Key to Understanding the Legal Maze
To understand fully the complex story revealing itself as to the prior pay issue, the reader needs to keep two different legal issues in mind and watch for them:
- May a private-sector employer ask an applicant about his/her prior salary history? (ALL court decisions interpreting the EPA, and the EEOC agree without caveat, that employers may ask about prior salary history. A small number of states and localities (notably California which employs a little over 7% (almost 18M workers: pre-pandemic) of the nation’s almost 130M workers) are more stringent and have statutes or local ordinances prohibiting the inquiry altogether affecting probably less than 10% of the working population in the U.S.) Most state laws and local ordinances address ONLY the next issue, and not the inquiry issue, or apply only to city government employees.
- May a private-sector employer use prior salary to set current pay? (Three different answers have now emerged under the EPA), so this is where it gets complicated and different by geographical location:
- Ninth Circuit (San Francisco): No, in whole or in part. This Circuit stands alone in this view.
- Several federal Courts of Appeal have said yes: an employer may use prior pay to set current pay, but must do so in conjunction with other “job-related” factors, with several decisions fuzzing the issue leading to differing judicial views about exactly what the other Court held. This is the legal battleground now unfolding: if an employer may ask about prior pay, as all agree under the EPA (including the Ninth Circuit), then how may an employer use prior pay in its pay decision, even when combined with other “job-related” factors?)<
- Seventh Circuit (Chicago): Yes, because prior pay is a “factor other than sex,” which the EPA exempts from limitation. This Circuit stands alone in this view.
Background to the Ninth Circuit Rizo Case Decision
Yovino is the Superintendent of the Fresno County, California public school district. Rizo is a “math consultant” who moved to Fresno, CA, from Arizona and went to work for the Fresno public school district in 2009. The school district had a written policy that it would pay new hires 5% more than their prior salary, regardless whether they were a Man or a Woman, or Black, White, Hispanic, or a Member of any other legally protected group. The school district paid Ms. Rizo at hire her prior pay plus the new-hire 5% bump, per the school district’s policy. Three years later, in 2012, in a chance discussion with colleagues over lunch, Ms. Rizo learned for the first time that the Fresno school district was paying two men in jobs similar to hers about $10,000 more than it was paying her. Rizo then sued under the Equal Pay Act (not Title VII).
By persuading the SCOTUS not to hear the County’s appeal to it, Ms. Rizo on Thursday beat back the County’s argument that, as a matter of law under the Equal Pay Act, it was lawful for the school district to set her pay based solely on her prior pay in Arizona. [In other words, the school district tried to convince the courts to adopt the Seventh Circuit approach, mentioned above and discussed below.] Significantly, in February of this year, the United States Court of Appeals for the Ninth Circuit (San Francisco) sitting en banc, had rejected the County’s argument that the EPA permitted an employer to base a new hire’s pay solely on his or her prior pay. (En banc means, in the United States Court of Appeals for the Ninth Circuit (San Francisco) at any rate, that 11 of its 29 active judges heard and decided the case).
Despite the school district’s evidence that it paid Ms. Rizo her initial pay based solely on her prior pay, and no other factor, this was the first ruling in the country to hold (and remains such) that a pay system that includes prior pay as one of several considerations can never constitute a “factor other than sex”—making it thus lawful under the EPA. (Lawyers call it “dicta” when a court takes on the burden to decide an issue not presented in the facts of the case). The Ninth Circuit’s February 2020 decision also rejected the EEOC’s sub-regulatory guidance on the issue. It also overruled an almost 40-year-old (1982) Ninth Circuit case three-Judge panel decision which had held the practice lawful under the EPA as a “factor other than sex” (one of the EPA’s four “defenses” (or exceptions”) to pay differentials between Men and Women and Women and Men making the differentials lawful). As a result, the Ninth Circuit’s February decision drew immediate and widespread interest because it was a one-of-a-kind decision, was en banc, and it gave Ms. Rizo the win as to the EPA issue regarding the use of only prior pay to set pay in a very close case decided by only one vote (6 to 5).
The Ninth Circuit’s Two Specific Majority Decision Holdings
Here are the two holdings of importance from the Ninth Circuit’s majority decision which Judge Christen authored (and which five other Judges of the en banc panel joined):
- Does the EPA affirmative defense allow employers to consider sex-neutral factors (like prior pay) to set pay differentially for men and women based on factors which are not job-related?
