Starting January 1, 2017, companies of all sizes doing business in California will need to take extra care to ensure they are not paying employees differently based on their race or ethnicity or basing new employees’ compensation solely on their prior salary. California Governor Jerry Brown recently signed two pieces of legislation that significantly expand the state’s recently revamped Fair Pay Act (FPA). Employers seeking to reduce legal risk amid the growing pay equity movement should take note.

Race and Ethnicity Now Included

Senate Bill 1063 extends FPA protections to prevent race- and ethnicity-based disparities in pay. Specifically, the law—known as the Wage Equality Act of 2016—adds language to California Labor Code Section 1197.5 prohibiting an employer from paying “wage rates less than the rates paid to employees of another race or ethnicity for substantially similar work.” Previously, the law only contained such protections based on gender.

In amending the bill, the legislature inserted findings that “[i]n 2015, the gender wage gap in California stood at 16 cents on the dollar. For women of color, wage inequality is much worse. African American women in California make just 63 cents and Hispanic women less than 43 cents for every dollar white non-Hispanic men make.” Although the pay gap has slightly narrowed in recent years, the law is aimed at accelerating the closure of the gap. The nonprofit Institute for Women’s Policy Research found that Hispanic women would not obtain equal pay for 232 years without policy changes, based on trends from the past 30 years.

No Justifying Pay Differences on “Prior Salary, By Itself”

The second amendment, Assembly Bill 1676, prevents employers from using “prior salary … by itself” to justify any pay disparities between workers. The law, which also amends California Labor Code Section 1197.5 is designed to stop employers from unintentionally perpetuating wage inequities by relying on earlier (and usually lower) salaries to set wages. As the legislature wrote in its findings and declarations, the act is designed to help parties “negotiate and set salaries based on the requirements, expectations, and qualifications of the person and the job in question, rather than on an individual’s prior earnings, which may reflect widespread, longstanding, gender-based wage disparities in the labor market.”

To be clear, the law does not ban questions about prior salary; however, such questions cannot be the sole reason an employer pays one employee less than another for substantially similar work. The law does not go as far as the pay equity law in Massachusetts, which will prohibit employers from asking about prior compensation altogether starting in July of 2018. That’s not for trying, however. An earlier version of the California bill contained an outright ban that was removed via a compromise. Governor Brown vetoed a separate bill last year that made such questions illegal.

Although Massachusetts and California are the first states tackling historic pay gaps by making it unlawful to peg current compensation to past wages, they may not be the last. Pay equity is a hot topic across the country. New York, Maryland, and Nebraska have recently passed legislation outlawing certain inequities. Although those new laws do not prohibit questions about past pay, Washington, D.C. is currently considering legislation that would do so.

2017 Changes Follow Significant Amendments in 2016 

The revisions set to go into effect on January 1, 2017, come on the heels of amendments that already fundamentally expanded California’s FPA at the start of 2016. Senate Bill 358, passed in 2015, gave significant teeth to the 65-year-old FPA through several notable amendments.

First, instead of having to prove a pay disparity for “equal” work, employees can now use the lower standard of “substantially similar” work. This change means that comparisons can be based on a job’s “skill, effort, and responsibility” rather than just the job’s title.

Second, the amendment struck the requirement that employees compare jobs at the “same establishment,” meaning they can now compare the pay of jobs at their current location with those across town—or across the state. However, the legislative history indicates that cost of living should play a role when comparing the wages, so employers need not pay workers at locations in, say, the San Francisco Bay Area identical wages to those at locations in California’s rural Central Valley.

Third, employers cannot prevent employees from discussing or disclosing their pay to other workers, similar to the anti-secrecy requirements imposed under the National Labor Relations Act. However, California Labor Code Section 232 already contained similar requirements, so this was not as significant as the changes listed above.

Finally, the law clarified that employers have the burden of proof to justify challenged pay differentials.

Justifications for Pay Differences

The revisions to the law do not mean California employers must pay employees equally across the board in all instances. Employers can still pay employees differently if they can establish one of several factors: (1) a seniority system; (2) a merit system; or (3) a system measuring earnings by quality or quantity of production (such as paying more to an employee who makes more widgets or has higher sales than the lower-paid employee). Employers can also base different pay rates on a bona fide factor other than sex, race, or ethnicity. In doing so, the employer must establish that the factor is not based on gender, race, or ethnicity; is consistent with business necessity; and is job-related to the position in question.

Practical Tips

The area of pay equity is expected to spawn significant litigation on both an individual and class basis in the coming years. Employers hoping to avoid these landmines may want to take the following steps.

Review policies and focus on race and ethnicity.

Many companies have already begun reviewing their pay policies with an eye toward gender disparities in light of last year’s amendments. Employers that have not done so may want to do so now, and all employers may want to conduct a proactive assessment concentrating on race and ethnicity to ensure compliance.

Retain records and make sure you can justify differences.

Last year’s amendments require that employers keep records regarding pay for three, rather than two, years. In addition, employers may want to review their records to ensure that they can justify any pay discrepancies and make certain that future record-keeping practices include information and/or statistics that will do so.

Ask open ended questions about pay.

Although California has stopped short of an outright ban, interview questions surrounding pay remain tricky. Rather than asking specific questions related to past pay, employers may want to ask open-ended questions and inquire about salary expectations to avoid any perception that pay decisions are based on impermissible factors. Employers relying on reports about an employee’s past wages should ensure the report is not the only factor in setting future pay.

Review written policies and train managers.

Now is also a good time to review written policies to ensure that they spell out a compensation practice that is fair, consistent, and lawful—and to ensure that managers receive training on such practices.

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Pay Equity

Recent high-profile lawsuits and increased activity from state legislatures have thrust pay equity issues to the forefront for today’s employers. As the momentum of legislation, regulation, and corporate initiatives focused on identifying and correcting pay disparities continues to grow, our attorneys are ready to assist with the full spectrum of pay equity-related issues.

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