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Salary History: Proceed at Your Peril

As of now, 18 states and 21 localities have passed laws prohibiting all employers from asking applicants for their pay history.

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Just last week, the Ninth Circuit Court of Appeals held in Rizo v. Yovino that prior pay is not a “legitimate factor other than sex” as defined in the Equal Pay Act (EPA). Thus, relying on this factor alone or in combination with other factors is illegal because it perpetuates past compensation discrimination. The stage is set for the U.S Supreme Court to weigh in on the legality of relying on prior salary to set pay.

The option of asking applicants for their salary history is all but dead. But this does not mean your company cannot have a measured approach to setting initial pay. An understanding of the drivers behind salary ban legislation and the applicable legal framework is critical to developing a workable alternative to salary history.  

Why Is Asking About Prior Pay Problematic if I Ask All Applicants?

It all comes back to the wage gap. Women still earn about 80 cents for every dollar paid to a man and the differential is even greater for women of color. African American women earn just 63 cents and Hispanic women earn a mere 54 cents for every dollar earned by a man. Studies have shown that the disparity is greater for working mothers.

Democrats have tried 10 times since 1997 to amend the EPA to address the wage gap, most recently on Jan. 30, 2019. The Paycheck Fairness Act seeks to:

  1. Narrow the catchall affirmative defense, “a factor other than sex,” by limiting the scope to factors “such as education, training, or experience”;
  2. Broaden the definition of an “establishment” to include employees who work for “the same employer at workplaces located in the same county or similar political subdivision of a state”;
  3. Expand available damages to include compensatory and punitive damages;
  4. Add a pay transparency requirement; and
  5. Expressly prohibit employers from asking about prior pay.

The vote on the act cut along party lines every time it was introduced, but it never made it into law.

When Congress proved unable to get the job done, states and cities jumped in to narrow the wage gap by making it unlawful to ask applicants for their salary history. It is too soon to tell whether these bans, in isolation, will have any impact on the pay gap.

Salary History Is Likely to Have a Central Role in the 2020 Supreme Court Docket

The Ninth Circuit’s Rizo decision solidifies the division among the circuit courts on the critical question of whether prior pay is a legitimate reason for paying employees in the same job title differently. The EPA, passed in 1963, requires that men and women working in the same establishment be given equal pay for equal work. Specifically, the EPA provides that employers may not pay unequal wages to men and women who perform jobs that require substantially equal skill, effort and responsibility, and that are performed under similar working conditions within the same establishment. 

An employer can justify a compensation differential by proving one or more of the four affirmative defenses built into the EPA. A pay differential between men and women performing substantially equal jobs is lawful if the difference is the result of:

  1. A seniority system (employer rewards employees for length of employment);
  2. A merit system (employer rewards employees for exceptional job performance);
  3. An incentive system (employer rewards employees based on quality or quantity of production); or
  4. “Any other factor other than sex” (a sex-neutral factor, applied consistently, that explains the compensation disparity).

Aileen Rizo was hired as a math consultant by the Fresno County Office of Education. The county had a simple formula for determining an employee’s starting pay: add 5% to the new hire’s prior salary. No other factors were taken into account. Rizo filed an EPA complaint against the county after learning that her male colleagues, who were hired as math consultants after her, were paid more.

The specific question presented in Rizo is whether prior pay alone or coupled with other factors is a legitimate, non-discriminatory justification for a difference in pay between male and female employees doing substantially equal work. The Ninth Circuit twice addressed Rizo’s claims — once in 2018 and again in 2020.

In 2018, the court, considering the language of catchall exception as compared to the other exceptions and the legislative history of the EPA, held that a legitimate “factor other than sex” must be job-related and prior salary is not job-related. According to the court, prior salary is not reflective of an employee’s prior work experience, ability, performance or any other legitimate criteria. Further, reliance on prior pay to determine starting pay perpetuates the gender-based wage disparities prohibited by the EPA.

Fresno County appealed to the Supreme Court. The Supreme Court kicked the case back to the circuit because one of the three Ninth Circuit judges that ruled on the Rizo case passed away before signing the decision.

Fast forward to Feb. 27, 2020: The Ninth Circuit reviewed the case anew and reached the same conclusion, that relying on prior pay illicitly perpetuates past discrimination. However, the court added a twist holding that prior pay is not job-related and only job-related factors constitute a “factor other than sex” under the EPA. Using prior pay in combination with job-related factors does not change the fact that prior pay is not a legitimate “factor other than sex.”

The Ninth Circuit’s decision in Rizo puts it at odds with the Second, Sixth, 10th and 11th Circuit Courts, which have held that employers may rely on prior pay along with other legitimate factors to determine starting pay. This is where the Supreme Court comes back in. In all likelihood, the county will appeal to the Supreme Court again and the court will likely accept the case this time. If the Supreme Court affirms the Ninth Circuit’s decision, reliance on prior salary to determine the starting salary is likely a vestige of the past.

Takeaways for Employers

Bottom line: Employers that are still asking applicants for their salary history should stop. The benefit of knowing a candidate’s prior salary is clear. Many employers rely on salary history information to ensure that they are not overpaying or underpaying for talent. However, there are other ways of hitting on the right number.

Employers should consider shifting their focus from the cost associated with this new hire to the benefits gained from this hire. Determine starting pay based on job-related factors such as the skills, experience and potential that the candidate brings to the table compared to the market and your other similarly situated employees.

In today’s tight labor market, the question shouldn’t be, “how cheaply can I acquire the skills I need?” Instead, the focus should be on what the business gains from hiring this candidate and what that gain is worth.

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About the Author

Consuela Pinto Bio Image

Consuela Pinto is a shareholder and head of the pay equity practice at FortneyScott.


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