On April 19th of this year, the Ninth Circuit Court of Appeals held that employers cannot consider an employee’s prior salary, either alone or in combination with other factors, to justify salary differentials between male and female employees. This decision increases employer liability for Federal Equal Pay Act[i] (“EPA”) claims brought by workers in California, Nevada, Idaho, Montana, Arizona, Oregon, Washington, Alaska, and Hawaii; and applies to employers in both the public and private sectors.

The Court’s decision in the local case of Rizo v. Yovino[ii] explicitly overturned the court’s longstanding 1982 ruling in Kouba v. Allstate Ins. Co.[iii], as well as an earlier 2017 Ninth Circuit decision in Rizo (based on Kouba), which held that prior salary is a “factor other than sex” that can be considered in setting an employee’s salary if an employer establishes that the use of prior salary was “reasonable and effectuated a business policy.”

Rizo v. Yovino – The Case

Aileen Rizo was hired by the Fresno County Superintendent of Schools (Yovino, hereinafter “County”) as a math consultant in 2009. The County based her new salary on its Standard Operating Procedure (“SOP”), which consists of ten stepped salary levels based on prior salary. The SOP does not consider other factors such as experience and education. Rizo’s salary was determined by adding 5% to her prior salary and placing her on the corresponding step of County’s salary schedule. In 2012, Rizo was informed that her later-hired, less qualified male counterparts had been hired for the same position at substantially higher salary steps. Rizo filed a complaint with the county, and eventually filed suit for violation of the Equal Pay Act, the Civil Rights Act, and California Government Code section 12940(k) in 2014.

In court, the County stipulated that Rizo was being paid less than males in her position for doing the same job, but contended that the wage difference was not based on gender, but on prior salary – a factor they did not consider to be discriminatory. The County filed a Motion for Summary Judgment based on the theory that prior salary is a valid factor “other than sex” allowing for lawful wage differences under the Equal Pay Act.

The District Court denied that motion, stating that the County’s Standard of Procedure “unavoidably conflicts” with the EPA and would perpetuate wage disparity in a way that “cannot stand.” County filed an interlocutory appeal, in which a three judge panel from the Ninth Circuit vacated the district court’s denial of the Summary Judgment Motion based upon Kouba and remanded the case back to the District Court. Upon petition for rehearing, the Ninth Circuit agreed to review the matter to clarify the law, including the effect of Kouba.

The entire bench of the Ninth Circuit reviewed the case and agreed with the District Court’s prior finding that the County’s wage-setting policy conflicts with the Equal Pay Act and cannot be used as a valid defense to a pay discrimination claim, stripping the County of its only affirmative defense.

The Ninth Circuit’s Reasoning: Comply With the Intent of the Equal Protect Act

The Court based its decision on the Federal Equal Pay Act, passed in 1963 as an amendment to the Fair Labor Standards Act, which created additional law prohibiting wage disparities based on sex. The Equal Pay Act requires employers to pay equal wages for all jobs performed that require the same level of skill, effort, and responsibility that are performed under similar working conditions.

Exceptions to the Equal Pay Act have been analyzed, scrutinized, and interpreted since the Act was passed. EPA exceptions for differing wages include those wage differentials based on:

1. a seniority system;
2. a merit system; and
3. a system measuring earnings by quantity or quality of production (productivity).

The fourth (and most disputed) exception, a “catchall,” allows wage differentials “based on any other factor other than sex.”

In Rizo, the County did not dispute that they paid Rizo less than male employees for the same work. They instead argued that considering her prior salary to set a lower wage fell within the catchall exception as a “factor other than sex”. The Court disagreed, stating prior salary is not a “job related” factor, and cannot legitimately measure experience, ability, work performance, or other qualities which may justify a higher (or lower) salary being set for the same work.

In the Court’s majority opinion, Justice Reinhardt reasoned prior salary must not be allowed in determining salaries under the EPA because doing so would “allow employers to capitalize on the persistence of the wage gap…contrary to the text and history of the Equal Pay Act, and vitiate the very purpose for which the Act stands.” The Court, in its majority and concurring opinions repeatedly mentioned the fact that despite the EPA having been in effect for 55 years, the wage gap between men and women continues to exist in modern society. Today, women make eighty cents for every dollar a man makes for the same job across virtually all fields, and minorities make even less, perpetuating income inequality brought about in days gone by.

