Fair Pay Act

How to Comply Effectively

The passage of California’s Fair Pay Act[i], which became effective January 1, 2016, changes other state laws and the federal Equal Pay Act in some very important ways. Under the Equal Pay Act (a federal law passed in 1963) employers had to pay employees who worked in the same establishment equal pay for “equal work,” which was defined as requiring “equal skill, effort and responsibility.”  This CA law does away with that definition and prohibits employers from paying any of their employees less than employees of the opposite sex for “substantially similar work.”

In 2017 the law was expanded to include race/ethnicity to the prohibited reasons for wage disparity.

These legal requirements have been added as provisions to our CA Labor Code in Section 1197.5. Defining the terms used in this section will be very important, particularly because the newer amendment doesn’t define “race” or “ethnicity.”

Adding to issues employers face, as of January 1, 2018, employers are no longer allowed to ask applicants for their salary history.  Obtaining this information is believed to continue wage disparity. Instead, it is the responsibility of employers to value each position based on the factors listed below and offer applicants the wage rate for that position.

These laws also address “pay secrecy,” which was found to contribute to the gender wage gap “because women cannot challenge wage discrimination that they do not know exists.”

For these reasons, CA law now provides greater protection than federal law and it is important that CA employers understand how this will affect their own compensation policies and practices as well as their hiring practices. The following information is designed to assist you in understanding these new rules.

“Substantially Similar Work”

  • Titles may or may not be useful; job functions requiring similar levels of skill and responsibility under similar working conditions should be evaluated.
  • The following list should be used to when evaluating a practice of paying different wages to employees of different genders and/or different ethnicities who are performing the same or substantially similar work. The practice may be justified if an employer can show all of the following[i]:
  1. The pay difference is based on one or more of the following 4 factors:
    1. A seniority system,
    2. A merit system,
    3. A system that measures earnings by quantity or quality of production,
    4. A bona fide factor other than sex or ethnicity, such as education, training or experience.
  2. Each factor you rely on is applied reasonably (which no doubt means that you can substantiate why and how you apply it); and
  3. The one or more factors you rely on accounts for the entire pay difference.
  • Regarding #4 above, the bona fide factor other than sex, you must also demonstrate that the factor:
    1. Is not gender or ethnicity based;
    2. Is job related; and
    3. Is consistent with “business necessity”.

“Business Necessity” and “Bona Fide Factor”

“Business necessity” means that you have an “overriding legitimate business purpose” and the factor relied upon effectively fulfills the business purpose it is designed to serve.  If the employee is able to show that another business practice exists that would serve the same business purpose without creating a pay difference, then you can’t rely on this defense.[i]

What happens if employees don’t work in the same establishment or even in the same geographic location?  Under the previous law employees were compared because they worked in the same establishment. Under this new law, they can be compared in different geographic locations. Fortunately, however, different geographic locations may be considered a “bona fide factor” if salaries can be shown to be substantially different in different locations.

Another factor that may be considered a “bona fide factor” is different shifts at different times of the day.[ii]  It is the employer’s burden to show that any of these factors are consistent with business necessity and are job related.  For example, if the pay for an employee in Fresno is being compared to the pay of an employee in San Francisco, it does not automatically disqualify the claim. The employer is tasked with justifying why this is a “bona fide factor” in the pay difference.

“Pay Secrecy”

Also included in this Act is a prohibition about pay secrecy. Employers are not allowed to prohibit employees from any of the following:[i]

  • Disclosing their own wages
  • Discussing the wages of others
  • Asking about another employee’s wages*
  • Aiding or encouraging other employees to exercise their rights under the Fair Pay Act

*However, the Act does not create an obligation on the part of another employee to disclose their wages when asked.  It also does not require the employer to give out other employees’ wage rates.

Please keep in mind that the National Labor Relations Board (NLRB) has made clear that employees are allowed to discuss anything that is work-related. It is considered “concerted activity” and is protected under law. This includes discussions on social media. If you have questions about how far reaching these laws are, please call our office.

Recordkeeping Requirements under the Fair Pay Act

Previously the law required that you keep records for two years; now the requirement is that you keep the following records for three years:

  • Wages and wage rates for each job
  • Job classifications
  • Other terms and conditions of employment

This last item is very broad but very important. It is recommended that you determine all the factors that impact your pay practices and first analyze them and then document them clearly and thoroughly.

How to Evaluate Your Pay Practices

This is a suggested method for making a determination about whether or not your pay rates are the same for substantially similar jobs in light of this Act. You may wish to follow these steps:

  1. Look at the skills, effort and responsibilities as well as the working conditions of your employees.
  2. Group all male employees that do substantially similar work into one group (Group A).
  3. Group all female employees that do substantially similar work as the male group into a second group (Group B).
  4. These groups are called the “comparator groups” and they must be used by any employee who wants to make a claim that there is a wage disparity based on gender.
  5. Look at the salaries of the employees in Group A and compare them to the salaries in Group B.
  6. If a gender-based pay disparity exists, review the four factors listed above and determine if the differential is justified and if so, if it accounts for the entire pay difference.
  7. If you rely on the fourth factor—a “bona fide factor other than sex”—you must also demonstrate that the factor is not gender-based and is job related and consistent with business necessity.

