Can employers rely partially, or entirely, on a candidate’s salary history in setting pay, or does such practice inherently violate the federal Equal Pay Act where women are paid less than men using this practice?
A recent decision by the 9th U.S. Circuit Court of Appeals overturned a lower-court ruling that says an employer may rely upon the prior salaries of employees in setting pay so long as the employer can show that using this factor “effectuated some business policy” and the employer used the factor “reasonably in light of the employer’s stated purpose as well as its other practices.”
In the case, Fresno County in California relied solely upon candidates’ current or prior salary in setting pay, including a policy that employees will receive a 5 percent increase, and will consistently be brought to the minimum pay range if the 5 percent increase fails to take the employee to the minimum of the pay range.
In the appellate court case, Aileen Rizo, a school employee, learned she was paid less than her male counterparts, which the county conceded. The county defended its actions stating that it had employed a factor other than gender in setting pay – prior salaries. Rizo claimed this practice violated the federal Equal Pay Act.
Under the Equal Pay Act, a plaintiff need only demonstrate that she or he is receiving different wages for equal work. Upon that showing, the burden shifts to the employer to show that it set pay based on (1) a seniority system, (2) a merit system and (3) a system which measures earnings by quantity or quality of production, or “a differential based on any other factor other than sex.”
The lower court granted summary judgment for the employee, holding that reliance on prior salaries alone in setting pay violates the Equal Pay Act.
The appellate court vacated the opinion, and concluded that the employer can rely on prior salary alone, or in combination with other non-discriminatory factors, so long as it can show that the factor or factors effectuated a business policy and the employer reasonably used those factors.
Equal pay among genders has been much discussed recently, in light of rhetoric that women are historically paid less than men.
In the Rizo case, the Equal Employment Opportunity Commission joined the argument in favor of Rizo, stating that prior salary alone cannot be a legal factor because such practice “perpetuates existing pay disparities and thus undermines the purpose of the Equal Pay Act.”
The 9th Circuit disagreed, stating that even if prior salary was used as any factor, if all things were equal between men and women relative to education and experience, the use of prior salary as a factor still would be relied upon.
Massachusetts is the first state to address the potential disparity that exists in relying on salary history to set pay.
Effective 2018, Massachusetts prohibits employers from asking about an applicant’s salary history on an application or during interviews for employment until after an offer has been made with compensation already negotiated.
New York, Connecticut and California recently passed laws prohibiting employers from implementing policies or practices that prevent employees from discussing their current wages, which would enable employees to uncover if there are existing pay disparities.
Employers need to set a legitimate policy in determining compensation and document its reasons for setting pay.
In a pay disparity case, employers will be required to demonstrate factors other than gender, and use of prior salaries as the basis for pay must be business related and applied reasonably.