The recent ruling by a federal appeals court holds that prior pay does not justify pay differential between male and female employees under the Equal Pay Act. Along with state and local laws that regulate reliance upon employees’ prior pay to determine salaries, the ruling shapes a legal landscape in which employers are advised to review employment application materials, design policies, train recruiting personnel, and conduct pay equity studies to comply with applicable equal-pay laws.
In Rizo v. Yovino, the US Court of Appeals for the Ninth Circuit issued an en banc opinion on April 9 holding that prior pay cannot justify a wage differential between male and female employees under the federal Equal Pay Act (EPA). Addressing whether prior pay satisfies the EPA’s fourth defense—the catchall defense of “any other factor other than sex”—the court held that it does not, regardless of whether it is considered alone or in combination with other factors.
In doing so, the Ninth Circuit overruled its own 1982 opinion in Kouba v. Allstate Ins. Co., 691 F.2d 873 (9th Cir. 1982), where it held that prior salary alone could constitute a “factor other than sex” under the EPA. It also overrules its own April 27, 2017, three-judge panel decision in this case (see our prior LawFlash describing this decision), which found that prior salary does not automatically qualify as a “factor other than sex,” but can constitute a defense if the employer’s use of prior salary effectuates a business policy and is reasonable in light of the employer’s stated purpose and its other practices.
The defendant in Rizo was sued in his official capacity by a math consultant for Fresno County, California (the County), who claimed she was paid less than her male counterparts for the same work in violation of the EPA. In June 2015, the County moved for summary judgment. The County conceded that it paid Ms. Rizo less than her male counterparts, but contended that this was permissible because the differential was based on the employees’ prior salaries, which it contended constituted a factor other than sex within the meaning of the EPA.
The County argued that its policy of basing employee pay on prior salary (1) is objective; (2) encourages candidates to leave other jobs because candidates will always receive a 5% pay increase over their prior salary; (3) prevents favoritism; and (4) is a judicious use of taxpayer dollars. The district court denied summary judgment, finding that the County’s policy of considering prior pay in setting compensation conflicted with the EPA because “a pay structure based exclusively on prior wages is so inherently fraught with risk . . . that it will perpetuate a discriminatory wage disparity between men and women that cannot stand.” The district court also certified the legal question for interlocutory appeal given the County’s acknowledgement that if prior salary does not qualify as an affirmative defense, it has no defense to Ms. Rizo’s EPA claim.
The Ninth Circuit granted the County’s petition for permission to file an interlocutory appeal. On April 27, 2017, a three-judge panel of the Ninth Circuit vacated the denial of summary judgment and remanded the case to the district court to determine whether the County’s stated reasons for relying upon prior salary effectuated a business policy and were reasonable. In that opinion, the Ninth Circuit explained that it was not breaking new ground but rather affirming its prior holding in Kouba. The Ninth Circuit then took this case en banc to clarify the law on whether an employer could consider prior salary, either alone or in combination with other factors, in setting employees’ salaries.
Sitting en banc, the Ninth Circuit held that prior pay does not constitute “any other factor other than sex” within the meaning of the EPA. Finding the text of the EPA, particularly its catchall defense, to be ambiguous, the Ninth Circuit relied upon the principles of noscitur a socis and esjusdem generis to “cabin the contextual meaning” of the EPA’s catchall provision and to ensure that the court did not ascribe it too broad of a meaning that would be inconsistent with its accompanying words. Employing these principles, the Ninth Circuit found the text surrounding the catchall provision—mainly the other three exceptions—to be significant in its interpretation and definition. Finding that the other three exceptions all relate to job qualifications, performance, and/or experience, the court concluded that the catchall provision should similarly be limited to job-related reasons.
The Ninth Circuit also turned to and heavily relied upon the EPA’s legislative history to find that “any other factor other than sex” is limited to legitimate, job-related factors. The court found that “[a]t the time of the passage of the [EPA], an employee’s prior pay would have reflected a discriminatory marketplace that valued the equal work of one sex over the other.” The court further explained:
Prior salary does not fit within the catchall exception because it is not a legitimate measure of work experience, ability, performance, or any other job-related quality. It may bear a rough relationship to legitimate factors other than sex, such as training, education, ability, or experience, but the relationship is attenuated. More important, it may well operate to perpetuate the wage disparities prohibited under the [EPA]. Rather than use a second-rate surrogate that likely masks continuing inequities, the employer must instead point directly to the underlying factors for which prior salary is a rough proxy, at best, if it is to prove its wage differential is justified under the catchall exception.
