California's Fair Pay Act Goes Into Effect
On January 1, 2016, Slate Precision Parts faced a new problem.
Mr. Slate has owned his own machine shop for ten years. Slate Precision Parts enjoys a long-term lease in Lodi, California for a 5,000 sq ft building encompassing a shop floor, a reception area, a filing room, a supply room, Mr. Slate’s office, a kitchen, and a break room. Along with his six employees, Mr. Slate has grown the business from bare survival to profitability by producing high quality precision parts at a reasonable price. Three machine operators, under the watchful eye of his shop foreman, Fred, keep the shop floor humming with activity. Barney, the shop steward, keeps the shop floor clean and maintains a watchful eye to ensure that the work flow is not interrupted by an accidental absences of shop supplies. Meanwhile, Betty runs the reception desk when she isn’t keeping the kitchen, break room and reception area clean and tidy. Betty also handles the filing and maintains the proper inventory of office and cleaning supplies.
Mr. Slate is especially proud of the continued high level of employee morale. Slate has paid its employees a good wage and provided health care benefits long before other companies its size. As a single example, Barney was hired in March 2010 as shop steward and was given a starting wage of $20/hour, well above the typical shop steward’s pay rate. Mr. Slate justified the higher wage because Barney was married with three kids and struggled to make ends meet. Meanwhile, Betty - the wife of Dr. Moneybags - was hired in September 2010 as a receptionist with a starting wage of $17/hour, an amount consistent with other receptionists in the area. To help prevent discontent and jealousy and keep morale high, Slate Precision Parts has long had a policy that strongly discouraged employees from asking each other about their wages or benefits.
Slate Precision Parts has never violated California’s laws prohibiting gender-based wage discrimination, which have been in place since 1949. Those laws required equal pay for jobs that required “equal skill, effort and responsibility, and which are performed under similar working conditions.” Comparing the wages of a shop steward to a receptionist to determine gender inequity would have been at least a dubious, if not incomprehensible, endeavor. Moreover, any employee complaining of pay inequity would bear the burden of proving that the pay disparity was unlawful.
On January 1, 2016, however, the world changed for Slate Precision Parts and every other California employer. On that day, the California Fair Pay Act - signed into law on October 6, 2015 - went into effect.
From now on, California employers will be required to pay equal pay for “substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions.” Cal. Labor Code 1197.5. As a practical matter, pay comparisons between employees will no longer be limited to people with the same job title or nearly identical duties.
In addition, once an employee demonstrates the existence of pay disparity, the burden falls upon the employer to demonstrate that the difference is “entirely attributable” to factors specified in the statute - either in isolation or in combination with others. These factors include: a seniority system, a merit system, or a production system that ties compensation to either quantity or quality of production. In addition, an employer may rely on a bona fide factor other than gender, including education, training, or experience provided the employer can prove that this factor is job-related concerning the position and “consistent with business necessity.” Nevertheless, this reliance may be overcome if the employee can demonstrate that an alternative business practice was available that would serve the same business objective without resulting in the wage discrepancy.
Further, the Fair Pay Act bars employers from prohibiting employees from discussing both their own compensation as well as the compensation of other employees. The Act also allows employees to request information about the compensation of other employees. Nevertheless, employers are not required to disclose wage information in response to the employee request. So how does the Fair Pay Act impact Slate Precision Parts?
First and foremost, Betty the Receptionist can compare her pay rate to Barney the Shop Steward if they perform “substantially similar work”. The specific job titles have little to no relevance on whether this 17% pay disparity violates California law. In fact, because Betty can demonstrate that the tasks that she performs are substantially similar to those performed by Barney, Betty most likely establishes her prima facie case of wage discrimination.
The burden, therefore, falls on Slate to establish that the difference in pay between Betty and Barney is “entirely attributable” to either a seniority system, a merit system, or a production system that ties compensation to either quantity or quality of production. In this case, Slate would be hard pressed to establish that a six-month difference in starting dates justifies the $3/hour difference. Nor is the difference entirely attributable to a merit system or a system that ties compensation to the amount or quality of their respective performances. Barney's Ph.D. in French literature–even though it establishes his higher level of education—is not job related and therefore cannot constitute a bona fide justification for his higher compensation.
In short, Slate Precision Parts is at risk of an enforcement action by the California Division of Labor Standards Enforcement (“DLSE”) or a civil action brought by Betty. Whether brought by the DLSE or Betty, Slate Precision Parts would be subject to a damages award of the previous two years worth of pay shortfall plus liquidated damages.
In addition, Slate Precision Parts’ policy discouraging its employees from discussing their respective compensation packages must be terminated.
So how should California employers respond to the changes wrought by the Fair Pay Act? Burying your head in the sand is simply not an option. Reduce the risks by being proactive.
Nine Steps for Employers to Take to Reduce Risk of Non-Compliance with the Fair Pay Act
1. Identify each employee and ensure that each employee has a written job description that accurately reflects the task that they perform.
2. Compare the compensation of each employee with either the same job title or job descriptions that require substantially similar work when viewed it is a combination of skill, effort, and responsibility, And performed under similar working conditions. (N.B. Remember to include within compensation any bonuses, equity, or any other form of compensation in addition to base salary or wages.)
3. Identify any gender differences in compensation disparity.
4. Examine whether any identified gender differences can be fully explained by one of the following factors—whether in isolation or combination
- A seniority system
- A merit system
- A system that measures earnings by quantity or quality of production
- A bona fide factor other than gender which is job-related with respect to the employees’ position and consistent with business necessity (N.B. Be sure to ask the question, “Are there any alternative means to achieve this business necessity without creating a difference in wages?”)
5. Adjust compensation for any employees whose compensation differences cannot be fully explained by the above factors immediately.
6. Put into effect clear written guidelines for setting compensation levels based upon the above analysis.
7. Create a policy addressing how you will respond to requests for comparative compensation inquiries.
8. Revise your employee handbook to ensure that any policies restricting or discouraging employees from discussing their compensation, as well as the compensation of other employees are eliminated.
9. Revise your employee handbook to ensure whistleblower and anti-retaliation policies expressly include employees who assert rights under the California Fair Pay Act or who assist others in its enforcement.
As with any legal issue that impacts your business, you should consult directly with a competent attorney to help address your particular situation.