Held: No. The EPA’s fourth affirmative defense, or “exception” allowing wage differentials between men and women (that the at-issue wage differential was based on a “factor other than sex”) “encompasses only job-related factors other than sex.” (Slip Op at pp. 21-22); and
- Is prior pay a “job-related factor other than sex”?
Held: No. “Because prior pay may carry with it the effects of sex-based pay discrimination, and because sex-based pay discrimination was the precise target of the EPA, an employer may not rely on prior pay to meet its burden of showing that sex played no part in its pay decision. For purposes of the fourth exception [i.e., the 4th EPA affirmative defense of a “factor other than sex”], we conclude that the wage associated with an employee’s prior job does not qualify as a factor other than sex that can defeat a prima facie EPA claim.” (Slip Op at pp. 27)
The Ninth Circuit’s Two Dissenting Arguments
However, five Judges of the 11 Judge en banc panel of the Ninth Circuit dissented from these holdings in two different opinions:
- Judge McKeown, joined by Judge Tallman and Judge Murguia, endorsed the view that the EPA permits employers to use prior salary if the employer did so along with valid job-related factors such as education, past performance, and training, etc. The McKeown dissenters read the EPA to allow employers to rely on the “factor other than sex defense” under the right circumstances. (This is unlike the Majority Opinion which held that an employer could NEVER rely on prior pay to set initial salary, regardless of the circumstances). Rather, these dissenters believe the EPA makes the employer prove that it considered other job-related factors along with prior pay when proving up the “factor other than sex defense”:“The majority embraces a rule not adopted by any other circuit—prior salary may never be used, even in combination with other factors, as a defense under the Equal Pay Act. The circuits that have considered this important issue have either outright rejected the majority’s approach or declined to adopt it.” (Slip Op at p. 33)
* * * * *
“…I differ with the majority in one key respect. Merely because prior pay is unavailable as a standalone defense does not mean that employers should be barred from using past pay as a factor in setting initial salary. Contrary to the majority’s assertion, it is wholly consistent to forbid employers from baldly asserting prior salary as a defense—without determining whether it accurately measures experience, education, training or other lawful factors not based on sex—but to permit consideration of prior salary along with (emphasis added) those valid factors.” (Slip Op at p. 37)
[Editor’s Note: This is the EEOC’s long-held position on the prior pay issue, by the way: See Commission’s Compliance Manual. Compensation Discrimination Section 10-IV. F.2.g (Dec. 5, 2000) which states:
“[A]n employer may consider salary as part of a mix of factors—as, for example, where the employer also considers education and experience and concludes that the employee’s prior salary accurately reflects ability, based on job-related qualifications. But because “prior salaries of job candidates can reflect sex-based compensation discrimination,” …[i]f an employer sincerely weighs such factors with prior salary, there is no reason to think the resulting pay decisions would perpetuate the gender pay gap.”
- Judge Callahan, joined by Judges Tallman and Bea, make the same points as Judges McKeown and Murguia (and Judge Tallman, who joined both dissents), but make their views known using only different language:
“There is no need or justification holding that an employer could, as a matter of law, justify a differential in salary under one of the first three exceptions (i.e., defenses], but not the fourth exception. Accordingly, I agree with our sister circuits, that when salary is established based on a multi-factor salary system that includes prior salary, the presumption that the system is based on gender is rebuttable. [fn omitted] Critically, as noted, the burden is on the employer to show that the use of prior salary as part of a multi-factor salary system does not reflect, perpetuate, or in any way encourage gender discrimination.” Slip Op at pp. 44, 46, 51-52)
* * * * *
“In reality, prior pay” is not inherently a reflection of gender discrimination. Certainly, our history of gender discrimination fully supports a presumption that the use of prior pay perpetuates discrimination. But differences in prior pay may be based on other factors such as differences in the costs of living and in available resources in various parts of the country.” [See below Editor’s Note, which shows one way an employer’s reliance on prior pay can definitively be shown to bear no relation to prior presumed historical sex discrimination in pay.]
* * * * *
…I agree that where prior pay is the exclusive determinant of pay, the employer cannot carry its burden of showing that it is a “factor other than sex.”[fn omitted] However, neither Congress’s intent nor the language of the Equal Pay Act requires, or justifies, the conclusion that a pay system that includes prior pay as one of several considerations can never constitute a “factor other than sex.”
