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

By Andrea N. Myers When California’s Fair Pay Act (SB 358) (the “Act”) takes effect on January 1, 2016, it will be among the nation’s strongest equal pay laws. The Act expands on what is already imposed by existing California and federal law, and aims to eliminate the state’s gender wage gap. It was signed into law by Governor Jerry Brown on October 6. With just over two months until the Fair Pay Act goes into effect, all employers—regardless of industry or size—should evaluate compensation policies for compliance with the new law and prepare employees and managers making pay decisions for compensation-related questions. Here’s a breakdown of what you need to know about the California Fair Pay Act. What should employers be prepared for under this new law? The law has three primary objectives.  It:

  1. Redefines and increases the employer’s burden of proof in defending equal pay claims.
  2. Provides additional rights to employees to encourage open discussion on wage information without fear of retaliation.
  3. Increases the number of years employers must retain employee records.

Here’s a closer look: Equal Pay Claims:  California’s existing Labor Code (section 1197.5) prohibits employers from paying an employee less than a member of the opposite sex in the “same establishment” for “equal” work. Under the Act, an employee must prove that he or she is getting paid less for “substantially similar” rather than “equal” work. The “same establishment” condition was also eliminated. Thus, the act relaxes an employee’s burden of proof by making it easier for an employee to establish an unequal pay claim regardless of whether he or she is employed at the same physical location or shares an identical job title. It also clarifies that employers bear the burden of defending any wage disparity by proving the differential is based entirely (and not just in part) on one or more of the following legitimate factors:

  1. Seniority system
  2. Merit system
  3. System measuring earnings by quantity or quality of production
  4. Bona fide factor other than sex (i.e. education, training or experience)

To successfully defend a wage differential claim on a bona fide factor other than sex, employers must prove that the wage disparity is job related and is consistent with a “business necessity.” Employers must further demonstrate that each relied-upon factor was applied reasonably and that the application of one or more of those factors accounted for the entire wage differential. The burden then shifts back to the employee to demonstrate that there is some less discriminatory alternative that would serve the same purpose without producing a wage differential. Employees may file an equal pay claim by pursing an administrative complaint with California’s Division of Labor Standards Enforcement or by filing a civil suit. Pay Disclosure and Retaliation:  The Act was designed to encourage open pay discussions between co-workers and allow employees the right to discover and challenge wage differentials to rectify gaps. The law prohibits employers from interfering with an employee’s ability to disclose wages or discuss and/or inquire about another employee’s wages. However, employers are not required to disclose an employee’s wages to other employees. Employees can file a civil suit or administrative complaint if they have been “discharged, discriminated or retaliated against” for discussing, questioning or disclosing wages. Record Retention:  Employers must now retain employee records for three years instead of two. What is the new “substantially similar work” standard? Substantially similar work means a composite of skill, effort and responsibility, performed under similar working conditions—meaning workers need not hold the same exact job when filing a wage dispute claim. The Act seeks to prevent an employer from defeating an employee’s wage claim by simply arguing the jobs were not “equal in every way.” However, the Act does not define the “substantially similar” standard. It’s likely there will be increased litigation over whether certain differences in job descriptions are enough to justify pay disparities. For example, an employer may be required to justify higher wages paid to male janitors if they are performing essentially the same work as a lesser-paid female maid. What constitutes a “bona fide factor other than sex?” The Act specifies that a “bona fide factor other than sex” includes a non-exhaustive list of potential factors, such as education, training or experience. It requires the employer to prove that the factor is not based on sex, is job-related with respect to the position in question and is consistent with a business necessity. A “business necessity” means an overriding legitimate business purpose. This defense, however, does not apply if an employee demonstrates an alternative business practice exists that would serve the same business purpose without also producing a wage differential. How has an employer’s defense burden changed? The law relaxes an employee’s evidentiary burden of proof to show that he or she is not being paid at the same rate for similar work and increases the burden on to employers to affirmatively demonstrate that any pay difference is based “reasonably” and “entirely” on one or more legitimate factors other than sex. What steps can employers take between now and January 1, when the law takes effect, to ensure their compensation practices are in defensible compliance with these new requirements?

  • Review Current Policies

Review pay policies, job descriptions and current salaries across all California locations to ensure that wage disparities among “substantially similar” jobs are justified and are not based on sex or any other protected category.

  • Consider Structured or Defined Compensation Policies

Common practices—such as basing pay on an employee’s prior salary or market conditions—could be challenged if they result in wage disparities between genders. Consider implementing defined and uniform compensation policies expressly structured on job-related factors. Be prepared to demonstrate why a higher salary is justified and how that employee adds more value to the company than his or her lesser-paid counterpart.

  • Document Legitimate Business Reasons for Pay Differentials

Rationales for pay differentials such as seniority, prior work experience, training, market factors, geographic location variations, cost of living and the employer’s financial circumstances should be clearly articulated and documented in records.

  • Review and Update Managerial Training

Supervisors and managers making compensation decisions should be adequately trained regarding pay raise practices and reminded of the appropriate job-related factors on which pay may be based. Managers must also be reminded of employees’ rights to discuss compensation with their co-workers without retaliation.

  • Update Employee Handbooks

Employers should review their confidentiality provisions in employee handbooks to confirm that there are no prohibitions on employees disclosing their compensation and ensure that supervisors are aware of the anti-retaliation protections regarding an employee’s discussions of wages.

  • Update Record Retention Policies

Employers should update record retention policies to reflect the new three-year retention period for records of wages and wage rates, job classifications and other terms and conditions of employment.

In short, employers should review pay policies to ensure compensation decisions are based on legitimate job-related factors, without regard to gender or other protected categories, and be prepared for more frequent discussions regarding employee wages. Andrea N. Myers is an associate with the San Diego-based law firm of Seltzer Caplan McMahon Vitek where her practice focuses on complex business disputes, professional liability defense and employment litigation. She has represented individuals and employers regarding a variety of employment matters such as discrimination, wrongful termination and retaliation.  She can be reached at myers@scmv.com.

October 21st, 2015  |  Categories: News, Employment Law