Oct. 6, 2015 Governor Brown Signs Historic California Fair Pay Act, Imposing New Standards on California Employers

Summary

Yesterday, Governor Jerry Brown signed Senate Bill 358 ("SB 358"), also known as the California Fair Pay Act (the "FPA"), which has been described as the toughest equal pay law in the nation.  The FPA, which goes into effect on January 1, 2016, amends California's Equal Pay Act (the "EPA"). 

Discussion

Presently, the EPA prohibits employers from paying any employee less than the rate paid to opposite sex employees in the same establishment for equal work, on jobs that require equal skill, effort and responsibility, and which are performed under similar working conditions.  This is consistent with federal law.

The FPA was created to close perceived legal "loopholes" in the EPA.  It makes the following key changes to the law:

1.  "Substantially Similar Work" Standard

Existing law only applies to "equal work" on jobs requiring "equal skill, effort, and responsibility" performed under similar working conditions.  The FPA significantly broadens the equal pay requirement by applying it to "substantially similar work." 

2.  No More "Same Establishment" Limitation

Existing law only allows for pay comparisons between comparable employees working in the "same establishment," defined as a distinct physical place of business, as opposed to an entire business or enterprise.   The FPA will allow comparisons across different company locations. 

3.  Changes to Employer Defenses and Burdens of Proof

Existing law allows an employer to justify a pay differential based on a "seniority system, a merit system, a system which measures earnings by quantity or quality of production, or a differential based on any bona fide factor other than sex." 

Under the FPA, an employer can still justify a wage differential based on use of a seniority or merit system, or a system measuring quantity or quality of production.  However, the FPA narrows the scope of the "catch-all" exception, only allowing pay differentials based on a "bona fide business factor other than sex."

The FPA defines a "bona fide business factor" as: "(1) not based on or derived from a sex-based differential; (2) job-related with respect to the position in question; and (3) consistent with business necessity."  "Business necessity" is defined as an "overriding business purpose" that "effectively fulfills the business purpose it is supposed to serve."  Examples of bona fide business factors are "education, training, or experience."

In addition, where an employer establishes a bona fide business factor as the reason for a pay differential, the FPA states the defense will not apply if the employee demonstrates an alternative business practice exists that would serve the same business purpose without producing the wage differential.  Finally, an employer must demonstrate any justifications relied upon are applied reasonably and account for the entire wage differential, not just a portion of it.  

4.  Anti-Retaliation Provision

Unlike the EPA, the FPA expressly prohibits retaliation against any employee for complaining about unequal pay.  This specifically includes employee inquiries about, or discussion concerning, their compensation.  However, the law does not require employers to disclose employees' pay.

What This Means

Under the FPA, employees will be able to compare their pay to others in a broader group of jobs.  It will also be more difficult for employers to justify any pay differentials between employees of different genders.  While the new law is clearly broader, the full extent of the changes will not be known until courts begin to interpret the new standards.  However, several issues are likely to be important:

  • Showing that two jobs are "substantially similar" is a lower burden than showing two jobs are "substantially equal."  For example, under the FPA, a female mechanical engineer could argue she should earn as much as a higher paid male software engineer because their work is "substantially similar."  Or, a housekeeper might argue her job is substantially similar to that of a janitor.     

  • Elimination of the "same establishment" provision will allow employees to compare their pay with colleagues in other locations.  For example, a nurse working in Bakersfield might argue she is entitled to earn as much as her male colleague working for the same employer in San Francisco.  While the cost of living may be a justification for a pay differential under current law, this justification is not expressly contained in the FPA, and will have to be analyzed under the new standards.    

  • The FPA provides little guidance on what will constitute "a bona fide business factor" to justify wage differences.  Although education, training and experience are enumerated examples, this list is not exhaustive and it is unclear how high a bar this will be for employers. 

Employers should take several steps to minimize the potential for claims under the FPA, including:

  • Identify existing wage differences between employees doing substantially similar work, even at different locations, and evaluate the reasons for the differentials.  Are the differences explained by one of the recognized exceptions?  If not, do adjustments need to be made?  

  • Educate supervisors on employees' expanded rights to inquire about wages and wage differences.  However, also advise them this does not mean that wage information should be disclosed to employees.    

  • Make sure that you are retaining records of employees' "wages, wage rates, job classifications, and other terms and conditions of employment" for three years, as required by the FPA.  

This E-Update was authored by Fred Plevin and Jennifer Zaharris.  For more information, please contact Mr. Plevin, Ms. Zaharris, or any other Paul, Plevin attorney by calling (619) 237-5200.