The Ninth Circuit’s Specific Approval of Employer Discussion of Prior Pay with an Applicant
Significantly, however, the Ninth Circuit en banc decision did NOT prohibit employers and prospective employees from discussing prior pay in the course of negotiating job offers. Instead, the Ninth Circuit’s opinion explicitly affirmed that practice as consistent with the EPA’s prohibitions, specifically noting that the EPA permits this and further affirmatively stating that nothing in its opinion prohibits an employer from discussing prior pay when negotiating an offer of employment.
“Our holding prevents employers from relying on prior pay to defeat EPA claims, but the EPA does not prevent employers from considering prior pay for other purposes. For example, it is not unusual for employers and prospective employees to discuss prior pay in the course of negotiating job offers, and the EPA does not prohibit this practice. [fn]
[Footnote: “In this way, the EPA is less stringent than California’s pay privacy law, which does not allow employers to inquire about prior pay. See Cal/Lab. Code section 432.3.”]
Certainly, our opinion does not prohibit this practice.” (Slip Op. at p. 31)
* * * * *
“Our statement that ‘prior pay, alone or in combination with other factors, is not [a job-related factor]” addresses the use of prior pay as an affirmative defense, not the consideration of prior pay to make a competitive job offer, to negotiate higher pay, or to set a salary. And there is no basis for concern that our opinion will prevent employers from considering prior pay when employees disclose it.” (Slip Op. at p. 32)
Here is an important passage from the Court’s majority opinion trying to reconcile how an employer might ask about prior pay (which the Court says employers may do and notes that it is commonplace for employers to do so), but may not rely on prior pay to defend pay differentials of men or women in an EPA lawsuit:
“We recognize that there may seem to be tension between allowing employers to consider prior salary in setting wages on the one hand, and requiring that they defend an EPA claim without relying on prior pay on the other. But this is inherent in the terms of the EPA itself. The statute places no limit on the factors an employer may consider in setting employees’ wages, but it places on employers the burden of demonstrating that sex played no role in causing wage differentials. To meet this burden, employers may rely on any bona fide job-related factor other than sex. But relying on the heuristic of prior pay, rather than the actual factors associated with employees’ current work, risks perpetuating historical sex discrimination.”
Editor’s Note: Bottom Line: Cutting through all the jargon, employers within the Ninth Circuit following the SCOTUS’ decision not to hear the Rizo case, are going to have to calibrate the new hire’s pay with the pay of any incumbents relying upon job-related factors and may NOT rely on prior pay IN WHOLE OR IN PART to justify pay differences. But, outside the Ninth Circuit, employers may consider prior pay along with other job-related factors, unless a local statute or ordinance otherwise prohibits consideration and/or use of prior pay (see below). Let’s assume:
- an employer hires a new employee into a higher paying state than where the newbie previously worked, and
- assume further that there are no local laws limiting the employer from considering prior pay to set current pay, and
- assume finally that the newbie answers your question that all men were paid equally to all women in the newbie’s prior position.
With these assumptions, the EPA (OUTSIDE the Ninth Circuit Court of Appeals jurisdiction) would allow the hiring employer not only to ask what the Applicant’s prior pay but to ALSO rely on the prior pay to set the new salary. For example, the employer in our example could also pay the newbie only 5% more than his/her old pay (since the properly trained recruiter in this example gathered proof that the prior pay was NOT based on sex discrimination: men and women were paid the same in the old job).
Other federal appellate circuits have gone in two other different directions, none of which precedents the Ninth Circuit adopted. By refusing to hear the school district’s appeal (SCOTUS agrees to hear only about 3% of the cases brought to it each year) and settle the “split in the circuits,” the result is that SCOTUS did not render a result under the EPA. Nonetheless, the Ninth Circuit’s February 2020 en banc decision now becomes the law under the EPA in the states subject to the Ninth Circuit’s jurisdiction (which covers, Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, the Northern Mariana Islands, Oregon, Washington, Nevada, and Washington. NOTE: Litigants may venue matters arising in American Samoa in either the United States District Court for the District of Hawaii (which is within the 9th Circuit’s jurisdiction), or in the United States federal District Court for the District of Columbia from which appeal lies to the United States Court of Appeals for the District of Columbia.)
