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California’s New Fair Pay Act – What Employers Need to Know

On October 6, 2015, California Governor Jerry Brown signed the Fair Pay Act (the Act), an equality wage bill introduced by state Sen. Hannah-Beth Jackson (D-Santa Barbara). In signing the bill, which goes into effect January 1, 2016 for employers with California-based employees, Governor Brown called the act “another step toward closing the persistent wage gap between men and women.”

Gender-based pay discrimination was already prohibited under the Fair Employment and Housing Act (FEHA) and Title VII, which generally prohibit any gender-based discrimination in employment. The Act, however, places a more significant burden on employers and increases the likelihood of liability because it shifts to employers the burden of justifying any wage differentials paid to opposite sex employees, and not just to those employees with the exact same job title, but to employees performing “substantially similar work.” The Act further explains that “substantially similar work” should be “viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions.” Unfortunately, this is broad definition offers little guidance for employers. 

If an employee brings a claim under the Act, the employer must justify any wage differential by establishing its pay structure is based on: (1) a seniority system, (2) a merit system, (3) a production-based system measuring earnings by quality or quantity, or (4) “a bona fide factor other than sex, such as education, training, or experience.” The fourth factor will apply only where an employer demonstrates 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.” “Business necessity” is further defined as an “overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve.” An employer cannot rely upon the business necessity defense if an employee proves an alternative business practice exists that would serve the same business purpose without the resulting wage differential.

Under the Act, employers may not prohibit employees from disclosing their own wages or discussing or questioning other employees’ wages. Notably, the Act explicitly states employers have no obligation to disclose employees’ wages. These requirements have the potential to create confusion for employers. On the one hand, employers must allow their employees to freely discuss and question each other’s wages. On the other hand, the employer is not required to disclose its employees’ wages. This is problematic in most private business where wage rates are not public knowledge. Employees need only have a belief or suspicion of a colleague’s pay rate to bring claims under the Act. Other employees may not want to share their rate of pay with colleagues, and might balk at the employer doing so. Thus, where wage differentials exist for legitimate, non-discriminatory reasons, revealing employees’ wage rates can create dissention among workers.

The Act also contains an anti-retaliation measure specifically protecting workers from discrimination and retaliation for any action taken to enforce the Act. Employers may not prevent their employees from aiding or encouraging other employees to exercise rights under the Act.

Employees bringing claims under the Act have the option of filing complaints with the Division of Labor Standards Enforcement or filing a lawsuit in Superior Court. A two-year statute of limitation applies, except when an employee’s claim arises out of an employer’s willful violation, the statute is extended to three years. A prevailing plaintiff may recover the wage differential, plus interest, along with an equal amount as liquidated damages and reasonable attorneys’ fees and costs. Employees alleging they have been retaliated against for engaging in protected conduct under the Act may also file a civil lawsuit and face a one-year statute of limitation. Prevailing plaintiffs alleging retaliation may recover reinstatement and reimbursement for lost wages and work benefits, including interest.

Going forward, California employers should be aware of the new law’s requirements and anticipate questions regarding employees’ wages. Employers should be prepared to implement a method of sharing employees’ wage rates in a manner satisfactory to the employer and the employees, some of whom may not wish for their pay rates to be shared.

Employers should also be prepared to justify a wage differential among opposite sex workers using the factors outlined in the Act. Specifically, employers should perform an internal audit as part of their year-end raise and bonus determinations. Employers should identify substantially similar positions and compare the pay rates of female and male employees, then they should adjust salaries as appropriate (the year-end is a good time to do this). If an employer maintains a wage differential, it should delineate its justification and outline the factors supporting the differential, making certain those factors are applied across the board to all employees, not just a portion of the workforce. Likewise, if a wage differential among opposite sex workers exists based on business necessity, employers should determine whether another method of providing fair compensation while meeting business needs exists without the resulting wage differential.

Prepared by Jennifer Brach and Erin DeNatale. Please contact Ms. Branch, Ms. DeNatale or any of the employment attorneys at Andrews • Lagasse • Branch & Bell LLP with questions about this eblast or any other employment-related needs.

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