Tuesday, May 30, 2017

Rizo v. Yovino, Part 2: The Need for a Coherent Approach to Relying on Pay History

Following up on my prior post on Rizo v. Yovino, this new post focuses on the recently filed briefs supporting rehearing by the full Ninth Circuit Court of Appeals. Rizo presents the issue of whether prior pay standing alone can be a defense under the Equal Pay Act. In other words, if a man and a woman are doing the same job and one of them is paid more than the other, can an employer ever justify the pay discrepancy by merely pointing to the higher-paid worker's prior salary? A three-judge panel of the Ninth Circuit held that prior pay standing alone can indeed be sufficient to justify a pay discrepancy under the Equal Pay Act. In requesting rehearing, Aileen Rizo contends that the panel decision should be rejected because it allows for the perpetuation of past pay discrimination and because it conflicts with the decisions of two other courts of appeals.

This post looks primarily at two amicus briefs, one filed by the EEOC and a second filed by a coalition of civil rights groups. While I agree that there are compelling reasons for restricting consideration of prior salary, the arguments advanced by the EEOC and by the civil rights coalition are confusing and fail to provide a coherent and workable solution. Rather, the EEOC and the coalition indiscriminately attack any consideration of pay history. To try to shine some light on this issue, this post discusses a possible solution that allows for the consideration of prior pay while also recognizing the risk of perpetuating pay discrimination.

It is important at the outset to distinguish the factors that an employer relies on in setting pay from the factors that ultimately result in a pay discrepancy between two individuals. For example, suppose XYZ Employer extends job offers as sales associates to a man and a woman (Darin and Dena) with similar qualifications and offers them each an annual salary of $75,000. Both applicants try to negotiate for higher pay. Darin is currently earning $65,000 while Dena is earning $85,000. Based on the applicants' salary histories, XYZ raises its salary offer to Dena to $88,000, but it keeps its offer to Darin at $75,000. Both applicants accept XYZ's offer. Under these circumstances, XYZ relied on prior salary and qualifications in setting Darin and Dena's starting salaries, but the sole reason that it ended up paying Dena more is her salary history.

So if we assume that prior salary standing alone is not a defense under the Equal Pay Act, does that mean that XYZ is out of luck because prior salary is the only reason that it has decided to pay Dena more than Darin, or does XYZ have a potential defense because it looked at both prior salary and qualifications when it set Dena and Darin's pay?

It is clear that the Rizo panel believed that the latter is the right way to view the issue:

[W]e do not see how the employer's consideration of other factors would prevent the perpetuation of existing pay disparities if . . . prior salary is the only factor that causes the current disparity. For example, assume that a male and a female employee have the same education and number of years' experience as each other, but the male employee was paid a higher prior salary than the female employee. The current employer sets salary by considering the employee's education, years of experience, and prior salary. Using these factors, the employer gives both employees the same salary credit for their identical education and experience, but the employer pays the male employee a higher salary than the female employee because of his higher prior salary. In this example, it is prior salary alone that accounts for the pay differential, even though the employer also considered other factors when setting pay. If prior salary alone is responsible for the disparity, requiring an employer to consider factors in addition to prior salary cannot resolve the problem that the EEOC and the plaintiff have identified.
In contrast, the civil rights coalition contends that the Rizo panel misconstrued the question of law that was presented on appeal: "The question was not whether prior salary can be the only factor considered by an employer in setting pay, but rather, if it can be the only factor that caused the gender wage differential, even if other factors were considered at the front end."

In my view, the Rizo panel is correct for several reasons. First, the civil rights coalition stands alone in contending that the pay discrepancy, rather than merely the pay-setting decision, must be based on more than salary history. Neither the EEOC nor Rizo has challenged the panel's framing of the issue. For example, in Rizo's petition for rehearing, she criticizes the practice of relying on prior pay as the sole basis in "setting compensation." The EEOC's amicus brief is even clearer. The EEOC acknowledges that prior salary can be an Equal Pay Act defense even if it is the only factor that causes a wage disparity, as long as it was not the only factor that was considered in setting pay. As the EEOC explains: "Factors such as education and relevant experience ordinarily are not gender-based. To the extent the employer actually considers such factors -- rather than merely paying lip-service to doing so, as the panel's example suggests -- it dilutes the relative importance of prior pay in the decision."

Second, as the EEOC notes, the purpose of requiring factors in addition to salary history is to dilute the importance of salary history and to minimize the potential for perpetuation of any sex discrimination. If an employer sets pay by looking at prior pay along with other factors, the reliance on prior salary cannot somehow become deficient merely because there is subsequently an opposite sex worker who is being paid less solely because of her pay history.

Third, if no part of a pay discrepancy can be based on salary history alone -- even if salary history was not the only factor considered in setting pay -- then that means, in reality, that salary history can never be any factor at all in setting pay. As the civil rights coalition argues in its amicus brief, "[P]rior salary should only be accepted as [an EPA defense] if the wage difference can be explained or supported by some other factor." As support, the coalition brief cites an example in the EEOC Compliance Manual in which the EEOC endorses reliance on prior salary where it accurately reflects an employee's ability and job-related qualifications. In such circumstances, however, the employer is merely basing pay on an employee's qualifications and is not basing pay on salary history in a meaningful way.