Five of the 11 judges concurred in the result, agreeing that the County violated the EPA in only considering Ms. Rizo’s prior salary when setting her compensation at hire, but disagreed with the majority’s general rule prohibiting use of prior salary as a defense to EPA claims. Judges Margaret McKeown and Mary Murguia argued that the majority went too far in holding that any consideration of prior pay is impermissible under the EPA, finding consideration of prior salary with other factors to be appropriate where the employer is able to show any pay differential is based on a valid job-related factor other than sex. Otherwise, according to Judges McKeown and Murguia, prospective employees will not be able to voluntarily disclose their prior salary in efforts to receive higher wages.
Judges Consuelo Maria Callahan and Richard Tallman found that the majority’s general rule (1) fails to follow US Supreme Court precedent; (2) ignores the realities of business; and (3) might hinder equal pay for equal work. More specifically, they explained that it is a factual fallacy that prior salary is not generally job-related and that prior salary inherently reflects wage discrepancies based on gender, and expressed similar concerns that this new rule will prohibit employers from relying upon prior salary to recruit top talent and prevent prospective employees from using prior salary to their advantage in hiring and compensation negotiations. Taking a different approach from these four concurring judges, Judge Paul Watford agreed with the result but concluded that past pay can constitute a “factor other than sex” if an employee’s past pay is not a reflection of sex discrimination.
The Ninth Circuit’s holding strays not only from its prior precedent but also from its sister circuit courts of appeals, which have taken varying approaches. Several other appeals courts have concluded that prior pay is not, in and of itself, a valid defense to an EPA claim as a “factor other than sex,” but have held that prior pay could be considered among other nondiscriminatory factors. The Tenth and Eleventh Circuits have specifically held that prior pay alone cannot justify a pay disparity, even though it may be considered along with other nondiscriminatory factors. The Fifth Circuit has rejected the use of prior pay as a defense to an EPA claim where the use of prior salary appeared to be pretextual and was easily rebutted. The Eighth Circuit allows employers to rely on prior pay as an affirmative defense, but only upon a showing that the prior pay itself was not the result of discrimination or sex stereotyping. Similarly, the Second Circuit allows the prior-salary defense, but places the burden on the employer to prove that a bona-fide, business-related reason exists for the wage differential (i.e., one that is “rooted in legitimate business-related differences in work responsibilities and qualifications for the particular positions at issue.”). The Seventh Circuit has specifically rejected the argument that the use of prior pay alone violates the EPA, finding that there is no requirement that an employer provide any further business justification.
Several state and local jurisdictions have enacted prior pay laws, which prohibit employers from relying upon prior pay as a defense to a pay discrimination claim and/or from inquiring about and/or relying upon prior pay in the first place: California, Delaware, Massachusetts, New Orleans, New Jersey (applicable only to state entities), New York (applicable only to state agencies), New York City, Oregon, Philadelphia, Pittsburgh (only applicable to City of Pittsburgh), Puerto Rico, and Washington. Several other jurisdictions are considering similar legislation, including Arizona, Connecticut, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Minnesota, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Dakota, Texas, Vermont, Washington, and Washington, DC.
Considering the Ninth Circuit’s ruling, as well as state and local laws regulating inquiries into and reliance upon prior pay, employers that operate in jurisdictions that have enacted these laws should
In addition, employers in all jurisdictions should keep track of other factors that determine initial
pay—including relevant prior work experience, education, and pay for incumbents in the same or substantially similar positions—and document the specific business reasons that motivated individual pay decisions. Furthermore, employers should conduct privileged pay equity studies and evaluate compensation practices.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Michael D. Schlemmer
 The defendant, Jim Yovino, is the Fresno County Superintendent of Schools. Because he was sued in his official capacity, he is referred to as the County.
 In its en banc opinion, the Ninth Circuit noted that some federal courts of appeals allow reliance on prior salary along with other factors, but bar reliance on prior salary alone, and found this to be a “distinction without reason” that it could not reconcile with the text or purpose of the EPA.