Look at any geographic differences but those differences alone may not justify a wage differential. That is also true of what might be considered “market factors.” An example might be trying to justify that new hires have to be paid more because “the market requires it.”

Do the same type of comparison with ethnicity.  If you have a workforce made up of a number of ethnicities, compare groupings of the same ethnicity with other groupings. If you find differences in the pay rate between the groups, make sure they are for reasons you can justify that have nothing to do with ethnicity.

Make sure that your employment application and other New Hire documents do not request salary history. Train all hiring managers that asking for current or past salary history is no longer allowed.  If an applicant volunteers his/her salary, it is not an invitation to continue the topic and it should not be written down.

Additional Tips

  • “Compensation” means more than just wages or salary—it may also include bonuses, commissions and incentives.
  • Make sure that compensation decisions are based on objective considerations. This includes discretionary bonuses. We recommend writing down the rationale behind giving bonuses—in other words, what do you value and why do you reward what you reward.
  • Document all compensation decisions including geographic considerations, longevity, etc.
  • Write or review job descriptions to make sure they support salary decisions and reflect actual job duties, skills, and responsibilities.
  • Ensure that you do not discipline employees for discussing wages among themselves.
  • Remember that employees can ask about wages but the employer is not obligated to disclose the wages of other employees. Train managers and employees in your accounting department on what their responsibilities are before they are asked.
  • Train any and all managers who have wage setting responsibilities to know and understand the requirements of this law.
  • Prohibit retaliation against employees for asserting their rights under the Act and train all managers accordingly.
  • Make sure you have a reporting mechanism in place if someone wants to make a complaint.
  • Update your record retention practices to make sure that all pay-related data is kept for at least three years.
  • Verify your security measures to ensure employees’ privacy.

Penalties and Enforcement

The Fair Pay Act also prohibits employers from terminating, discriminating or retaliating against an employee who exercises his/her rights under the Act, assists others in exercising their rights or acts in any way to invoke or enforce the Act including bringing a complaint to the Labor Commissioner.[i]

This law provides different enforcement remedies than other laws as well. They are of two kinds:

  1. Administrative remedies:
    1. An employee can file a complaint with the Division of Labor Standards Enforcement (DLSE) which will investigate and enforce any payment owed to the employee(s);[ii] or
    2. The Department of Industrial Relations (DIR) or the DLSE can bring a civil action on behalf of the employee and other similarly affected employees to recover unpaid wages, an additional equal amount as liquidated damages and costs of a lawsuit.[iii]
  1. Civil remedies:
    1. An employee can bring a civil action for the amount of wages they believe have not been paid fairly, an equal amount of liquidated damages, interest, costs of suit and reasonable attorneys’ fees. The statute of limitations is two years unless the violation is “willful” and then it is three years.
    2. An employee who has been retaliated or discriminated against for asserting his/her rights can file a civil action for reinstatement, reimbursement of lost wages and work benefits, interest and other equitable relief. The statute of limitations is one year.

Suggestions

If you invest the time and effort in developing your pay practices and documenting them properly, you will be able to meet the requirements of these new laws and protect yourself most effectively. You will also be able to justify your pay practices and proactively communicate them to your employees before someone makes a claim.

We will be happy to assist you in this necessary (and daunting) endeavor with any or all of the following:

  • Development or review of job descriptions
  • Confirmation of classifications as exempt and non-exempt
  • Review of your hiring practices and new hire documents
  • Review of salaries by position and in your geographic location(s)
  • Review of compensation and benefit offerings in general and by gender and ethnicity
  • Review of performance measurements including the basis for bonuses and incentives
  • Assistance with salary analysis (with legal review required)
  • Creation of a customized compensation plan which is a reflection of your company values and creates confidence by meeting the compliance requirements of this section of the CA Labor Code
  • Development and updating of New Hire documents as needed
  • Development of communications to employees on this subject
  • Training for supervisors and managers on legal pay practices including hiring, discrimination and retaliation
  • Other related requests

We anticipate that this law will be defined in the courts as time goes by with various changes becoming necessary.  If/When this occurs we will communicate those changes to you. In the meantime, we strongly recommend that you make sure your employee handbook is current, you have current job descriptions in place and you have a fully functioning HR structure including effective hiring and communication practices with your employees.

The Fair Pay for All Compliance Suite

We have developed a program to assist you with all of the above. If you are interested, please contact our office and request information about the Fair Pay for All Compliance Suite which includes all of the above. The pricing is based on your number of employees.

Please call our office at 925-310-4824 or email us with comments or questions. We hope this summary has been helpful.

[i]  Labor Code§1197.5(l)(1)

[ii]  Labor Code§1197.5(e)

[iii] Labor Code§1197.5(f)

[i]   Labor Code §1197.5(j)(1)

[i]  Labor Code §1197.5(a)(1)(D)

[ii]  Senate Daily Journal, Letter from Senator Hannah-Beth Jackson (May 26, 2015)

[i]   Labor Code §1197.5(a)(1-3)

[i]     Now codified in Labor Code §1197.5(a)

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