Is Setting Pay Based on Prior Salary the Same as Setting Pay Based on Sex?

By Parker E. Thoeni and Lindsey A. White - Shawe Rosenthal LLP

May 11, 2017

Can prior salary justify a pay differential, or does it necessarily perpetuate sex-based pay discrimination? This was the subject of a recent Equal Pay Act (EPA) case before the U.S. Court of Appeals for the Ninth Circuit, in which the court bucked the recent trend of connecting prior salary with pay discrimination against females.

The EPA is a federal law that prohibits discrimination between employees on the basis of sex by paying employees of one sex less than employees of the opposite sex for equal work. It bears noting that the law applies to both sexes. Under the EPA, a Plaintiff must show that he or she is receiving different wages for “equal work.” If the Plaintiff makes that showing, the burden shifts to the employer to assert any of a number of affirmative defenses to explain the wage disparity, including:

• A seniority system
• A merit system
• A system based on quantity or quality of production
• A differential based on any other factor than sex (Common legitimate rationales under this factor, which is something of a catchall, include variables such as type of or years of experience, education, and certifications).

In Rizo v. Yovino, the court confronted the question of whether prior salary alone can constitute a legitimate “differential based on any other factor than sex.” Rizo worked for a public school system in California. When Rizo was hired, her salary was determined based on a schedule of twelve levels, each level consisting of ten progressive steps within the level. New employees were hired into level 1, and placed in the step that corresponded with the prior salary increased by 5%.  Rizo’s prior salary, even increased by 5%, was lower than the lowest step in level 1, so she was hired at step 1 of level 1. Rizo subsequently discovered that she earned less than her male counterparts, one of whom was hired at step 9 of level 1.

Relying on prior Ninth Circuit cases, the court held that a pay differential based on prior salary alone qualifies as a factor other than sex if it effectuates some business policy and that the employer uses the factor reasonably in light of the employer’s stated purpose as well as its other practices. The employer provided four business reasons for its policy: (1) it is objective, (2) it encourages candidates to leave their current job to join the employer because of the guaranteed 5% increase, (c) it prevents favoritism and ensures consistency, and (4) it is a judicious use of taxpayer money (an argument unique to a government employer). The court accepted these business reasons. It further noted that the fact that an employer may have relied upon other factors as well to explain the wage differential is of no significance, “if…as is the allegation here, prior salary is the only factor that causes the current disparity.”

Although the court did not delve into this topic, it may be worth noting that Rizo was moving from Arizona to California.  As all of us know, wages vary significantly in differing geographies.  Thus, a difference in prior salary may very well be based on the geography of the prior employment rather than perpetuating sex-based pay discrimination.

Frankly, the Ninth Circuit’s decision was somewhat unexpected, given its reputation as being among the most liberal (i.e. employee-friendly) Circuits. Its decision lies diametrically opposed to the position of the Equal Employment Opportunity Commission (which is the federal agency that enforces the EPA) and other federal appellate courts, as well as a recent legislative trend banning the use of pay history.

The EEOC takes the position that prior salary alone cannot constitute a differential based on any other factor than sex. This position essentially assumes that all women have been subjected to unlawful pay discrimination by prior employers, which would render prior salary alone a sex-based consideration.

Some other federal Circuit Courts have agreed with the EEOC’s position. For example. the Tenth Circuit in Angove v. Williams-Sonoma, Inc., held that, “The EPA only precludes an employer from relying solely upon a prior salary to justify pay disparity.” In Irby v. Bittick, the Eleventh Circuit stated that, “Appellees cannot defend paying [Appellant’s male comparator] more than [Appellant] simply because of the pay schedule of Jones and Evans’s previous employer.” The same court also found, in Price v. Lockheed Space Operations Co., that “[t]he legislative history thus indicates that the ‘factor other than sex’ exception applies when the disparity results from unique characteristics of the same job; from an individual’s experience, training, or ability; or from special exigent circumstances connected with the business.”

Of particular note, this issue has become a hot topic in the legislative arena, with several jurisdictions banning the use of pay history to set pay. The stated rationale underlying these laws essentially adopts the EEOC’s position – that a historical gender wage gap exists, with women receiving a significantly lower rate of pay for similar work as men, and basing pay on prior pay history perpetuates that gender gap. Massachusetts, Philadelphia, and New York City have all passed laws preventing prospective employers from requesting or using pay history. The New York City law is set to go into effect in October 2017, and the Massachusetts law is set to take effect in 2018.

Notably, the implementation of the Philadelphia bill is delayed due to a lawsuit filed by the Chamber of Commerce for Greater Philadelphia. The Chamber asserts that the law violates:

• employers’ First Amendment right of free speech to ask about and rely on pay history,

• employers’ due process rights under the Fifth Amendment because it imposes severe penalties for violations of vague statutory prohibitions,

• the Commerce Clause of the U.S. Constitution because it has extraterritorial effect that burdens interstate commerce, and

• the Pennsylvania Constitution and Home Rule Act because it impacts those who neither work nor live in Philadelphia.

It will be interesting to see if any of these arguments find support from the court – if it does, that may embolden others to challenge similar legislation elsewhere. In the meantime, however, similar bills are being proposed in jurisdictions all over the country and we would expect this legislative trend to continue.