Thus, the coalition's argument that a pay differential, rather than merely a pay-setting decision, cannot be based solely on prior salary is really an argument against any reliance whatsoever on salary history. There may very well be reasonable arguments for prohibiting any consideration of salary history. However, that is not the position that the coalition purports to advance. Instead, the coalition presents a disingenuous argument that superficially supports a limited reliance on prior salary but in reality attacks any reliance on prior salary.

So if the EEOC concedes that prior salary can be a defense as long it is not the sole factor in setting pay, does that mean that there are clear circumstances in which the EEOC believes an employer can rely on prior salary in setting pay? Hardly. Even though the EEOC's approach appears to be more flexible than that of the civil rights coalition, the EEOC nonetheless appears loathe to identify any circumstances in which prior salary can be given any real weight in setting pay. As already noted, the example from the EEOC's Compliance Manual does not suggest that prior pay can play any meaningful role in setting an employee's pay and instead suggests that prior pay is only a permissible consideration to the extent it reflects job-related qualifications.

Luckily, the solution may be staring us right in the face. It is almost certainly impossible for an employer to determine with pinpoint accuracy the market value of a particular job and an employee's qualifications. There will always be some range of what can be considered reasonable pay for an individual with particular qualifications to perform a particular job. In my view, therefore, a reasonable and balanced approach to considering prior pay in setting a new employee's starting salary is for an employer to (1) establish a pay range for a new employee based on the position being filled and the applicant's qualifications and (2) then use salary history to set the new employee's pay within that range. For the sake of brevity, I refer to this below as the "salary range" approach.

For example, in North v. United States, the court upheld a salary discrepancy between the plaintiff, a female attorney hired at the GS-14 level by the Department of Education, and a man who was also hired as a GS-14 attorney. The court concluded that the pay disparity did not violate the Equal Pay Act because it was based on the male attorney's "superior" qualifications and prior salary. Although the plaintiff also had superior qualifications -- meaning that she and the male attorney were both considered "highly qualified" for the position -- her starting salary exceeded her prior salary, so her pay was set at the lowest step of the GS-14 pay grade. The male comparator's salary, by contrast was set at the highest step of the GS-14 pay grade (almost $30,000 above the lowest step), and even at that rate, he made less than in his previous job.

The salary range approach is consistent with the recently introduced Paycheck Fairness Act, H.R. 1869, which would amend the Equal Pay Act to restrict employers' reliance on salary history. The civil rights coalition characterizes this bill as prohibiting employers from "seeking or relying on salary history," but I think that is incorrect. Specifically, the bill provides that it is unlawful for an employer to "seek from a prospective employee or any current or former employer the wage history of the prospective employee, except that an employer may seek to confirm prior wage information only after an offer of employment with compensation has been made to the prospective employee and the prospective employee responds to the offer by providing prior wage information to support a wage higher than that offered by the employer." Thus, although the bill prohibits employers from requiring applicants to disclose their salary history, it does not prohibit employers from relying on salary history in setting pay when salary history is voluntarily disclosed by applicants, and the bill contemplates that salary history will be used by applicants to negotiate for higher pay. Moreover, like the pay range approach discussed above, the bill requires an employer to make an initial assessment of an appropriate starting salary for a new employee.

This is not to say that the salary range approach should necessarily be considered a sufficient defense to an Equal Pay Act claim in all cases. In the Ninth Circuit, an employer must establish that its asserted defense "'effectuate[s] some business policy' and that the employer 'use[s] the factor reasonably in light of the employer's stated purpose as well as its other practices.'" Certainly, there could be instances in which an employer has acted unreasonably in using prior salary to set starting pay within a range, such as where the range is unreasonably large.

On the other hand, if employers have no freedom to pay some new employees more than others based on prior salary, employers may have difficulty competing for the best employees. As the EEOC suggests, consideration of other factors along with prior salary dilutes the effect of reliance on prior salary and reduces, but does not eliminate, the potential for perpetuating pay discrimination. The salary range approach is an imperfect compromise, but in my view, it strikes a reasonable balance between the interests of employers and employees. Given that the federal government follows this procedure in setting pay, it hardly seems fair to fault private sector employers for following suit. Sadly, however, in this if-the-President-does-it-it's-not-illegal era that we live in, fairness may be too much to expect.

Curiously, in Rizo, although the parties apparently do not dispute that the defendant relied solely on prior salary in setting pay, I disagree. The salaries of Rizo and the higher-paid male math consultants were based on level 1 of the management pay scale, which in 2009 had 10 steps ranging from $62,133 to $81,461. The defendant set a newly hired math consultant's pay at the step that corresponded to the employee's prior salary, plus a 5% raise. While the defendant apparently relied solely on prior salary in setting a new employee's salary within the level 1 range, starting salary was limited by that range. Thus, although the plaintiff's prior salary was only about $52,000, the defendant set the plaintiff's pay at the lowest step, which was considerably more than a 5% raise. The pay-setting procedure followed in Rizo largely mirrors the approach in North. The one significant difference is that in Rizo the defendant relied on prior pay in setting any new employee's salary within the applicable range. In North, by contrast, the defendant relied on prior salary only if an applicant had "superior qualifications." My point here is not that the pay procedure followed by the defendant in Rizo was necessarily lawful, but rather that like the one at issue in North, it did not involve a pay-setting decision that relied solely on prior salary. Nonetheless, it's possible that at this late stage, it may be too late for the defendant to point this out.

This blog reflects the views solely of its author. It is not intended, and should not be regarded, as legal advice on how to analyze any particular set of facts.