Jan. 19, 2016 Actively Addressing California's Fair Pay Act

by Meredith P. Grant, Esq. and Fred M. Plevin, Esq.

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The California Fair Pay Act (FPA), effective January 1, 2016, set out to be the strongest equal pay law in the United States. To that end, the FPA made four key changes to existing law. First, the FPA changed the requirement of equal pay for equal work to a requirement of equal pay for “substantially similar work.” Second, the FPA removed the same establishment requirement, allowing employees to compare pay rates between work locations. Third, the new law narrowly defined bona fide business factors other than sex, limiting an employer’s defenses. Finally, the FPA imposed strong anti- retaliation provisions, protecting employees who inquire about wage differentials or otherwise invoke the FPA’s protections.

Before the FPA, pay equity was not expected to occur in California until 2042.i However, the FPA mandates pay equity now. To best ensure compliance, employers should identify positions that do substantially similar work and articulate and document specific reasons for any arguable discrepancies. Employers may want to include counsel to maintain the attorney-client privilege when assessing potential liability.

This article uses recent social science research to identify the most likely litigants and suggest business practices designed to achieve ongoing FPA compliance. Employers can prioritize compliance efforts by first reviewing employees who likely experience high wage gaps, making claims easier to identify and increasing potential damages. These red-flag employees include:

  • Sales, production, transportation, and professional positions.ii
  • Finance, insurance, real estate, manufacturing, and healthcare industry employees.iii
  • Educated,iv older,v and minorityvi women.

Initial FPA claims will likely be made by sophisticated female employees who are highly educated or highly compensated such as: engineers, executives, actresses, professors or attorneys. These salaries will generate sufficient damages to interest counsel and these individuals may want to trail blaze under the FPA for the benefit of less sophisticated parties.

After taking an initial survey of high-risk employees, employers can make some institutional changes to aid ongoing FPA compliance.  Specifically, employers should:

  1. Assign Responsibility

Employers should designate a responsible party for FPA compliance to establish institutional accountability. This person will identify discrepancies between positions doing substantially similar work and either adjust compensation or document the bona fide business factors other than sex to explain the wage disparity.

  1. Change Policies

Employers should update policies to require fair pay for substantially similar work, omit prohibitions on discussing wages, add anti-retaliation provisions, and establish an investigation policy relating to pay equality.  For example:

“The Company will comply with all applicable laws regarding pay equity. Any discrepancies in pay for substantially similar work will be based on bona fide business factors other than sex.”

“Nothing in the Company’s policies should be construed to prohibit employees from discussing wages.”

“The Company will not retaliate against employees for raising pay equity concerns, consistent with applicable law.”

“The Company encourages employees to immediately report any wage discrepancies possibly based on sex for prompt and careful investigation.”

  1. Develop an Internal Dispute Resolution Process

As noted above, employers should institute an investigation policy relating to pay equality. Taking prompt action to address concerns will demonstrate the employer’s good faith efforts to comply with the FPA and may allow for settlement prior to litigation. With such policy, employers must also establish a process for raising and investigating fair pay complaints and clearly communicate the process to all employees.

  1. Require Documentation

Employers should require all compensation decisions to have written business justifications because any wage discrepancies must be based on bona fide business factors, and employers must account for the entire wage discrepancy for substantially similar work.  The FPA enumerates education, training, and experience but the statutory list is not intended to be exhaustive and courts may accept other justifications such as cost-of-living. Due to this uncertain standard, even the slightest distinctions in an employee’s education, experience, or job duties should be documented. This practice may be easy to implement going forward; however employers should also look back and document reasons for the pay rates of existing employees, which are likely based on many unidentified factors over years of employment.

  1. Consider All Compensation

Employers need to account for all forms of compensation, including: group health insurance, equity awards, bonuses and the availability of training and overtime. The FPA mandates fair “wage rates” between the sexes and California courts have routinely interpreted the statutory term “wages” broadly.vii Therefore, all forms of compensation could be either the source of an employee’s claims or the employer’s best defense.

  1. Include Both Genders on Hiring and Compensation Committees

Research has shown that including women on compensation committees can improve pay equality.viii Therefore, to aid long term FPA compliance, employers should try to include both genders in compensation decisions.

