay disparity—Rizo may ultimately be decided by the U.S. Supreme Court. Nevertheless, it is controlling law in the 9th Circuit. Accordingly, employers with operations in the 9th Circuit should consider taking the following steps to reduce the risk of equal pay claims:

• Review practices for setting starting salaries and eliminate any reference to and/or reliance on prior salary, whether alone or in combination with other factors;
• Make sure that whatever factors are used in setting salaries are specific to the job in question and are not based on general business policies or objectives; and
• To the extent prior salary has been used in salary-setting, consider undertaking a privileged analysis of the compensation structure to determine whether gender-based pay disparities exist and, if so, what should be done about it.

Open Question

Note that the Rizo opinion expressly leaves open the question of whether or under what circumstances salary history may play a role in the course of an “individualized salary negotiation.” While the Court’s language suggests that prior salary may possibly be used in salary negotiations with a particular person, employers are advised to use caution and to seek the advice of experienced employment counsel before doing so.