Last June, we reported on a major decision by the Ninth Circuit U.S. Court of Appeals which interpreted the federal Equal Pay Act of 1963. In Rizo v. Yovino, the court ruled that a pay differential based on the employer's use of an employee's prior salary may be the basis for a defense to an equal pay claim under federal law.

Earlier this month, however, the Ninth Circuit overruled its original decision in Rizo and issued a new decision with a very different conclusion. Under the new decision, an employer cannot justify a wage differential between male and female employees by relying on prior salary.

The new decision in Rizo, like the original one, only involves federal law, and is not binding on California state courts when deciding cases under California's equal pay law. However, the Ninth Circuit's new decision is consistent with a new California Labor Code provision on which we reported last fall. That law goes even further and prevents employers from even asking about a job applicant's prior salary history, or from relying on that history unless the applicant volunteers that information. Additionally, California laws make clear that an employer cannot justify a disparity in pay between male and female employees based on prior salary alone.

Under the federal Equal Pay Act, employers cannot pay wages to employees "at a rate less than the rate" paid to "employees of the opposite sex" for jobs that require "equal skill, effort, and responsibility." A key defense to the federal act is if the pay differential is "based on any factor other than sex."

In the Rizo case, the Fresno County Office of Education admitted that it paid Aileen Rizo less than male employees for the same work. Nevertheless, it claimed that this differential was legal because it was caused by Ms. Rizo's salary in her prior position in Arizona, which it argued was a "factor other than sex." A federal district judge rejected this argument.

The Ninth Circuit granted the County permission to appeal this decision. Most federal appeals are decided by panels of three judges. The original three-judge panel in Rizo relied on a 1982 Ninth Circuit decision ( Kouba v. Allstate Insurance Co .) which permitted prior salary, by itself, to qualify as a "factor other than sex," as long as that factor "was reasonable and effectuated some business policy." The Ninth Circuit panel sent the case back to the trial court to decide whether the pay differential was lawful under the standard in Kouba .

However, Ms. Rizo asked the full Ninth Circuit to reconsider this decision. A majority of Ninth Circuit judges granted Ms. Rizo's request, and agreed to have the case decided "en banc," by a panel of 11 appellate judges. The new Ninth Circuit decision was one of the last ones written by Judge Stephen Reinhardt, who served on the court for over 37 years and was one of its most liberal judges. Although Judge Reinhardt died two weeks before the opinion was published, he had finished the opinion by that time.

Judge Reinhardt's decision for the Ninth Circuit overruled the 1982 Kouba decision, and declared that "prior salary alone or in combination with other factors cannot justify a wage differential" between employees of different genders. The court stated that "the financial exploitation of working women embodied by the gender pay gap continues to be an embarrassing reality of our economy." It reasoned that "to allow employers to capitalize on the persistence of the wage gap," and to keep perpetuating it into the future, would contradict the text, history, and purpose of the federal Equal Pay Act.

Under the Ninth Circuit's new decision, the defense of "any other factor other than sex" means only "legitimate, job-related factors." Examples include the employee's "experience, educational background, ability, or prior job performance." The court concluded that prior salary "is not job related" under this standard.

Despite the broad language of its decision, the Ninth Circuit stated it was only expressing "a general rule," and was not deciding how the rule would be applied "under all circumstances." In particular, the court did not decide whether "past salary may play a role in the course of an individualized salary negotiation," or "under what circumstances" such a negotiation might be lawful.

For these reasons, the Ninth Circuit agreed with the original District Court decision, which rejected the County's "factor other than sex" defense, and sent the Rizo case back to the District Court to decide whether Ms. Rizo is entitled to judgment in her favor, or whether the case should go to trial. All 11 judges on the Ninth Circuit panel agreed with this result. However, five of the 11 judges thought Judge Reinhardt's decision for the majority went too far, and would have permitted prior salary to be used as a factor in some circumstances.

What This Means For You

In light of Rizo , both federal and state law now prohibit California employers from relying on prior salary history to justify a pay differential between male and female employees. California law goes further and prohibits employers from even asking for a job applicant's salary history, either on an employment application or by other means. California employers also cannot rely on an applicant's salary history as a factor in deciding whether to make a job offer, or determining what amount of salary to offer a job applicant, unless the applicant voluntarily provides that information.

California law still permits an employer to ask an applicant how much he or she desires to be paid in the new position. This also appears to be lawful under the federal Equal Pay Act, although the Ninth Circuit did not decide this issue in Rizo .

It is possible that the United States Supreme Court will decide review the Ninth Circuit decision in Rizo . However, such a decision would only address the federal Equal Pay Act, and would have no impact on the recent changes to the California Labor Code.

Even before these recent changes in California and federal law, it was essential for California employers to articulate a well-reasoned basis for all pay setting decisions, separate and apart from prior salary history. Now, California employers must avoid using prior salary altogether, unless a job applicant voluntarily decides to reveal that history. Even then, a disparity in pay cannot be justified by prior salary alone.

If you have any questions about the matters discussed in this issue of Compliance Matters, please call your firm contact at (818) 508-3700, or visit us online at www.brgslaw.com.

Sincerely,
John J. Manier
Richard S. Rosenberg
Katherine A. Hren
Ballard Rosenberg Golper & Savitt, LLP