California Fair Pay Act

The California Fair Pay Act (S.B. 358), which took effect January 1, 2016, amended California Labor Code § 1197.5 to protect employees who want to discuss their co-workers’ wages and circumscribed the defenses an employer may assert to employee unequal pay claims. Recently, numerous bills were passed that have expanded upon those amendments and offer clarity as to how they are to be applied.

What changes did the 2016 amendments to the California Fair Pay Act make?

The California Fair Pay Act strengthened the protections employees enjoyed under the Equal Pay Act. As of January 1, 2016, employers are required to provide equal pay for employees who perform substantially similar work “when viewed as a composite of skill, effort, and responsibility.” It also eliminated the requirement that employees who are being compared work at the same establishment and made it more difficult for employers to justify inequities in pay through a “bona fide factor other than sex,” limiting said factors that can be considered.

Additionally, the Act ensured that any legitimate factors relied upon by the employer for pay inequities had to be applied reasonably and account for the entire pay difference. It explicitly stated that retaliation against employees who seek enforcement of the law is illegal. Employers cannot prohibit employees from discussing or inquiring about their co-workers’ wages. It also extended the number of years that an employer maintains wage and other employment-related records from two to three years.

What is “substantially similar work”?

Pursuant to Lab. Code § 1197.5(a), “[a]n employer shall not pay any of its employees at wage rates less than the rates paid to employees of the opposite sex for substantially similar work.” The Department of Industrial Relations (DIR) defines “substantially similar work” to mean that under similar working conditions, the work performed is similar in the skill, effort and responsibility expended by the worker.

“Working conditions” refers to the physical surroundings the work is completed in. Various hazards an employee may encounter or the temperature, ventilation, fume, etc. are all part of working conditions. “Skill” means the experience, education, ability and training that is required to perform the job. “Effort” refers to the amount of physical or mental exertion that is required to perform the job. “Responsibility” is assessed based on the duties and the degree of accountability required to perform the job.

Under these standards, when an employee files a claim based on unequal pay, the job titles being compared do not have to be the same. Rather, the work itself must be substantially similar.

What must an employee show?

For an employee to prevail on an unequal pay claim, they must prove that they are being paid less than an employee or employees of the opposite sex, of another race, or of another ethnicity who are performing substantially similar work. Once an employee has established this, the employer has to provide a legitimate reason for the pay difference.

An employee has two (2) years to file a claim from the date of the violation, unless the violation is willful, in which case, the employee has three (3) years to file. For the purpose of calculating a deadline to file, each paycheck that demonstrates unequal pay is considered a violation.

How can an employer defend against a claim?

To defeat a claim brought by an employee, the employer has to prove that the pay difference for the substantially similar work is based on seniority; merit; a system that measures production based on quantity or quality; and/or a “bona fide factor” other than sex, race, or ethnicity. The employer must show not only that they apply the previously mentioned factor(s) reasonably but also that those factors account for the entire difference in wages.

Furthermore, effective January 1, 2019, employers are prohibited from justifying pay differences between employees of the opposite sex or those of a different race or ethnicity based on an employee’s previous salary. Employers are allowed to make decisions regarding compensation based on a current employee’s salary, however, as long as the resulting wage differential can be justified based on any of the aforementioned statutory considerations—seniority, merit, etc.

What factors can an employer rely on that are examples of a “bona fide factor other than sex, race, or ethnicity”?

Factors an employer can rely on to justify wage differentials include but are not limited to, education, training, or experience. Labor Code § 1197.5(a)(1)(D) states that a bona fide factor “shall apply only if the employer demonstrates that the factor is not based on or derived from a [sex-, race-, or ethnicity-based] differential in compensation, is job related with respect to the position in question, and is consistent with a business necessity.”

What recent changes in the law affect an employer’s obligations?

A.B. 168 became effective in January of 2018 and added Section 432.3 to the California Labor Code. This statute prohibits employers from using an applicant’s prior salary history to determine whether employment would be offered or what salary would be offered an applicant. (Notably, this does not prevent applicants from voluntarily disclosing their salary history to a prospective employer.) It also requires employers provide a pay scale upon reasonable request.

A.B. 2282 then amended Sections 432.3 and 1197.5, relating to salary history and pay equity, respectively. A.B. 2282 clarified Section 432.3 by defining the terms “applicant,” “reasonable request,” and “pay scale.” An applicant is defined as someone “who is seeking employment with the employer.” For the purposes of this statute, an existing employee, who applies internally, is not considered an applicant. A reasonable quest for a pay scale must occur after the initial interview. The definition of pay scale is “a salary or hourly wage range.” Although the statute expressly prohibits an employer from asking applicant to disclose their salary history, the amendment allows a prospective employer to ask about the applicant’s salary expectations.

A.B. 2282 also permitted employers to consider a current employee’s existing salary when making a compensation decision so long as all of the wage differential is justified seniority, merit or production.

What should employers do?

To avoid potential liability, employers should review job applications and company policies and update them as necessary consistent with these changes. Employers may also want to provide training for supervisors or other decision makers so when they interview prospective applicants or make decisions regarding wages they do so consistent with California’s complex legal framework governing equal pay obligations and consideration of salary history.