Salary History Not Always a Defense to Equal Pay Act Claims

Historically, an employer has been able to defend against a claim of sex-based salary discrimination under the Equal Pay Act by establishing that, at least in part, it based the challenged compensation decision on an employee's prior salary. But courts and lawmakers have expressed growing concern that using prior compensation data to set new employees' initial salaries perpetuates the very gender-based pay disparities that Congress intended the Equal Pay Act to eliminate.

The Ninth Circuit's recent en banc decision in Rizo v. Yovino, No. 16-15372 (9th Cir. Apr. 9, 2018) (en banc), is representative of a broader trend away from allowing employers to use salary history as a defense against claims of pay discrimination in violation of the Equal Pay Act. In addition to increased judicial scrutiny, a growing number of states and municipalities have proposed and enacted laws prohibiting employers from using salary history as a baseline for prospective employees' initial compensation rates. In the face of this mounting concern, employers should think twice before using compensation history during the hiring process.

The Equal Pay Act

The Equal Pay Act prohibits employers from discriminating between employees on the basis of sex by paying disparate wages to employees of a particular sex "for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions." 29 U.S.C. § 206(d)(1). Employers can defend a difference in pay between employees of opposite sexes by establishing that the difference results from "(i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production; or (iv) a differential based on any other factor other than sex." Id.

Employers often have looked to the broad, catch-all affirmative defense allowing pay disparities to be "based on any other factor other than sex" to defend against Equal Pay Act claims. For example, employers may proffer evidence that they set compensation based on factors like education, relevant job experience, specialized skill and prior salary. But courts and lawmakers have begun to view employers' use of prior salary with suspicion, expressing concern that using historical pay rates to set new hires' compensation ingrains the gender-based pay disparities that Congress designed the Equal Pay Act to eliminate. For example, a prospective female employee's prior compensation may be lower than her male counterpart's prior compensation due to historically discriminatory pay practices. By using the female candidate's lower salary to set her compensation going forward, employers perpetuate longstanding gender-based pay disparities. Courts and legislatures have become increasingly mindful of this risk.

Rizo v. Yovino

Most recently in Rizo, the en banc Ninth Circuit foreclosed employers' use of prior salary as an affirmative defense to Equal Pay Act claims, overruling its contrary precedent. The Ninth Circuit held that the catch-all affirmative defense for setting compensation based on "any other factor other than sex" is limited to "legitimate, job-related factors such as a prospective employee's experience, educational background, ability, or prior job performance." Because, the court reasoned, prior salary "is not a legitimate measure of work experience, ability, performance, or any other job-related quality" and bears only an "attenuated" relationship to an employee's "training, education, ability, or experience," an employer must set compensation based on employees' underlying qualifications rather than their prior salaries. The court emphasized that to hold otherwise would be to perpetuate "the past pervasive discrimination that the Equal Pay Act seeks to eradicate."

As a result of its conclusion that salary history is not a "legitimate, job-related" factor, the Ninth Circuit held that employers may not use prior salary alone or in combination with other factors to establish the catch-all affirmative defense. Notwithstanding Rizo, there may still be certain circumstances in which employers in the Ninth Circuit can use salary history in setting compensation. In particular, the Rizo court left unresolved whether and in what circumstances "past salary may play a role in the course of an individualized salary negotiation." This creates a potential conflict by suggesting that employers may, in some circumstances, use prior compensation as a factor when setting an employee's salary while simultaneously holding that prior compensation cannot be cited as a "factor other than sex" when defending against an Equal Pay Act claim. For this reason, employers in the Ninth Circuit should carefully consider whether to forgo considering prior compensation altogether and, instead, base initial compensation on the types of "legitimate, job-related factors" the Rizo court viewed favorably: experience, education, ability, prior performance and training.

A Deepening Circuit Split

The Ninth Circuit's decision in Rizo highlights a deepening circuit split regarding whether employers may rely on prior salary as a "factor other than sex" in defending against an Equal Pay Act claim. The Eleventh Circuit, for example, prohibits employers from using prior salary alone to justify a pay disparity between employees of opposite sexes who perform equal work. See, e.g., Irby v. Bittick, 44 F.3d 949, 955 (11th Cir. 1995). But, unlike the Ninth Circuit, the Eleventh Circuit has held that "an Equal Pay Act defendant may successfully raise the affirmative defense of 'any other factor other than sex'" by pointing to prior salary in combination with other factors, such as experience or education. Id. The 7th and Eighth Circuits also have permitted employers to cite prior salary in combination with other factors to establish the catch-all affirmative defense. Taylor v. White, 321 F.3d 710, 720 (8th Cir. 2003) ("[W]e believe a case-by-case analysis of reliance on prior salary or salary retention policies with careful attention to alleged gender-based practices preserves the business freedoms Congress intended to protect when it adopted the catch-all 'factor other than sex' affirmative defense."); Covington v. S. Ill. Univ., 816 F.2d 317, 322–23 (7th Cir. 1987) (permitting an employer "to consider the wages it paid an employee in another position unless this policy is discriminatorily applied or unless there is evidence independent of the policy which establishes that the employer discriminates on the basis of sex").

The Rizo court's outright prohibition against employers' use of prior salary, whether alone or in combination with other factors, complicates the patchwork of judicial decisions regarding when and how prior salary can be used as a defense in Equal Pay Act cases. This deepening circuit split increases the likelihood that the U.S. Supreme Court may weigh in on this issue. Until then, employers – particularly those with operations in multiple states – should be wary of relying upon prior salary to justify compensation decisions. 

The Legislative Front

In addition to competing judicial decisions, employers should be aware of the growing number of states and municipalities proposing and enacting laws prohibiting the use of prior salary to set initial compensation. Typically, these laws prohibit employers from inquiring about prospective employees' wage histories during the hiring process, including on applications and during interviews. In the past year, California, Delaware, New York City and Oregon, among others, have enacted such laws, with coverage extending to private-sector employers. Although neither North Carolina nor South Carolina currently prohibits employers from using prior salary to set initial compensation, there is proposed legislation in North Carolina that would bar employers from screening candidates based on their salary histories and from seeking candidates' salary histories until after making an offer of employment with compensation.

As federal law regarding whether and to what extent employers may consider prospective employees' prior salaries in setting compensation, plaintiffs may seek the certainty provided by the growing number of state laws that prohibit employers' consideration of applicants' salary histories. Some experts advise employers to be on the lookout for an increase in the number of state-law class actions alleging pay discrimination.

Next Steps

Employers may take a number of steps in the face of courts' and legislatures' increased focus on the use of prior salary and its interaction with the Equal Pay Act and pay equity principles generally.

In jurisdictions in which employers are prohibited from inquiring about or making compensation decisions based on salary history, employers should revise their job applications and interview processes accordingly. In jurisdictions in which employers are permitted to consider prior salary in combination with other factors, employers should ensure that compensation decisions are not based on salary history alone. And even in jurisdictions in which employers may set compensation based solely on prior salary, employers should consider revising their compensation policies to focus on the underlying characteristics on which a candidate's prior salary is based, rather than on the salary itself. For example, employers may consider shifting their focus toward candidates' relevant experience, educational background, specialized training and job-related skills. In so doing, employers increase the number of "factor[s] other than sex" that they can cite as affirmative defenses to future claims under the Equal Pay Act.

For more information regarding pay equity principles and affirmative defenses under the Equal Pay Act, please contact Robinson Bradshaw's Employment and Labor Practice Group.