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INSIGHT: U.S. and U.K. Changes in Pay Equity Laws Call for Employers to Look Internally to Avoid Discrimination Claims

Aug. 8, 2018, 12:01 PM

Although the Equal Pay Act and Title VII have been the laws of the land since the 1960s, social and political discourse focusing on gender inequality, such as the “Me Too” movement, have returned attention to the gender pay gap in the United States.

Several states have passed or are considering legislation prohibiting employers from asking prospective employees to disclose their salary data before extending an offer of employment. The U.S. Court of Appeals for the Ninth Circuit recently interpreted the Equal Pay Act to prohibit employers from using prior salary as a justification for paying women less than men for the same work. Across the pond, the United Kingdom took another step this year in efforts to end the gender pay gap by requiring larger companies to disclose their gender pay gap to the government and to publish a gender pay gap report on their websites.

New State and Local Laws in the United States Prohibiting Employers from Asking About Salary History During the Hiring Process

Seven states and seven local governments have passed legislation prohibiting public and—in some cases—private employers from soliciting salary history during the hiring process. The states that have already passed legislation include California, Delaware, Massachusetts, New Jersey, New York, Oregon, and Puerto Rico. Some local governments in those states, along with Chicago, Philadelphia, Pittsburgh, and New Orleans, have also enacted laws banning city agencies from asking for applicants’ salary histories. Philadelphia’s ban extends to private employers but is currently on hold while the Chamber of Commerce challenges the ban through litigation. Similar legislation is under consideration in 20 other states.

The Ninth Circuit Holds that Prior Salary is not a Job-Related Factor in Equal Pay Act Litigation

On the eve of Equal Pay Day, the Ninth Circuit, sitting en banc, held that a female employee’s prior salary by itself, or in combination with other factors, cannot justify a wage differential between a male employee and a female employee under the Equal Pay Act in Rizo v. Yovino. In doing so, the Court overruled its more than 30-year-old decision in Kouba v. Allstate Ins. Co., 691 F.2d 873 (1982).

Plaintiff Aileen Rizo brought an Equal Pay Act claim against her employer, the Fresno County, Calif., government, asserting that the County was paying male employees more than her for the same work as a math consultant. The County defended against her claim by pointing to its Standard Operating Procedure (SOP) 1440. SOP 1440 dictates salaries for new hires at one of 10 salary steps and one of 10 levels within those steps. Instead of relying on an employee’s prior experience—like the County’s prior hiring schedule—SOP 1440 takes a new hire’s prior salary, adds 5% and then places the individual on the corresponding step of the salary schedule. Plaintiff Rizo contended that this SOP resulted in pay disparities for equal work and ultimately put more men at a higher average salary step than their female counterparts.

The County moved for summary judgment, not disputing that Rizo was paid less than her male counterparts, but instead arguing that her prior salary was an affirmative defense under the Equal Pay Act’s catch-all clause, a “factor other than sex.” The Court, therefore, was faced with the purely legal question of whether an employee’s prior salary was a legitimate basis for justifying a wage differential between male and female employees.

Writing for the en banc Court, in one of his last opinions prior to his death, Judge Stephen Reinhardt answered that question with a resounding “No.” The Court engaged in a thorough review of the text and legislative history behind the Equal Pay Act to support its conclusion that the exception for “any other factor other than sex” had to be limited to “legitimate, job-related factors such as a prospective employee’s experience, educational background, ability, or prior job performance.” Given that the primary purpose of the Equal Pay Act is to “eliminate long-existing ‘endemic’ sex-based wage disparities,” the Court found it inconceivable that the catch-all clause could be construed to incorporate evidence of past discrimination in the form of prior lower salaries for women.

Considering the Ninth Circuit’s decision and legislative trends toward banning pay history questions, U.S. employers may want to consider reviewing their pay practices and related recruiting policies. It is likely that U.S. employers will see an increasing amount of legislation and litigation in this area.

