Another Approach to Interpreting whether Prior Pay is a “Factor Other than Sex” Under the Equal Pay Act

Posted on by Brett Bonfanti

Background

The Equal Pay Act prohibits employers from paying one employee less than another employee of the opposite sex when the two do equal work.1 There are four exceptions.2 Employers can pay an employee of one sex less than another of the opposite sex if the pay differential is pursuant to “(i) a seniority system, (ii) a merit system, (iii) a system which measures earnings by quantity or quality of production, or (iv) a differential based on any other factor other than sex.”3 The Circuit Courts of Appeal are split as to whether an employee’s prior salary qualifies under the Fourth Exception as a “differential based on any other factor other than sex.”4 All but one of the Circuit Courts that have addressed the issue have recognized that because women have historically received lower wages than men for equal work, basing a woman’s pay on her prior salary perpetuates the pay disparity.5 In other words, the reasoning goes, prior salary is tainted by historical discrimination on the basis of sex and is therefore a proxy for sex.

The Circuit split breaks down as follows. The Ninth Circuit has held prior pay can never justify a pay disparity between a male and female employee.6 Only job-related qualities can justify a pay differential as a “factor other than sex.”7 The Seventh and Eighth Circuits have held the opposite: prior pay is always a factor other than sex.8 The Tenth Circuit, Eleventh Circuit, and the Equal Employment Opportunity Commission take a middle ground.9 They allow an employer to consider, but not rely completely upon, prior history in justifying a pay differential between men and women employees.10 More lenient than the Ninth and Tenth Circuits, the Second and Sixth Circuits allow an employer to justify a pay differential between men and women based on prior pay if there is a legitimate business reason to consider prior pay.11 It is unclear what a legitimate business reason for considering prior pay might be. The rest of the Circuit Courts have not squarely addressed the issue.

The Supreme Court in 2020 declined the opportunity to resolve the Circuit split.12 The Supreme Court did not clarify why it declined to resolve the split.13 The Supreme Court also denied certiorari to a 1992 case that sought to clarify whether a “differential based on any other factor other than sex” must be supported by a “legitimate business reason.”14 In the meanwhile, States and local governments have enacted legislation addressing the matter.15 The legislation ranges from prohibiting employers from considering prior pay when setting employee pay to prohibiting employers from even inquiring about job applicants’ prior pay at all.16

Another Approach to Interpreting the Fourth Exception’s Application to Prior Pay

In reaching their conclusions, the Circuit Courts have focused mainly on the text, history, and purpose of the Fourth Exception itself. They have analyzed legislative history to determine why Congress added this broad Fourth Exception.17 All agree that, as announced by the Supreme Court, the purpose of the Equal Pay Act was to prohibit employers from paying women less than men because they are women.18 The Second Circuit put it bluntly that given this purpose, allowing non-job-related factors like prior salary to justify discriminatory wages would be a “gaping loophole” in the statute.19 The Circuits also apply traditional canons of statutory interpretation to the Fourth Exception.20

An unexplored part of the statute that sheds light on the meaning of the Fourth Exception comes before the exceptions are listed. This text clarifies that “no employer having employees subject to any provisions of this section shall discriminate…between employees on the basis of sex” (emphasis added) by paying employees of one sex less than employees of the opposite sex without falling into one of the Act’s exceptions.21 The Act focuses on internal equity: paying men and women within the same company equally for equal work. The external market, which includes prior pay, cannot justify paying men less than women. This result lends support to the Ninth Circuit’s conclusion in Rizo v. Yovino: prior pay can never be considered a “factor other than sex.” Only job-related factors can qualify as “factors other than sex.”

Because the Equal Pay Act focuses on pay disparities between employees of one company, the Act could not have intended to combat the wage gap in a one-step process. It is not the case that in one swoop Congress sought to ensure all workers at all companies who do the same job receive the same pay. The Act implicitly envisions two steps toward the ultimate goal of closing the gender pay gap. First, within one company, employees who do equal work must be paid the same unless an exception like a seniority system or merit system applies.22 For example, Company A is free to pay its female cashiers less than Company B pays its male cashiers. Both companies can create a system where newer employees get paid less and employees with strong performance ratings get paid more.23 This is because the Equal Pay Act permits pay disparities between men and women on the bases of merit or seniority.24 But both companies must generally pay its own men and women cashiers the same.

