California Governor Jerry Brown signed the California Fair Pay Act (SB 358) into law on October 6, 2015 to become effective January 1, 2016. Although there are state and federal laws already in place to address pay inequality (i.e., the California Equal Pay Act and the very similar Federal Equal Pay Act), the California Legislature intends the new Fair Pay Act to increase pay transparency and further close the alleged gender wage gap in California. The California Legislature also intends, however, the amended California Equal Pay Act to expose California employers to greater pay discrimination liability, creates ambiguities which will likely augur more equal pay litigation and will likely increase the number of pay discrimination claims which must be resolved by jury trial and all of its attendant costs.
SB 358 makes the following key changes to the existing law:
• Eliminates the requirement that the wage differential be in the same establishment;
• Changes the “equal work” requirement to a requirement that the work only be “substantially similar”;
• Increases the employer’s defense burden such that the employer must now affirmatively “demonstrate” that the wage differential is based on a seniority system, a merit system, a system that measures earning by quantity or quality of production, or a bona fide factor other than sex (such as education, training, or experience). To use the “bona fide factor other than sex” defense, the employer must demonstrate that the factor is not based on or derived from a sex-based differential in compensation, is job related, and is consistent with business necessity (i.e., an “overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve.”) The “bona fide factor other than sex” defense will fail if the employee can demonstrate that an alternative business practice exists that would serve the same business purpose without the wage differential.
• States that employers shall not prohibit an employee from disclosing the employee’s own wages, discussing the wages of others, inquiring about another employee’s wages, or aiding or encouraging any other employee to exercise his or her rights under the Act.
• Prohibits discharge, discrimination, or retaliation of an employee for asserting his or her rights under the Act.
• Permits an employee who has been discharged, discriminated or retaliated against for engaging in any conduct permitted by the Act, to recover in a civil action reinstatement, reimbursement for lost wages and interest, an equal amount as liquidated damages, lost benefits, and other equitable relief so long as the claim is brought within one year of the prohibited conduct.
• Increases the length of time during which employers must maintain records of employees’ “wages and rates of pay, job classification, and other terms and conditions of employment” from two years to three years.
Existing law prohibits an employer from paying employees of one sex at a wage rate less than the rate paid to employees of the opposite sex in the same establishment for equal work on jobs, the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions. There is an exception to this prohibition if the payment is made pursuant to a seniority system, merit system, a system which measures earnings by quantity or equality of production, or a differential based on a bona fide factor other than sex. Under the current law, an employer is guilty of a misdemeanor if it pays an employee, or causes an employee to be paid, a wage less than the rate paid to an employee of the opposite sex in violation of the California Equal Pay Act.
Because the Act substantially reduces a complaining employee’s burden of proof by eliminating the “same establishment” requirement and requiring only that the comparator employees perform “substantially similar” work, while simultaneously increasing the employer’s defensive burden of proof, California’s new Fair Pay Act is arguably the strictest in the nation. The new Act not only expands potential liability for employers, it creates ambiguity as to what constitutes “substantially similar” work, as the Act does not provide a definition for this term. The result is that the Act will undoubtedly force employers to defend more unequal pay complaints from employees who work in different geographic locations and/or perform jobs that differ from their alleged comparator(s).
In preparation for the California Fair Pay Act, employers should:
• Review and modify compensation policies and employee handbooks to ensure compliance with the Act, including eliminating any policies that prohibit employees from discussing pay;
• Review job descriptions and employee salaries to ensure pay differentials are justified and defendable per the standard set forth above;
• Modify record retention policies and practices in light of the new three-year requirement;
• Provide internal training to supervisors who make decisions regarding employee pay and train all supervisors regarding employees’ right to discuss pay.
Alexa L. Morgan