The “Checkerboard” Balkinzation of Employment Law Continues, and Now Gets Worse. A Chance Missed!
The Equal Pay Act does not protect minorities: only Men and Women. So, how does Title VII intersect the prior pay issue as to Minorities and Whites, or does it?
Neither Ms. Rizo’s claim, nor the Ninth Circuit’s decision or the SCOTUS’ order refusing to hear the Rizo case, arose under or decided anything with respect to Title VII, Executive Order 11246, the ADA, Section 503 of the Rehabilitation Act of 1973, or VEVRAA (38 USC 4212).
The United States Court of Appeals for the Second Circuit (New York) has held that the EPA only allows employers to consider “job-related” factors when relying on the “factor-other-than-sex” defense. This Court would thus allow the prior pay defense but would require the employer to also prove that “a bona fide business-related reason exists” for any wage differential.
The United States Court of Appeals for the Tenth Circuit (Denver), is in the same place. It has interpreted the EPA to allow employers to set pay based on prior pay, but employers there also “must present evidence that the job-related distinctions underlying the salary plan…in fact motivated [the Company] to place the claimants and the comparators on different steps of the pay scale at different starting salaries” [so prior pay can be one part of a multi-part pay algorithm or consideration];
The United States Court of Appeals for the Seventh Circuit (Chicago), launched out in an entirely different direction (which employers favor because of the freedom to set pay this interpretation allows). The Seventh Circuit has held that the EPA’s “factor-other-than-sex” defense may consider prior pay because that defense “embraces an almost limitless number of factors, so long as they do not involve sex.”
Two panels of the United States Courts of Appeals for the Fourth Circuit (Richmond) are at odds with each other. One three-Judge panel held (in 2014), like the Seventh Circuit, that employers may always solely consider prior pay without offending the EPA. But then, another three-Judge panel of the Fourth Circuit (in 2018) went the other way and would find a violation of the EPA if an employer based its pay on any factor which was not job-related (even if sex-neutral), including prior pay but allowed consideration of prior pay in the decision-making.
The other seven United States Courts of Appels which could hear EPA case appeals have either not weighed-in on the prior pay issue or have failed or refused to decide the question or to render guidance pursuant to the EPA as to an employer’s use of prior pay to set current pay. Several of those circuit decisions, for example, merely call for a case-by-case review (whatever that means as applied to these several contentious legal issues: where is the “line in that sand”?)
Also, a few states have jumped into the fray with varying prohibitions (read each state law carefully: like snowflakes: no two are the same) limiting private sector employers, including Alabama, California (prohibits employers from asking an applicant about pay history and prohibits employer reliance on an employee’s prior salary to justify any race, or sex, or ethnicity-based pay difference); Connecticut, Delaware, Hawaii, Maine, Maryland, Massachusetts, Oregon, and Vermont.
And then there are a few cities and territories which have also jumped into the fray, including (you guessed it!) San Francisco, District of Columbia, Cincinnati (15 or more employees), Toledo (15 or more employees), Philadelphia (lawsuit pending) to name a few.
And then Michigan goes the other way and bans any local bans on an employer’s use of prior salary questions or use of the information to set current pay.
Bottom Lines
- There is no universal ban on private employers asking or using prior pay history to set current pay. That rule basically boils down to California and a small handful of other states and a few cities.
- There is no universal ban on private employers using prior pay history to set current pay. That rule basically boils down so far to the U.S. Court of Appeals for the Ninth Circuit (San Francisco) and a few states and municipalities.
- Companies have to review their pay practices against the physical locations of their employees to determine what law applies, and what that law or local ordinance limits the company from doing. Constant vigilance is required as new statutes/ordinances emerge helter-skelter every few months, although most miss private sector employers.
- Companies then have to decide whether the company will have a single pay policy nationwide with respect to prior pay (“Lowest Common Denominator” approach) or whether the company will follow the law in each jurisdiction where it has employees (“Checkerboard” approach).
- Companies then have to train up recruiters and hiring managers accordingly.
- Companies should, counterintuitively, hope for more case decisions in the Courts to further clarify company permissions and prohibitions. (It is not likely, for example, that the SCOTUS will climb out on the ledge with the Ninth Circuit to affirm and endorse it’s unique, fractured and tenuous decision. But more case decisions will help employers understand precisely how they may consider prior pay in the bouillabaisse of information they use to make a pay decision.)
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