California’s Fair Pay Act: What is it and What Should Employers Do?

Under the Act, employers must maintain hiring and compensation records for three years, and employers cannot stifle discussions between its employees regarding pay, and, most concerning, the Act lessens the evidentiary standard for employees to prove a sex-based pay discrimination claim. Employers could now face significant liability under the Act, which does not resolve complicated questions regarding how to properly comply with the new requirements. As a result, we expect to see more pay discrimination complaints and lawsuits in the years to come.

New Evidentiary Standard

Existing law prohibits employers from paying employees “at wage rates less than the rates 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.” The Act eliminates the “same establishment” requirement and replaces the “equal work” standard with a “substantially similar work” standard. In practice, this means that employees will be able to compare their pay rate to employees of the opposite sex who hold different jobs or are located at a different worksite. For example, a female housekeeper who cleans hotel rooms in Fresno may claim pay discrimination based on sex by comparing her pay to the male custodian who cleans a hotel lobby in Los Angeles.

The Act not only lessens employees’ evidentiary burden to prove that they were discriminated against on the basis of sex with respect to pay, but also raises the bar for employers to justify those pay differences. Employers must now prove that differences in wages are entirely and reasonably based on a seniority system, merit system, a system that measures earnings by quantity or quality of production, education, training, experience, or a bona fide factor other than sex. The Act also makes it more difficult for employers to rely on the last factor. It now requires the employer to affirmatively demonstrate that the factor is “not based on or derived from a sex-based differential in compensation, is job related with respect to the position in question, and is consistent with business necessity.” Adding to these difficult requirements, employees will now have an opportunity to rebut the employer’s showing of a bona fide factor other than sex by demonstrating that “an alternative business practice exists that would serve the same business purpose without producing the wage differential,” without expressly requiring that the employer must have had notice of the alternative or that the alternative is reasonable.

The following is a list of questions that employers may confront in defining policies and practices to comply with the new law:

• How does the company determine whether two positions are substantially similar?
• What factors can be considered in determining pay?
• Should the company consider a candidate’s prior salary as a basis for setting compensation for the new hire?
• If a company hires a new candidate at a certain salary level, does it need to increase existing employee compensation doing “substantially similar” work to that same salary level?
• Is it acceptable to factor in cost of living, store sales volume, and other market conditions when establishing compensation? 
• What qualifies as a business necessity? 
• How can the company justify pay disparities across locations under different supervisors, managers and/or decision makers? 
• How can the company ensure fair pay systems without conceding that two positions are substantially similar in the event of a claim or future litigation? 
• What remedial measures can be taken without being accused of wrongdoing? 
• When an employer evaluates these factors, is that something people who file a claim or lawsuit are entitled to review? 
• How does the company ensure that employee salary is not affected by implicit sex bias? 

Legal counsel can help employers consider and navigate the many complicated questions raised by the Act, and allow employers to avail themselves of the protections of the attorney work product doctrine and attorney-client privilege, which may be especially useful for the inherently complicated legal analysis on which positions might be considered “substantially similar.”

What Employers Can Do Now

There are several steps to consider now to limit exposure to liability and minimize the risk of legal noncompliance.

1. Audit the Company’s Pay Systems

An audit of pay systems can help employers identify and evaluate pay disparities, if any exist. Of course, documenting any audit is crucial to demonstrating the fact of an audit, the audit methodology, whether and why changes in pay were made, and that any remaining pay disparities are justified. The audit should compare positions across locations to determine which ones require substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions. Employers should also audit their bonus policies for legal compliance. Inclusion of outside counsel in this process will ensure attorney-client and attorney work product protections.

If an audit suggests that changes are in order, certain changes to the employers’ pay systems may be recommended, including:

• Establish base rates for hourly positions.
• Establish objective legitimate criteria for departures from the base rate with monetary values assigned to each criteria.
• Establish salary bands for each salaried position.
• Establish objective legitimate criteria used to determine where salary should fall within the range for the position.
• Avoid perpetuating implicit sex bias in pay by no longer using prior compensation to determine new hire compensation.
• Enact policies and practices to document the specific criteria actually used to set pay for each new hire and for each pay increase or bonus.

2. Revise Record Retention Policies

The Act expands employers’ record-retention obligations from two years to three. As a result, record retention policies should be revised such that records of the wages and wage rates, job classifications, and other terms and conditions of employment are maintained for three years.

3. Allow Employees to Discuss Their Pay

The Act reaffirms that employers cannot 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. Employers, however, are not obligated to disclose wages to inquiring employees.

4. Update Company Policies

All handbooks and policies referencing compensation should be reviewed and revised to ensure they are consistent with applicable law. Employers should make sure that their Equal Employment Opportunity policy prohibits pay discrimination on the basis of sex. Anti-discrimination and non-retaliation policies should also be revised to prohibit retaliating or discriminating against employees who take action to invoke the Act or assist in any manner with the enforcement of rights thereunder.

5. Update Written Job Descriptions

Employers should maintain accurate, up to date, detailed, written job descriptions. Job descriptions should properly reflect the current responsibilities and duties of each position. Written job descriptions can serve as useful tools in distinguishing positions and in justifying pay differences both for audit purposes and in the event of litigation.

6. Provide Training to Supervisors and Other Decision Makers

Employers can minimize risk of liability by having more informed supervisors and other decision makers. It is critical that these individuals understand the factors that can be legitimately considered in determining pay and that they do not subjectively assign a monetary value to objective standards when setting pay. Employers should also consider providing training on pay discrimination and/or implicit sex bias in conjunction with the sexual harassment training already provided to supervisory staff.