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California Fair Pay Act goes into effect on January 1, 2016, Strengthening the State’s Ban on Gender-Based Pay Discrimination

November 11, 2015

Margaret A. Sedy, Esq.

On October 6, 2015, Governor Brown signed the California Fair Pay Act (“the Act”), which amends Labor Code Section 1197.5. The Act is designed to address the gender wage gap in California and to increase requirements for wage equality and transparency. When the Act goes into effect on January 1, 2016, employers in California will be subject to one of the strictest and most aggressive equal pay laws in the country. The Act expands employer liability for sex-based wage disparities and makes defending equal pay claims more difficult.

According to the author of the amended law (Senate Bill 358), its purpose is to allow open discussion and inquiries by employees regarding their own pay and the pay of their co-workers, and to enable employees to discover and challenge any wage differential and rectify the disparity. The amended law also prohibits employers from discriminating or retaliating against employees who seek to enforce their rights under the amended statute. Employees may also directly file suit without having to first exhaust administrative remedies.

I. The New, Broader Standard for Fair Pay: “Substantially Similar Work”

Under existing California and federal law, employers are prohibited from paying employees of one sex less than employees of the opposite sex for performing “equal work” at the “same establishment.” The Act, however, eliminates the “same establishment” and “equal work” requirements, creating a much broader standard for employers to comply with. The amended law will prohibit an employer from paying its employees,

at wage rates less than the rates paid to employees of the opposite sex for substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions.”

Consequently, this means that that employees can bring equal pay claims based solely on disparities between individuals performing substantially similar work, irrespective of their work locations or job titles. For example, as the Act’s author explained, a female housekeeper who cleans hotel rooms could challenge the wages paid to a male janitor who cleans the lobby and banquet halls. A claim for unequal pay no longer requires that the pay at issue be within the same job, department or same work location to be actionable.

Under the amended law, so long as the work performed is “substantially similar,” an employee only needs to demonstrate that he or she is not being paid at the same rate as an employee of the opposite sex (“comparator-employee”) in any of the employer’s locations and in any other job category. This means that employees in different roles and locations may now be used as “comparators” for purposes of establishing a violation under the amended law.

II. Shifting the Burden of Proof: Significantly Relaxed for Employee, Heightened for Employer

Once an employee is able to show a pay differential as described above, the burden of proof shifts to the employer, who must affirmatively demonstrate that the entire pay differential is based on the reasonable application of one or more of the following four factors:

  1. A seniority system;
  2. A merit system;
  3. A system that measures earnings by quality or quantity of production, or
  4. A bona fide factor other than sex, such as education, training, or experience.

While these four factors are included under existing law, the Act now makes an employer’s ability to rely on the fourth factor as a defense significantly harder. The new law states that a bona fide factor other than sex, such as education, training or experience

shall only apply if the employer demonstrates that 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.”

Furthermore, “business necessity” under the Act is defined as “an overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve.

Assuming the employer is able to demonstrate that a pay difference is not sex-based, is related to the position in question, and that a business necessity exists, an employee may still rebut the employer’s defense “if the employee demonstrates that an alternative business practice exists that would serve the same business purpose without producing the wage differential.” Essentially, this means that an employer relying on the fourth factor to defend a difference in pay must demonstrate that it is closely tied to an absolute business necessity. This is indeed a significantly greater burden and higher standard to meet than under existing law, including the federal Equal Pay Act of 1963.

Damages under the amended law have not changed: an employee that successfully proves his or her claim may recover the amount of wages the employee was not paid due to the wage differential, plus interest, an additional equal amount as liquidated damages, and attorneys’ fees.

III. Wage Transparency: Prohibiting Employees’ from Discussing their Wages is, well…Prohibited

As mentioned in the introduction to this article, the Act also seeks to decrease pay secrecy by further prohibiting employers from enacting rules, policies or otherwise engaging in conduct that prohibits employees from disclosing their own wages, discussing the wages of others, asking about other employees’ wages, or aiding and encouraging employees to exercise their rights under the Act. However, the Act explicitly makes clear that it does not obligate any person (employer or employee) to disclose wages. It should also be noted that under California Labor Code Section 232, employers are already prohibited from requiring an employee to refrain from disclosing the amount of his or her wages or to waive his or her rights to do so. The National Labor Relations Act (“NLRA”) includes a similar legal counterpart that protects employees that act together, or in “concert,” in an effort to improve the terms or conditions of their employment, such as wages. The difference in the Act is that now employees specifically have a private right of action directly against their employer for violating this provision. Under Labor Code Section 232 and the NLRA, an employee’s remedy against an employer for prohibiting such conduct was only actionable by the state or federal regulatory authority (i.e., the California Labor Commission; the National Labor Relations Board). Now, it is actionable by the employee directly and in civil court.

IV. Additional Remedies and Causes of Action: Anti-Discrimination and Anti-Retaliation Provisions

The Act also prohibits employers from discriminating or retaliating against employees who seek to enforce their rights under the Act, or for assisting others to invoke their rights. Employees who can prove they were discharged, discriminated against, or retaliated against in violation of the Act are entitled to seek reinstatement of employment, recover lost wages and benefits, and obtain equitable relief against their employer.

V. Increased Record Keeping Requirement

The Act also extends the two-year time period for keeping records related to employees’ terms and conditions of employment, including but not limited to, wages, rates, job descriptions and job classifications, to three years.

VI. Considerations for California Employers: Recommendations to Minimize the Risk of Noncompliance

Employers should begin reviewing their compensation-related policies and procedures now, before the law goes into effect on January 1, 2016. Here are some steps California employers may wish to consider to help minimize the risk of noncompliance with the California Fair Pay Act:

1) Evaluate all compensation-related policies and procedures with counsel to ensure all additional requirements are met.

2) Review employees’ job descriptions and current salaries to ensure any pay differentials are completely accounted for by any or all of the above-numerated factors and that the factor has been reasonably

3) Evaluate and update handbooks, polices, and procedures prohibiting retaliation and discrimination to include a specific reference to the Act.

4) Train any employees that make compensation-based decisions on the Act’s new statutory requirements and specifically, on the factors that such decisions can legally be based.

5) Evaluate your company’s internal complaint procedures and ensure there are adequate methods and means to bring to light and address any wage differential issues or complaints.

6) Evaluate any references to compensation in employee handbooks, employment contracts and/or confidentiality agreements to ensure provisions are consistent with the Act; revise any prohibitions on disclosure of compensation accordingly.

7) Consider how your company will address employee inquiries about other employees’ salary information; while the amended statute does not preclude an employee from making an inquiry (for the purpose of ascertaining their rights under the Act), the employer is not legally obligated to disclose the salary of any of its employees; after adopting a policy to address this, ensure supervisors, managers and/or human resource professionals carry it out consistently and evenly.

8) Update your company’s internal record retention policies and procedures to reflect the new three-year retention period for employment records, including: employee wages and rates, job classifications and descriptions, and all other terms and conditions of employment.

By: Margaret A. Sedy, Esq.

Cochran, Davis & Associates, P.C

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