Jan 14, 2016 / Insight

California Fair Pay Act: Less Scary Than It First Seems?

Insights from Existing Case Law Can Help Employers Comply with the New Equal Pay Regime

Few legislative developments in recent California history have prompted as much fear and gnashing of teeth in the business community as the recently enacted California Fair Pay Act, which was signed into law on October 6, 2015 and went into effect on January 1, 2016.

The bad news is that there are good reasons to worry about the legal uncertainties and litigation risks posed by the new Act (which replaced the Equal Pay Act), and it is too early to predict how the new legal standards under the Act will play out.

The good news is that in the meantime California employers can meaningfully mitigate those uncertainties and risks by focusing on compliance with key standards of conduct that already exist under current California case law.

The new Act replaces the equal work standard of the Equal Pay Act with a substantially similar standard. According to the new law, substantially similar work should be viewed “as a composite of skill, effort, and responsibility,” performed under similar working conditions. This vague standard makes employers nervous, and rightfully so.

What does “substantially similar work” mean?  For two positions to be substantially similar, will it be required that each element of skill, effort, and responsibility meet some common threshold? Or will those factors be evaluated on some composite standard?  All of this remains to be determined by the courts in litigation.

Until there is guidance from the courts, an attempt to conform pay structures to the new criterion is likely a fool’s errand.  What employers should do instead is focus their attention on the defenses and exceptions under the new law, and specifically the permitted pay inequalities that are the same under the new Act and the old Equal Pay Act.

Both laws use similar language to describe defenses for pay discrepancies. The old law allowed unequal pay between genders when the difference was due to a seniority system, merit system, system which measured earnings by quantity or quality of production, or any bona fide factor other than sex. The new law keeps the old exceptions. The new law further clarifies that a bona fide factor other than sex will only support a pay difference when the employer can demonstrate that the factor is not related to sex-based differences, is job related with respect to the position in question, and is consistent with a business necessity.

Although the old law did not contain this qualifying language, cases that dealt with a defense based on a bona fide factor can serve as a valuable source of information as to how this factor may be decided under the new law.

For instance, in Green v. Par Pools Inc., the court agreed with the employer that prior work experience qualified as a bona fide factor and justified pay differences. 111 Cal. App. 4th 620, 626 (2003). Specifically, the plaintiff spent two years outside the employer’s industry and required training. Id. Similarly, in Stanley v. Univ. of S. California, the employer demonstrated that a pay differential was based on a bona fide factor. 178 F.3d 1069, 1075 (9th Cir. 1999). This case involved a female basketball coach who was paid less than her male counterpart. Both coaches had significant coaching experience: the male had 31 years of coaching experience whereas the female had 17 years. Id. at 1076. Nevertheless, the 14 years difference between their coaching involvements was an important factor in the court’s decision. Id. Furthermore, factors such as the female coach’s lack of basketball related publishing experience or marketing and promotional experience weighed in favor of holding the pay difference nondiscriminatory. Id.

The defendant employer also prevailed on the argument that pay inequality was caused by a factor other than sex in Cooper v. United Air Lines, Inc. 82 F. Supp. 3d 1084, 1099 (N.D. Cal. 2015). The court held that the hiring policies were gender neutral when the employer set different compensation ranks for supervisors. In that case, the employer set different pay for union workers promoted to supervisory positions, for managers hired internally from other management positions, and for mangers hired externally. Id.

As these cases demonstrate, not only the most obvious factors, such as the number of years of experience, are important to the courts. With the more defined standard of a bona fide factor under the new law, it is important to apply common sense. Although the employer will have to prove that the applied factor is related to the position in question and is a business necessity, each of the situations described in the above-mentioned cases appears to also meet this standard.

For instance, it is easy to imagine that setting different compensation for supervisory positions as in Cooper v. United Air Lines, Inc., depending on whether the hire was external or internal, is a business necessity. Such a practice can be used to ensure that management-level employees mainly come in as the outside hires, if the employer can articulate a business rationale for that preference.

Most importantly, the precedent shows that courts will trust businesses to make business judgments without imputing a discriminatory motivation.

Thus, until there is a body of case law determining what constitutes substantially similar work under the new Act, employers should take a closer look at their businesses and decide whether pay differences between men and women can be justified by any of the defenses offered by the new law.