The second step in eliminating the pay disparity is competition between employers for talent. If Company A pays all its cashiers less than Company B pays all its cashiers, Company B will win in the marketplace and attract the most talented employees. This will incentivize Company A to raise its wages, and it must do so for all employees regardless of gender. Then Company A and Company B will be paying their men and women cashiers the same. Other companies in the industry will follow suit and then a more global closing of the wage gap would follow. This two-step process gets blurred by the fact that wage studies often compare men’s versus women’s wages between employers across entire industries or professions, not within one company.25 The Equal Pay Act’s focus is equal pay within one company.

Implications for Common Pay Practices that Rely on the External Market in Setting Employee Compensation

Employers will no doubt find it disruptive that they cannot consider employees’ prior pay in setting wages. It was once common during an interview process to ask candidates about their prior pay.26 Now, an employer may go through the entire interview process with a candidate and realize only after extending an offer that the candidate will not accept because they are currently making much more than the company offered or is willing to pay.27 The candidate would likely turn down the job offer.28 Employers can mitigate this risk of wasting time by asking the job candidate what his or her compensation “expectations” are early in the interview process.29 Alternatively, employers could disclose salary ranges in job postings so candidates could self-select out if they would not accept a position at the listed compensation range.30

If the Ninth Circuit is correct that only job-related factors can be “factors other than sex,” then the external market is irrelevant in comparing the pay of male versus female employees within the same company. This has other implications for common pay practices. For example, an employer may rely on a salary survey when determining the compensation package it will offer to a job candidate.31 Employers submit data to companies performing salary surveys so that they can benchmark their compensation schemes with other employers, usually within the employer’s own industry.32 However, if a wage gap does exist (as most Circuits have acknowledged) these salary surveys have the wage gap between men and women built into their data. If an employer uses such a salary survey in determining an individual employee’s pay, then the employer is most likely using data tainted by sex discrimination. Employers should be careful: if they use a salary survey to determine one employee’s pay, they should do so for all. Otherwise, that one employee’s pay could be depressed compared to another who does equal work because of the reliance on a salary survey with a discriminatory wage gap built into it. Similarly, if an employer uses a salary survey to determine a new employee’s pay, the employer should benchmark all current employees who do equal work against the same survey. Otherwise, again, the new employee’s wage may be artificially lower because of reliance on a salary survey tainted by sex discrimination. Employers should note that the Equal Pay Act prohibits reducing any employee’s pay in order to eliminate a pay disparity.33

Another common pay practice that relies heavily on the external market is the practice of negotiating one’s pay using offers from other companies. Sometimes an employee may interview at other companies and receive an offer of employment with a higher salary than the employee is currently making.34 The employee may come back to his or her current employer and ask the employer to match the offer he or she has from the other employer.35 The fact that this employee is a “flight risk” or a stronger salary negotiator is not a job-related factor.36 If the employer makes a counter-offer, the employer should also adjust the wages for other employees who do equal work. Otherwise, the employer will need to rely on another exception to the Equal Pay Act such as merit to explain the pay disparity. Employers should document such merit-based raises well.

Conclusion

The Equal Pay Act aims to promote gender pay equity within one company. As a result, factors that justify a pay disparity between a male and female employee must be job-related, not based on external market factors. Prior pay is a type of external market factor. Relying on prior pay tainted by sex discrimination that exists in the marketplace perpetuates discrimination on the basis of sex. The Equal Pay Act requires that prior pay be irrelevant in setting an employee’s pay.

