The California Fair Pay Act (Senate Bill 358) recently amended the California Equal Pay Act, codifying in California Labor Code section 1197.5 discrete changes regarding gender pay discrimination cases. These changes in the language directly impact how gender pay discrimination analysis is conducted and how companies collect employee information.
Brief Summary of the California Fair Pay Act
The California Fair Pay Act, which went into effect on January 1, 2016, broadens the already existing law against gender pay inequality. Equal Pay Act of 1963, 29 U.S.C. § 206(d) et seq.
The 2016 act distinguishes four specific factors to be analyzed to account for any gender pay discrimination. In short, employees of the opposite sex can have pay discrepancies, but only the following factors can be used to account for those differences:
- Seniority system
- Merit system
- Quantity and quality of work
- Other bona fide factors such as education, training, or experience
The above items must be considered for “substantially similar work,” viewed as a composite of the following:
- Skill: experience, ability, education, and training required to perform the job
- Effort: the amount of physical or mental exertion needed to perform the job
- Responsibility: the degree of accountability required to perform the job
- Performed under similar working conditions: physical surroundings of the job
Rebekah Mintzer, “California’s New Fair Pay Act Could Make Waves Elsewhere” [login required], Corp. Couns. (Dec. 21, 2015).
Section 1197.5 can now potentially exclude certain key factors, such as location, in accounting for pay discrimination. Any differences in pay across gender that are not captured by section 1197.5 have the potential to be construed as pay discrimination.
The California Fair Pay Act Versus Title VII
Prior to January 1, 2016, Title VII of the Civil Rights Act of 1964, a federal law prohibiting employment discrimination based on gender, set the standard used for gender-based pay discrimination litigation. However, this law is not specific to gender-based pay issues. As a result, most analyses have considered a wide variety of factors in an attempt to account for any pay discrimination. Such factors include the following:
- job title
- business unit/department
- merit reviews
- pay history
- job history
Many of these items are still likely to be important factors in pay discrepancy analyses. However, the California Fair Pay Act appears to redefine how these factors should be considered and examined.
Each of the seven factors listed above can be easily retained by a company’s human resources data warehouse and could act as a proxy for specific analytical components.
New Considerations for Discrimination Analysis
Although a lot of the current information that companies maintain on their employees will still be necessary to collect, how these elements are used for a discrimination analysis is changing. The California Fair Pay Act states that this type of analysis hinges on whether the work is “substantially similar . . . when viewed as a composite of skill, effort and responsibility.” Cal. Lab. Code § 1197.5.
This indicates that from an analytical perspective, certain categorical factors, such as job title and business unit or department, are not necessarily valid in assessing pay differences. It is reasonable to argue that additional details on job duties and how work is performed should be considered instead of simply using these variables as proxies for responsibilities. After all, there is likely a wide variety of scenarios in which employees can have the same job title and department but perform vastly different duties. Similarly, those with different job titles or departments could perform virtually the same duties. Job titles that have similar characteristics may need to be combined to do a proper pay discrepancy analysis. For example, in a hotel establishment, a housekeeper and janitor could be considered to perform “substantially similar” work. Juliana Kenny, “The Controversy Behind California’s Fair Pay Act,” Inside Couns. (Oct. 22, 2015). This whole situation is further complicated by differences that may exist across locations. An accurate reflection of an employee’s actual job duties should be considered critical in conducting a proper analysis.
Additionally, prior salary history does not appear to be a proper differentiating factor for analysis. An employee’s prior work experience, abilities, and skills may still be valid factors for the analysis, but prior salary history does not appear to be a valid factor under the new California law. Keith I. Chrestionson, “California’s Fair Pay Act Will Likely Impact Employers Beyond the Golden State” [login required], Corp. Couns. (Jan. 22, 2016).
The new law also states that location will not be a factor in the analysis and that pay differences existing across different work sites can no longer be a factor in explaining pay differences across gender. Chris Micheli, “New Equal Pay Act Is Nothing to Fear” [login required], Recorder (Dec. 28, 2015). However, location may still be considered if there is a bona fide reason as to why location matters in the pay difference.
Key Data Sources to Consider
Most companies keep a large bevy of information about their employees, much of which will be critical for properly analyzing pay differences. As discussed above, current means by which most companies likely collect and store their data may not be sufficient when doing a pay differential analysis, but the data is necessary nonetheless.
There are three primary sources of information usually required for this type of analysis: payroll, human resources, and merit/review data.
- Payroll Data. This data should contain current and historical records on an individual employee’s paychecks, pay rates, and bonuses. This data is necessary to calculate total compensation paid to each employee.
- Human Resources. This data should contain demographic information about each employee and his or her historical job title, department, business unit, and location information. Additionally, this data also contains historical hire, promotion, termination, and transfer dates. This data is necessary to determine gender and the career history of each employee. Additionally, it allows for the creation of other variables, such as tenure.
- Merits/Reviews. This data should contain historical performance reviews and be used to determine the level of performance relative to each employee.
These data sources should be combined in order to conduct a proper analysis, which, typically, will be performed on an annual basis, comparing annual compensation between male and female employees. The data is combined to have one record per employee per year with various categorical variables related to gender, business unit, job title, department, performance metrics, and continuous variables such as total compensation and tenure. As stated previously, many of these variables will need to be modified to account for the new definitions in the law.
Considerations for Employers and Counsel
Employers should consider how to quantify bona fidefactors such as experience, education, and training. Employers may need to retain additional data on these and other factors that may not be part of their standard human resources data warehousing.
Companies should consider doing the following:
- Conduct a wage audit to determine if there are pay discrepancies in the company that are not justified by differences other than sex.
- Hold formal training for managers so that they do not inadvertently discipline employees for discussing or inquiring about wage rates and are not making decisions about employee compensation that could be considered discriminatory.
- Retain records that relate to an employee’s wages, past performance, and raises for the last three years.
- Retain records that relate to an employee’s prior work history, skills, and abilities.
- Properly document the needs of a job and the exact skills that are required as well as the amount each skill set is worth. The California Fair Pay Act demands that the employer show why a higher degree of or more training is necessary for the job. Furthermore, each financial decision in terms of hiring must be properly documented. For example, if a firm is hiring an engineer with the ability to program in certain computer languages and offering a $10,000 bonus, the firm should be able to explain exactly why and how the bonus was determined.
- Update job and work descriptions to accurately reflect the actual duties of a particular position.
As the California Fair Pay Act is applied, it has the potential to change the landscape of how pay discrimination cases are analyzed. Companies, therefore, should be cognizant of the data they are capturing on employees based upon the law’s requirements.
It should also be noted that since the original passage of this law, California has amended the law to prohibit pay discrimination on the basis of race and ethnicity.
Navigant Consulting is the Litigation Advisory Services Sponsor of the ABA Section of Litigation. This article should be not construed as an endorsement by the ABA or ABA Entities.
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