  1. Encourage Paternity Leave

Gender pay discrepancy is also related to leave for pregnancy and childbirth.ix Therefore, without expanding its obligations, employers can reduce gender wage gaps that increase over time by encouraging both genders to take family leave under the FMLA and CFRA.

  1. Re-Think Salary Negotiations

Gender wage gaps have consistently been attributed to women’s inability or unwillingness to effectively negotiate salaries.x However, the FPA makes pay equality the employer’s responsibility. Whether an employer can rely on an employee’s prior salary as a bona fide business factor other than sex is an open question. However, an employer seeking to rely on this defense bears the burden of demonstrating 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 a business necessity. It is not clear that prior salary, which could be a vestige of sex-based discrimination, can constitute a valid defense.

  1. Avoid Blinders

Pay equity is usually discussed in reference to women. However, both sexes can make claims under the FPA and men should be considered when assessing potential liability. In particular, millennial men have been shown to suffer adverse wage differentials in California.xi

The FPA has changed the gender wage gap discussion. It is a powerful mandate that eliminates equal pay for equal work at the same location and instead requires equal pay for “substantially similar work” at all locations. This is particularly difficult when employers do not know what constitutes “substantially similar work” or which bona fide business factors will justify the entire wage differential. Until there is further guidance from the courts, employers must speculate about how the FPA will be applied.  Proactive employers will actively address potential FPA liability while they wait for these new standards to be tested and further defined.

Meredith P. Grant is an attorney with Paul, Plevin, Sullivan & Connaughton and specializes in the representation of public and private employers in all areas of labor and employment litigation.

Fred M. Plevin is the managing partner of Paul, Plevin, Sullivan & Connaughton and  has specialized in serving employers throughout California for  30 years.  Mr. Plevin was named San Diego Best Lawyers’ “Labor & Employment Lawyer of the Year” in 2012 and is a member of the Wage & Hour Defense Institute.

i Inst. of Women’s Policy Research. The Status of Women in the States 2015: Employment and Earnings 2015, at 8 (2015), http://statusofwomendata.org/app/uploads/2015/02/EE-CHAPTER-FINAL.pdf.

ii Id. at 24.  The occupational groups with the largest pay gaps are sales, professional, and production. Id.

iii Id. at 22.

iv Id. at 13. The average earnings ratio for males to females is 78%, whereas earnings ratio for women with bachelors’ degrees is 71.4% and graduate degrees is 69.1%. Id.

v Id. at 9. Millennial women have an average earnings ratio of 87% of men whereas women age 65 and older only have an earnings ratio of 73%. Id.

vi Nat’l P’ship for Women and Families, Fact Sheet IWPR #C350a (2015). The average California woman makes 84 cents to a man’s dollar, but African American women in California make 63 cents and Latinas only make 43 cents. Id.

vii See generally Schachter v. Citigroup, Inc., 218 P.3d 262 (Cal. 2009) (construing “wages” broadly, including any benefits reflecting overall compensation); Murphy v. Kenneth Cole Productions, Inc., 155 P.3d 284 (Cal. 2007) (determining “wages” includes room, board, clothing, vacation and sick pay).

viii Scott Hirst, Gender Composition of Board Important for Competitiveness, Harvard Law School Forum on Corporate Governance & Financial Regulation (2012), available at http://corpgov.law.hardward.edu/2012/07/24/gender-composition-of-boards-important-for-competitiveness;    National Association of Women Lawyers, Report of the Eighth Annual NAWL National Survey on Retention and Promotion of Women in Law Firms, at 5 (2014).

ix CONSAD Research Corporation, An Analysis of Reasons for the Disparity in Wages between Men and Women, at 9 (2009).

x Linda Babcock, Sara Laschever, Michelle Gelfand & Deborah Small, Nice Girls Don’t Ask, HARVARD BUSINESS REVIEW (2003), available at http://hbr.org/2003/10/nice-girls-dont-ask/; Jennifer Ludden, Ask for a Raise? Most Women Hesitate, NPR (2011), available at http://www.npr.org/2011/02/14/133599768/ask-for-a-raise-most-women- hesitate.

xi Conor Dougherty, Cities Where Women Outearn Male Counterparts, WALL STREET JOURNAL (2010), available at http://blogs.wsj.com/economics/2010/09/01/cities-where-women-outearn-male-counterparts. Millennial men earn less than millennial women in various California metro areas, including San Diego, San Bernardino, Los Angeles, Sacramento and San Francisco. Id.