The United Kingdom’s New Pay Gap Reporting Regulations

Employers that have operations in the United Kingdom have already seen major regulations in the area of equal pay. Companies in the UK with 250 employees or more were required to disclose gender wage gap data in a report uploaded to a public government website by April 4, 2018, under regulations passed in 2017 pursuant to the Equality Act of 2010. In introducing mandatory gender pay gap reporting, the UK government concluded that although progress had been made in the UK gender pay gap, voluntary action by companies has been slow, and changes have not been made at the rate that Parliament had hoped.

Of the 300 employers that signed up for a voluntary initiative called “Think Act Report,” only seven signatories actually published their gender pay gap. To increase the rate of progress, companies were given a year from the date the regulations became effective until the date the report was due under the assumption that they would take steps to reduce the wage gap during that year to avoid reputational harm.

The UK government has recognized the “significant cumulative impact” that the gender pay gap could have on a woman’s earning potential for her lifetime. While noting that some employers may not even realize they have a pay gap, the UK government introduced this reporting requirement to drive employers to audit their pay practices internally to gain insight into factors that cause gaps in pay based on gender. Some examples include historical organizational cultures favoring men and thereby hindering women, unconscious bias in the minds of recruiters and management-level employees with hiring and firing authority, and the lack of part-time work that both pays well and aligns with childcare needs. The stated objectives of this reporting requirement include transparency and encouraging employers to identify workplace policies that may have contributed to the gender pay gap as opposed to socio-economic factors beyond the employer’s control.

The 2017 regulations require employers to report the following categories of data, and the UK Government Equality Office published guidance on calculating these data points:

  • Pay gap, mean and median—using an hourly rate of pay, this measures the difference between male and female employees and is expressed as a percentage of the hourly pay of male employees. Therefore, a positive number shows that men earn more than women while a negative number means the opposite.
  • Bonus pay gap, mean and median—this data point includes bonus pay paid to male and female employees in the 12 months prior and also is expressed as a percentage of the bonus pay paid to male employees.
  • Bonus pay proportion—this criterion measures the number of employees who received a bonus in the preceding 12 months, expressed as a percentage of all bonus-eligible employees but broken down by gender.
  • Quartiles—employers must break down their employees into evenly sized quartiles of employees from highest to lowest by hourly rate of pay and then identify the number of male and female employees in each quartile as a percentage of the total in the quartile.

If employers subject to the regulations fail to file the report by the annual deadline (April 4 for businesses and charities, March 31 for public sector), the failure constitutes an “unlawful act” under the Equality Act and is subject to an enforcement action by the Equality and Human Rights Commission (EHRC). Doubts have been expressed about whether the EHRC actually has power to enforce the regulations. While more than 10,000 employers have published their gender pay report on the government’s website, it appears that the EHRC has sent letters to nearly 1,500 employers whom it believes should have published a gender gap report. Reports must be published not only on the website of the Government Equalities Office but also on the employer’s own website and must remain there for at least three years.

Given the increasing focus on the gender pay gap in the U.S. and the UK, employers in both countries should review their policies and procedures for employee compensation.

Author Information

Gail Westover has over 20 years of experience advocating for clients in both federal and state courts as well as in arbitration. Her experience includes litigating employment, ERISA, intellectual property, personal injury and general commercial contract disputes for a wide range of clients, including those in the insurance, financial services, energy and pharmaceutical industries.

Kristine Maher represents clients in the insurance and financial services, construction and pharmaceutical industries on a wide variety of commercial litigation matters. Her experience includes specialized types of litigation including ERISA litigation, class action cases, claims under various state consumer protection laws and federal laws such as the civil Racketeer Influenced and Corrupt Organizations (RICO) Act and mechanics’ lien actions. She represents her clients on both the trial and appellate levels and regularly appears in the state and federal courts of Virginia.

Elizabeth Graves is a Partner in the Human Resources Practice Group at Eversheds Sutherland specialising in providing cross-border employment advice to multi-national businesses, particularly those in the financial service, life sciences and technology sectors. She has advised many employers about complying with their obligations to publish a gender pay gap report for United Kingdom employees and on strategies to manage their gender pay gap and diversity and inclusion within the workforce.