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general / Employment

Can prior pay inform a new hire’s salary?

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The 9th U.S. Circuit Court of Appeals' recent en banc decision in Rizo v. Yovino has generated significant press and interest among attorneys who advise on or litigate pay equity issues. Some have characterized the opinion as barring any consideration whatsoever of an employee's prior salary in setting her starting pay. But does the opinion reach so far? What questions does it answer, and what does it leave open? A review of the particular facts of the case, the appellate panel's disagreement with the district court, and the fractured opinions issued by the 9th Circuit en banc reveals the challenges of divining general, broadly applicable rules from the case.

Fresno County Relies Exclusively on Prior Pay

Rizo involved a challenge to a Fresno County Office of Education policy that dictated an objective formula to determine the initial salary step that would be offered to all newly hired management employees. The office would verify the daily rate of the employee's most recent position, add five percent, and place that new employee on the next step that pays an amount at or above the five percent increase. The starting salary the office offered to each new employee was thus determined exclusively by his or her prior salary, without any consideration of his or her educational attainment, relevant prior experience, skill level, demonstrated prior performance, or any other factors.

In September 2009, Aileen Rizo applied for an open position as a math consultant with the Fresno education office. Consistent with the office's policy, she was offered a starting salary of $62,733 -- the bottom of the range for Step 1 of the office's salary schedule, but more than a five percent increase over what she had been making in her prior position -- and she accepted.

Three years later, Rizo learned that a male colleague in the same position was hired at a starting salary in Step 9 of the salary schedule. She complained to human resources, who investigated and found that the office's starting salary formula had been consistently applied to Rizo and others, and that application of the policy had actually resulted, on average, in the placement of women higher on the salary schedule than men. Rizo sued, alleging, inter alia, violations of the federal Equal Pay Act, Title VII of the federal Civil Rights Act of 1964, and the California Fair Employment and Housing Act.

District Court Rejects Justification for Unequal Pay

The Fresno education office filed a motion for summary judgment as to all of Rizo's claims, arguing that its salary-setting system's reliance on prior pay was permissible as a matter of law. Magistrate Judge Michael J. Seng of the Eastern District of California disagreed, and denied the office's motion in its entirety. Rizo v. Yovino, 1:14-CV-0423-MJS (E.D. Cal. Dec. 18, 2015).

On the Equal Pay Act claim, the court found that Rizo had established -- and the office had not challenged -- that she was paid less than men performing "substantially equal" work. The burden thus shifted to the office to demonstrate that one of the enumerated defenses in the act permitted the wage disparity. The office relied on the "factor other than sex" defense, arguing that consistent application of its starting salary policy led to the challenged pay differential, and that at least four distinct business reasons justified the policy: (1) having objective pay determinants; (2) attracting quality new employees; (3) preventing favoritism and ensuring consistency; and (4) making judicious use of taxpayer dollars.

The district court found these justifications of the office's blanket policy unavailing. As the court noted, the 9th Circuit had previously "unequivocally found that the Equal Pay Act allows an employer's consideration of prior salary," citing Kouba v. Allstate Ins. Co., 691 F.2d 873, 878 (9th Cir. 1982). However, the court distinguished Kouba, arguing that the system challenged in that case utilized prior salary as just one among several factors in determining starting pay. The district court thus viewed the case before it as presenting the open question of whether the exclusive use of prior salary to set starting pay violated the Equal Pay Act. In finding that the office's system violated the act, the court reasoned:

"[A] pay structure based exclusively on prior wages is so inherently fraught with the risk -- indeed, here, the virtual certainty -- that it will perpetuate a discriminatory wage disparity between men and women that it cannot stand, even if motivated by a legitimate non-discriminatory business purpose." The court also cited to evidence about the national "across-the-board pay disparity" between men and women working in education -- i.e., to the oft-cited national "wage gap" statistics from the U.S. Census Bureau -- and concluded that systems "which do not look beyond prior salary will perpetrate that disparity." The court reasoned that such an outcome -- which it viewed as an inevitable consequence of the office's singular focus on prior salary -- could not be reconciled with the intent or spirit of the Equal Pay Act.

Accordingly, the court ruled that the office's prior salary reliance did not constitute a defense to Rizo's Equal Pay Act claim. But it certified for interlocutory appeal the legal issue that was key to its ruling -- whether as a matter of law "an employer subject to the [act] may rely on prior salary alone when setting an employee's starting salary." (Emphasis added.)

9th Circuit Panel Unanimously Reverses

A panel of the 9th Circuit, in a 3-0 decision authored by Judge Lynn S. Adelman of the Eastern District of Wisconsin (sitting by designation) and joined by Judges A. Wallace Tashima and Andrew D. Hurwitz, granted the office's interlocutory appeal and vacated the district court's summary judgment order. Rizo v. Yovino, 854 F.3d 1161 (9th Cir. 2017).

The panel disagreed that Kouba had left open the question the district court felt itself free to consider. In Kouba, the panel noted, the challenged salary system involved multiple factors, but the plaintiff alleged that it was the use of prior salary that caused the wage differential. The court in Kouba held that if the defendant could show that its reliance on prior salary "was reasonable and effectuated some business policy," that reliance would be sufficient to establish the "factor other than sex" defense as to any disparity that such reliance generated. Thus, the panel concluded, Kouba had already decided the issue before it.

The panel also considered and rejected the argument of amicus curiae the U.S. Equal Employment Opportunity Commission that reliance on prior salary "perpetuates existing pay disparities and thus undermines the purpose of the Equal Pay Act," finding that Kouba foreclosed that argument, too. Quoting Kouba, the panel directed the district court on remand to "evaluate the four business reasons offered by the County and determine whether the County used prior salary 'reasonably in light of [its] stated purpose[s] as well as its other practices.'"