  1. Equal Pay Act of 1963, 29 U.S.C. § 206(d)(1) (2012). ↩

  2. Id. ↩

  3. Id. ↩

  4. Rizo v. Yovino, 950 F.3d 1217, 1231 (9th Cir. 2020) (explaining the split among the Circuit Courts). ↩

  5. See, e.g., Rizo, 950 F.3d at 1241; Irby v. Bittick, 44 F.3d 949, 955 (11th Cir. 1995). But see Wernsing v. Dep’t of Human Servs., 427 F.3d 466, 470 (7th Cir. 2005) (“[w]age patterns in some lines of work could be discriminatory, but this is something to be proved rather than assumed”). ↩

  6. Rizo, 950 F.3d at 1232. ↩

  7. Id. ↩

  8. Wernsing, 427 F.3d at 470; Taylor v. White, 321 F.3d 710, 714-15 (8th Cir. 2003). ↩

  9. See, e.g., Riser v. QEP Energy, 776 F.3d 1191, 1199 (10th Cir. 2015); Irby, 44 F.3d at 955; U.S. Equal Emp. Opportunity Comm’n, EEOC-CVG-2001-3, EEOC Compliance Manual § 10 Compensation Discrimination (2000). ↩

  10. Id. ↩

  11. Aldrich v. Randolph Cent. Sch. Dist., 963 F.2d 520, 525 (2d Cir. 1992); Beck-Wilson v. Principi, 441 F.3d 353, 365 (6th Cir. 2006). ↩

  12. Yovino v. Rizo, 141 S. Ct. 189 (2020) (denying certiorari). ↩

  13. Id. ↩

  14. Randolph Cent. Sch. Dist.v. Aldrich, 506 U.S. 965 (1992) (denying certiorari). ↩

  15. E.g.,N.Y. Lab. § 194-a (Consol. 2020). ↩

  16. See Jathan Janove, More Jurisdictions Are Banning Salary-History Inquiries, Soc’y For Human Res. Mgmt. (Apr. 4, 2019), https://www.shrm.org/resourcesandtools/legal-and-compliance/state-and-local-updates/pages/more-jurisdictions-are-banning-salary-history-inquiries.aspx. ↩

  17. See, e.g., Rizo v. Yovino, 950 F.3d 1217, 1226 (noting that House Reports during the passing of the Equal Pay Act indicated exceptions to the equal pay mandate were job related such as shift differential or whether an employee was required to lift or move heavy objects). ↩

  18. See Corning Glass Works v. Brennan, 417 U.S. 188, 195 (1974). ↩

  19. E.g., Aldrich v. Randolph Cent. School Dist., 963 F.2d 520, 525 (2d Cir. 1992). ↩

  20. E.g., Rizo, 950 F.3d at 1224-25. ↩

  21. Equal Pay Act of 1963, 29 U.S.C. § 206(d)(1) (2012). ↩

  22. Id. ↩

  23. 29 U.S.C. § 206(d)(1)(i)-(ii) (2012) (the seniority system and merit system exceptions). ↩

  24. Id. ↩

  25. See, e.g., Rizo, 950 F.3d at 1229 (citing studies demonstrating a gender pay gap when the studies’ data compared men and women across entire industries and professions). ↩

  26. See James Bessen et al., Stop Asking Job Candidates for Their Salary History, Harv. Bus. Rev (July 14, 2020), https://hbr.org/2020/07/stop-asking-job-candidates-for-their-salary-history. ↩

  27. Id. ↩

  28. Id. ↩

  29. Id. ↩

  30. Id. ↩

  31. Joanne Sammer, The Art of Setting Pay, Soc’y for Human Res. Mgmt. (May 1, 2013), https://www.shrm.org/hr-today/news/hr-magazine/pages/0513-salary-surveys3.aspx. ↩

  32. Id. ↩

  33. 29 U.S.C. § 206(d)(1) (“an employer who is paying a wage rate differential in violation of this subsection shall not, in order to comply with the provisions of this subsection, reduce the wage rate of any employee”). ↩

  34. Amy Gallo, Setting the Record Straight: Using an Outside Offer to Get a Raise, Harv. Bus. Rev. (July 5, 2016), https://hbr.org/2016/07/setting-the-record-straight-using-an-outside-offer-to-get-a-raise. ↩

  35. Id. ↩

  36. See Dreves v. Hudson Group Retail, U.S. Dist. LEIXS 82636 at *26 (D. Vt. 2013) (“[T]here is simply no basis for the proposition that a male comparator’s ability to negotiate a higher salary is a legitimate business-related justification to pay a woman less.”). ↩

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