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California Adopts Landmark Pay Differential Law

    Client Alerts
  • October 26, 2015

Last month, California’s Governor Brown signed new legislation intended to address what the state characterizes as persistent pay gaps between men and women working the same or similar jobs. The law builds on existing California pay requirements, but shifts a higher burden of proof to the employer to justify business reasons for any difference in pay.

The key provision of the new law reads as follows:

1197.5. (a) An employer shall not pay any of its employees at wage rates less than the rates paid to employees of the opposite sex for substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions, except where the employer demonstrates:

    (1) The wage differential is based upon one or more of the following factors:

          (A) A seniority system.

          (B) A merit system.

          (C) A system that measures earnings by quantity or quality of production.

  (D) A bona fide factor other than sex, such as education, training, or experience. This factor shall apply only if the employer demonstrates that the factor is not based on or derived from a sex-based differential in compensation, is job related with respect to the position in question, and is consistent with a business necessity. For purposes of this subparagraph, “business necessity” means an overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve. This defense shall not apply if the employee demonstrates that an alternative business practice exists that would serve the same business purpose without producing the wage differential.

    (2) Each factor relied upon is applied reasonably.

    (3) The one or more factors relied upon account for the entire wage differential.

The new law raises a number of factors in making this determination that will be reviewed by judges and juries. For example, how will courts define “substantially similar” as opposed to equal work? When looking at two different but arguably similar jobs, how can employers demonstrate merited differences in pay? For example, if two managerial jobs appear on the same vertical level of the company’s organizational chart, are they presumed substantially similar?

Next, the employer will bear the full burden of proving that any pay differentials fall within the enumerated defenses contained in the statute. An individual employee’s negotiating skill is not a valid defense to a pay discrimination claim. What documentation and testimony will meet this burden? What is an “overriding business purpose?”  How can an employer prove that there are no alternative practices that achieve these business purposes?

These uncertainties and the frequently random nature of jury determinations may cause employers to broadly equalize pay even in situations where they believe that legitimate business factors justify individual differences benefitting male or female employees. Employers with California operations clearly need to pay attention to these new requirements. However, California often serves as the testing ground for legislative initiatives that later spread to other states. The new California law bears similarities to the federal EFCA legislation that failed to pass Congress several years ago. The new California law takes effect January 1, 2016.