En Banc 9th Circuit Vacates

On April 9, the en banc 9th Circuit reversed the panel, overruled Kouba, and affirmed the district court's grant of summary judgment. Rizo v. Yovino, 887 F.3d 453 (9th Cir. 2018). Of the eleven judges who heard the case, five joined the late Judge Stephen R. Reinhardt's majority opinion, with the remaining five split across three concurring opinions. The judges unanimously agreed that the salary differentials generated by the office's particular pay-setting system violated the Equal Pay Act. But both within and across the various opinions, there appeared to be differing and uncertain views as to how other practices involving consideration of prior pay might fare. In particular:

• Although the majority held that "prior salary alone or in combination with other factors cannot justify a wage differential," it later stated that it was "express[ing] a general rule" only, and disavowed any "attempt to resolve its applications under all circumstances." Of note, the court expressly declined to decide "whether or under what circumstances past salary may play a role in the course of an individualized salary negotiation."

• The majority held -- without citation to any record or other supporting evidence -- that prior salary "is not a legitimate measure of ... any [] job-related quality," opining that while prior salary "may bear a rough relationship to legitimate factors other than sex, such as training, education, ability, or experience, ... the relationship is attenuated." But the majority went on to note that an employer can "point directly to the underlying factors for which prior salary is a rough proxy ... to prove its wage differential is justified under the catchall exception." In other words, where an employer can point to the job-related factors -- such as prior experience and specialized skills -- that led a new hire to command a particular prior salary, it may permissibly pay that individual commensurate with the prior salary (even if that practice generates a wage differential).

• In her concurrence, Judge M. Margaret McKeown (joined by Judge Mary H. Murguia) agreed that the office's exclusive reliance on prior salary was impermissible, but cautioned that the more expansive aspects of the majority's holding were "unsupported by the statute, ... unrealistic, and may work to women's disadvantage." Judge McKeown noted that employers may need to meet or exceed a new recruit's existing salary to attract top talent, citing articles detailing the intense competition for talent among high-tech and other cutting-edge firms. She also opined that the majority's opinion should not be read to bar women from voluntarily disclosing and leveraging their existing salaries in negotiations with prospective employers, as such a reading could "disadvantage rather than advantage women."

• Judge Consuelo María Callahan expressed similar concerns in her concurrence (joined by Judge Richard C. Tallman), and further criticized as a "factual fallac[y]" the majority's suggestion that prior salary is generally not job-related, or that it inherently, necessarily reflects prior pay-setting discrimination. She noted that both employees and employers may point to prior salary during negotiations, and expressed concern that the majority's approach "ignores these economic incentives and appears to demand a lockstep pay system such as is often used in government service."

• Finally, Judge Paul J. Watford wrote separately to emphasize that it may often be difficult for an employer to prove that prior salary is truly a "factor other than sex" -- i.e., a factor "not tainted by sex discrimination" -- but appeared to leave open the possibility that an employer could, and should be permitted to attempt to, make such a showing.

Takeaways

It remains to be seen whether the U.S. Supreme Court will ultimately weigh in on Rizo. Until then, employers in the 9th Circuit will need to evaluate their starting pay practices in light of the court's constellation of opinions.

For employers operating in California, Rizo may not prompt any significant changes given that, since Jan. 1, 2017, the state Fair Pay Act has dictated that "prior salary shall not, by itself, justify any disparity in compensation."

For employers elsewhere in the 9th Circuit, the opinions in Rizo certainly suggest that a policy that sets starting salary based solely on an employee's prior salary -- without consideration of any other factors or allowance for individual negotiations -- would be problematic. But it is important to keep in mind the host of issues left open by the decision:

• Fresno County did not dispute that Rizo had established a prima facie case under the Equal Pay Act -- i.e., that she was paid less than men performing "substantially equal work" -- or attempt to invoke any of the other statutory defenses. Rizo thus says nothing about the standard that an employee must meet to make her initial showing under the act and shift the burden to the defendant.

• The 9th Circuit's opinions address solely the viability of exclusive reliance on prior salary as a defense under the Equal Pay Act, and do not address the plaintiff's other claims under Title VII or the Fair Employment and Housing Act. Because the Equal Pay Act has no intent requirement, Rizo's holding cannot be mechanically applied to claims under statutes (like Title VII and the Fair Employment and Housing Act) that generally require a showing of discriminatory intent.

• The court expressly declined to resolve any questions about how employees and employers may discuss, leverage, or consider prior salary in "individualized salary negotiation[s]." Particularly in light of the concerns flagged by the concurring opinions, employers should not over-read Rizo to prohibit discussion with potential employees about the salary expectations they bring to the position, or the salary offer they require to leave their current position.

• Finally, employers operating outside the 9th Circuit should be aware that other federal courts have adopted a different view of what the Equal Pay Act requires, and held that systems that peg starting salary to a new employee's most recent prior salary constitute a "factor other than sex" and can suffice to justify resulting wage differentials under the act. See, e.g., Wernsing v. Dep't of Human Servs., State of Illinois, 427 F.3d 466, 469 (7th Cir. 2005).

What is clear is that Rizo adds a layer to the complexity to the prior salary issue, particularly in jurisdictions where state and local pay equity laws also address the topic in differing ways. Employers should continue to follow both federal and state law developments and evaluate their practices in light of the ever-changing legal landscape.

#257

Ben Armistead


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