Employers Beware: Ordinance Prohibiting Inquiry or Reliance on Applicant’s Wage History Survives Appeal

Recently (though, pre-pandemic so it feels like an eternity ago), the United States Court of Appeals for the Third Circuit examined the City of Philadelphia ordinance that prohibits employers from inquiring about an applicant’s wage history and from relying on an applicant’s wage history in making hiring decisions (the “Ordinance”).  The Ordinance is aimed at reducing gender and race-based pay disparities (i.e., the pay gap).  The Third Circuit held the district court erred in granting a preliminary injunction enjoining implementation of the ordinance provision prohibiting inquiry as to an applicant’s wage history, and affirmed the district court’s denial of a preliminary injunction with respect to the portion of the Ordinance that prohibits reliance on wage history in the hiring process.

Whatever the future holds, employers fortunate enough to be in the hiring position must bear in mind that a growing number of jurisdictions are adopting laws that prohibit inquiry into or reliance on an applicant’s wage history.  In order to ensure compliance with such laws, employers should be familiar with the legal landscape concerning hiring in jurisdictions where they operate and adjust their application and hiring process as necessary.

Philadelphia’s Ordinance Prohibiting Wage History Inquiry or Reliance Aimed at Reducing the Pay Gap

Enacted in 2017, the Ordinance prohibits employers from relying on wage history at any point in the process of setting or negotiating a prospective employee’s wage (“Reliance Provision”), or even asking about a prospective employee’s wage history (“Inquiry Provision”).  More specifically, the Reliance Provision makes it an unlawful employment practice for an employer to…

… rely on the wage history of a prospective employee from any current or former employer of the individual in determining the wages for such individual at any stage in the employment process, including the negotiation or drafting of any employment contract, unless such applicant knowingly and willingly disclosed his or her wage history to the employer, employment agency, employee or agent thereof.

The Inquiry Provision makes it an unlawful employment practice for an employer to…

…inquire about a prospective employee’s wage history, require disclosure of wage history, or condition employment or consideration for an interview or employment on disclosure of wage history, or retaliate against a prospective employee for failing to comply with any wage history inquiry.

The Ordinance was aimed at reducing the pay gap.  Nationally, as of 2017, women overall earned $0.81 for each $1.00 earned by male peers.  According to the 2015 census, women in Pennsylvania earned $0.79 for each $1.00 earned by similarly situated men.  For women of color, the wage gap is even more profound as black women earn $0.68 for every $1.00 paid to male peers, and Latina women earn $0.56 each $1.00 paid to male peers. The gap begins for women as soon as they enter the workforce and women aged 35 and over earn only 77-81% of what their male peers earn.  In the litigation resulting from enactment of the Ordinance, the pay gap is undisputed.

The District Court’s Decision

The Greater Philadelphia Chamber of Commerce (“Chamber”) sued the City of Philadelphia (“City”), individually and on behalf of some of its members, alleging that both provisions of the Ordinance infringe on the freedom of speech of the Chamber and its members. The Chamber sought a preliminary injunction enjoining implementation of the Ordinance.  The district court agreed with the Chamber that the Inquiry Provision violated employer’s First Amendment speech rights  but concluded that the Reliance Provision withstood the Chamber’s First Amendment challenge because it did not impact speech.                                                           

The Appellate Court’s Decision

On appeal, the Chamber argued that the district court erred in refusing to enjoin implementation the Reliance Provision and that both provisions should have been reviewed under strict scrutiny, while the City argued that the district court erred in enjoining implementation of the Inquiry Provision.   In a substantial opinion filed February 6, 2020 authored by Circuit Judge Theodore A. McKee, the United States Court of Appeals for the Third Circuit affirmed the district court’s denial of a preliminary injunction as to the Reliance Provision and vacated the district court’s grant of a preliminary injunction as to the Inquiry Provision, remanding the case with directions to the district court to deny the preliminary injunction as to the Inquiry Provision. 

Reliance Provision

Both the district court and Third Circuit held that the Reliance Provision does not implicate speech and thus it survived the Chamber’s constitutional challenge.  The Chamber  argued, among other things, that “‘in formulating a proposed salary,’ a prospective employer is ‘communicating a message about how much that applicant’s labor is worth to the employer.’”  In rejecting that argument, the appellate court noted that the Reliance Provision “does not restrict an employer from communicating an applicant’s worth. An employer may still discuss an applicant’s value based on his or her qualifications and abilities.”  It went on to state that the Reliance Provision “simply attempts to prevent the employer from unknowingly incorporating past wage discrimination into the terms of an applicant’s job offer.  The employer remains free to communicate its own valuation of the employee by making as many offers at whatever salary it deems appropriate. The Ordinance merely attempts to ensure that any such offers are not unwittingly tethered to past discriminatory wage discrepancies.”

Inquiry Provision

Both the district court and the Third Circuit agreed that the Inquiry Provision regulates commercial speech and that intermediate scrutiny is the appropriate level of review.  In examining whether the Inquiry Provision satisfies the intermediate scrutiny test, the Third Circuit found that the speech at issue is not “related to illegal activity”, that the City has a substantial interest in closing the wage gap, and that the Inquiry Provision directly advances the City’s interest in pay equity.

The Third Circuit found that the City offered substantial evidence (by way of testimony and metanalysis of relevant research) to support the need for the Inquiry Provision. Acknowledging that “[r]easonable minds can debate whether the City’s evidence placed the need for, and potential effectiveness of, the Inquiry Provision beyond doubt. However, […] certainty of proof or empirical data is not required here. Rather, substantial evidence of the possibility that the speech restriction could favorably impact a concern that the state actor had a fundamental interest in addressing is sufficient. The City easily satisfied that standard. In concluding otherwise, the district court imposed too high a burden on the City.”

Growing Number of Jurisdictions Prohibit Wage History Inquiry or Reliance

States with bans on pay history inquiry or reliance, include Massachusetts (the first state to enact such a law in August 2016), New York, Oregon, Delaware, Vermont, Alabama, California, Connecticut, Hawaii, Illinois and Maine. Municipalities across the country have also enacted similar prohibitions, such as the City of Philadelphia discussed above. 

New York’s statute is one of the most recent of such laws, having become effective January 6, 2020. ,   The statute makes it unlawful to (1) rely on the wage or salary history of an applicant in determining whether to offer employment or determine wage or salary, (2) seek, request, or require the wage or salary history from an applicant or current employee, or (3) seek, request or require the wage or salary history of an applicant or current employee from a current or former employer.  This law applies to applicants seeking employment as well as current employees and contains several exceptions, including that an applicant is not precluded from “voluntarily, and without prompting, disclosing or verifying wage or salary history.”

Are You in Compliance? 

Employers should determine whether they operate in a jurisdiction with laws banning them from inquiring or relying on pay history in the application and hiring process.  Employers in jurisdictions where a compensation history inquiry/reliance prohibition exists should carefully review their existing employment applications and forms used in their promotions processes to ensure that they are not seeking information that would be in violation of the law. 

It may be prudent to adopt a salary history inquiry policy for the company to memorialize how the company’s practices are compliant with applicable law and to ensure they are consistently communicated to all involved in the hiring process.  No matter the size of the employer, all personnel involved in the hiring process should be made aware of the applicable law, its scope and any applicable exceptions.