May 2018

Often, it’s not that employers have deliberately chosen to pay women less than men for the same jobs. In many cases, the basis for pay differentials has seemed sensible, such as salary history. But it turns out that basing pay on salary history perpetuates discrimination over an employee’s career. Mindful of these facts, some states across the country have instituted salary history bans and implemented other legal measures to strengthen pay equality. And the 9th Circuit Court of Appeals issued an opinion recently that significantly strengthened the federal Equal Pay Act.

In this article, we’re going to look at that ruling as well as some of the state legislative efforts. But, first, let’s review the federal Equal Pay Act, since that law affects all employers.

The Equal Pay Act

The Equal Pay Act makes it illegal for employers to pay unequal wages to men and women who perform jobs that require substantially equal skill, effort and responsibility, and that are performed under similar working conditions within the same establishment. Job duties, not job titles, will determine whether jobs are substantially equal. Each of the relevant factors are summarized below:

• Skill is measured by factors such as the experience, ability, education, and training required to perform the job. The issue is what skills are required for the job, not what skills the individual employees may have. For example, two bookkeeping jobs would be considered equal even if one of the workers has a master’s degree in physics, since that degree would not be required for the job.
• Effort is the amount of physical or mental exertion needed to perform the job. For example, if employees are working side by side assembling machine parts, but the person at the end of the line must also lift the assembled product off the line, that job requires more effort than the other assembly line jobs. As a result, it would not be a violation to pay that person more, regardless of whether the job is held by a man or a woman.
• Responsibility is the degree of accountability required in performing the job. For example, a salesperson who must decide whether to accept customers’ personal checks has more responsibility than other salespeople. On the other hand, a minor difference in responsibility, such as turning out the lights at the end of the day, would not justify a pay differential.
• Working Conditions encompass two factors: physical surroundings (like temperature, fumes, and ventilation) and hazards.
• The prohibition against compensation discrimination under the EPA applies only to jobs within the same physical establishment. In some circumstances, physically separate places of business may be treated as one establishment. For example, if the corporate office hires employees, sets their compensation, and assigns them to separate work locations, the separate work sites may be considered part of one establishment.

Under the EPA, pay differentials are permitted when they are based on seniority, merit, quantity or quality of production, or a factor other than sex. These are known as “affirmative defenses” and it is the employer’s burden to prove that they apply. In correcting a pay differential, no employee’s pay may be reduced.

The 9th Circuit Ruling

The 9th Circuit Court of Appeals ruled last month that salary history is not an acceptable reason for pay differences under the EPA, even when used in conjunction with other factors. The new reading of the law impacts employers in Alaska, Washington, Montana, Idaho, Hawaii, Oregon, California, Nevada, and Arizona, but since Circuit Courts often rely on one another’s rulings, it’s very possible that the impact of this decision will spread.

As written, the EPA allows for pay discrepancies for the following reasons:

• A seniority system;
• A merit system;
• A system that measures earnings by quantity or quality of production; or
• Any factor other than sex.

Employers, including the defendant in this case, have often used salary history to help determine a new employee’s starting salary, and assumed that this would count as “any factor other than sex.” The court did not claim that this is an unreasonable reading of the law. Rather, it said that such a reading is contrary to the point of the law, as an employee’s past salary is likely to be impacted by gender-based pay discrimination.

The Court also established that “any factor other than sex” is limited to legitimate, job-related factors, such as experience, education, and ability. The catch-all provision does not include business-related reasons, such as an individual’s willingness to work for lower wages or the need to offer higher wages to candidates in a more employee-friendly market. Essentially, the opportunity for cost-savings is not an acceptable reason for a pay differential.

The Court, however, deliberately stopped short of saying whether individualized salary negotiations—which may involve some reliance on past salary—would provide a defense, but it suggested a future court could rule on that issue.

State Bans on Salary History Inquiries

So far, California, Oregon, Delaware, and Massachusetts (as of July 1) have banned salary history inquiries. Washington allows employers to ask about salary history, but it prohibits employers from using that history as the basis for pay differentials.

The salary history bans are an effort to break the cycle of lower pay. These cycles happen all the time. Maybe it started with an employee’s first job or somewhere along the way, but at some point, the employee received pay lower than a male co-worker who was in a similar position with similar qualifications. Perhaps the cause of was deliberate discrimination. Or perhaps she simply requested lower pay than her male peers, and her employer saw no need to argue. In any case, she received less pay than she should have. If her future salaries are determined with reference to this salary, then the original disparity will stay with her over the course of her career. Salary history bans are an attempt to end such cycles and reset wages at equitable levels.

Action Items

Audit Your Pay Scales
Between the spread of equal pay legislation at the state level, the narrowing of the catch-all in the EPA, and the increased visibility of the women’s equality movement, there is no better time to take a long hard look at how your employees are paid.

If you are in the 9th Circuit and among the many employers who have based employee wages to some extent on salary history, that practice should be stopped immediately, and different wages adjusted or accounted for. Also look for factors that contributed to pay differentials that were business-related rather than job-related. Remember that you cannot reduce someone’s pay as a remedy under the EPA.

Stop Asking About Salary History
We have advised against asking candidates about their salary history for some time, but the advice becomes more urgent now. Although it is still legal to ask this question in most states, having this information is very likely to impact the offer made to a new employee. Even if the answer has no impact on the offer, the mere asking of the question implies that the employer intended to do something with the information, thereby opening the door for a discrimination claim.

The rules around tip pooling have been mired in litigation since 2011, when regulations came into effect that forbid tip pooling between employees who customarily receive tips and those who do not. The recently passed federal budget bill has created clarity by amending the Fair Labor Standards Act (FLSA) and eliminating that rule for employers who do not take a tip credit. Since the rule has been eliminated entirely, court decisions interpreting it—such as Oregon Restaurant and Lodging Association, et al v. the U.S. Department of Labor—are irrelevant.

The amended portion of the FLSA, while allowing for tip pooling between front and back of house employees if no tip credit is taken, clearly states that tips cannot be shared with managers or supervisors. To determine if someone is a manager or supervisor for the purpose of the tip pooling statute, employers should apply the White Collar Executive duties test below. An employee is only disallowed from sharing in tips if all of the following are true:

1. Their primary duty is the management of an enterprise in which the person is employed or a customarily recognized department or subdivision; and
2. They customarily and regularly direct the work of two or more full-time employees (or the equivalent, e.g., four 20-hour per week employees); and
3. They have the authority to hire, fire, or promote other employees or effectively recommend similar actions.

Given the specificity of the test, a fair number of workers who operate in a supervisory capacity on an occasional basis, or while performing their own customer service tasks, will likely still be eligible to share in tips.

Employers who do take a tip credit are still prohibited from enforcing any tip pooling system that shares tips with employees who do not customarily receive tips.