The Court interpreted the EPA based upon the spirit of the Act and Congress’ intent in passing the Act, the goal of which was to eliminate long-existing, widespread sex-based wage disparities, “not only related to sex but caused by sex.” They further asserted the County’s argument cannot be accepted because this inequality will continue if employers are allowed to decide to pay women less for the same work based on prior salary, continuing rather than eliminating “the pervasive discrimination at which the Act was aimed.” Taking a woman’s prior lower salary into consideration continues the discriminatory cycle which has prevented women from making as much money as similarly situated male counterparts for doing the same job.

The Court concluded “factor(s) other than sex” that can justify wage inequity will now be limited to legitimate job-related factors like education, experience, and ability, to name a few. This decision will require employers asserting the “catchall” defense to provide evidence that a difference in wages between the sexes is in fact based upon legitimate job-related reasons. Because a system (such as County’s SOP) that has no discriminatory intent can still cause discriminatory results, Plaintiffs will not be required to prove discriminatory intent on the employer’s part.

Although the entire panel agreed that County could not use prior salary as a “factor other than sex,” concurring judges including McKeown, Murguia, Callahan, and Tallman disagreed that any consideration of prior salary should not be allowed under the EPA, concerned that to do so ignores the realities of business.

While the Court indicated that this ruling was to become black letter law, the ruling is meant to be applied to company policies, and is not necessarily meant to be applied in all circumstances, including individualized salary negotiations where the employee has offered prior salary information. The Court’s decision clarified that the ruling should not be considered a bar to consideration of past salary under every circumstance, stating: “We prefer to reserve all questions relating to individualized negotiations for decision in subsequent cases.”

CA Law Counterparts

Ahead of the curve, California’s Equal Pay Act offers some of the strongest protections in the nation for its employees. The most recent amendments added provisions for race and ethnicity-based wage discrimination claims to match gender-based rules already in effect. The Act applies to all public and private sector employers of any size and requires equal pay for for “substantially similar work;” eliminates the requirement that employees being compared work at the “same establishment;” makes it more difficult to prove a “factor other than sex/race/ethnicity” defense; ensures that pay-based factors are legitimate, applied reasonably, and account for the entire pay difference; makes retaliation against employees who seek to enforce the law illegal; prevents employers from banning discussion of wages; and extended the number of years employers must retain wage and employment records for three years.

As of January 1, 2018, California Labor Code §432.3 (A.B. 168) prohibits employers from asking applicants for their salary or benefit history both personally or through an agent, and provides additional protections against an employer basing salary offers on salary history. It does not, however, prevent employees from disclosing salary information willingly. To do so allows an employer to legally take that information into consideration, as long as past salary is not the sole factor used to justify a lower salary paid for equal work. Finally, employers must provide a salary payscale to applicants for the job they are seeking, if it is requested.

The Effect of Rizo On Ninth Circuit Employers

It is worth noting that circuit courts in the Eleventh and Second Circuits agree with the Ninth Circuit’s conclusions on this matter although the current decision contradicts the holdings of other federal circuits. The Fresno County Office of Education has indicated that it will petition for review with the United States Supreme Court to reverse this decision, but the law should be followed according to this ruling in the meantime.

As the law stands today, employers doing business within the Ninth Circuit may be in violation of both the Federal Equal Pay Act and various California rules if any consideration is given to an employee’s prior salary in setting their wages, unless an exception described above can be proved. As such, employers should review their hiring practices to exclude prior salary questions in applications and interviews, and take prior compensation out of any consideration being made to determine starting salaries to avoid the risk of liability for claims that salary information was used to make wage-setting decisions. If an applicant chooses to disclose prior salary, that voluntary disclosure should be documented in writing, as should any request for pay scale information.

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1. [i] Equal Pay Act (29 U.S.C. §206(d))
2. [ii] Rizo v. Yovino/Fresno County Office of Education (9th Cir. 16-15372 4/9/18.)
3. [iii] Kouba v. Allstate Ins. Co., 691 F.2d 873 (9th Circ. 1982)