Implemented on January 1, 2016, the California Fair Pay Act is one of the toughest equal pay laws in the US. (Employers outside California will also want to read this post for strategy insights because the Federal government is currently considering updates to its own equal pay laws).
The Problem: 84 Cents on the Dollar
The California Fair Pay Act takes on a very real problem: according to 2013 US Census data, full time women workers in the state were paid a median of 84 cents for every dollar paid to men (and the difference is worse for Latina and African-American women).
California Fair Pay Act Requirements: A Summary
Prior state law required employers to provide "equal pay for equal work"...namely, they could not pay employees less than the rate paid to an opposite-sex employee in the "same establishment" for "equal work" that required "equal skill, effort and responsibility". The new California Fair Pay Act broadens prior state law in 2 significant ways:
As with most laws of this kind, the burden is on the employer to prove that any pay differences are legal and justified. Wage differences between employees of different genders who perform "substantially similar work" can be justified only if the employer can show that all of the following 3 conditions apply:
Condition 1: The pay difference is based on one (or more) of these 4 factors:
Condition 3: The factor(s) relied on must account for the entire pay difference.
Note on "Bona Fide Factors": To successfully defend a pay difference based on "a bona fide factor other than sex", the employer must show that the "bona fide factor" is not gender based, is job-related and is consistent with "business necessity". “Business necessity” specifically means the employer has an "overriding legitimate business purpose" and the factor being relied upon effectively fulfills the business purpose it supposedly serves. If the employee questioning his or her pay shows that an alternative business practice exists that would serve the same business purpose without creating the pay difference, the employer cannot rely on the "business necessity" defense. It is also important to note that although market conditions and geographic differences can still be cited as "bona fide" factors, either one by itself will no longer justify a wage difference under the new law. Other provisions of significance for employers:
No Pay Secrecy: consistent with other similar laws already on the books, employers cannot prohibit employees from:
Protection from Retaliation: Once again echoing other similar laws, the Fair Pay Act prohibits employers from terminating, discriminating or otherwise retaliating against an employee who:
- It replaces "equal work" with "substantially similar work". “Substantially similar work” means a combination of skill, effort and responsibility that is performed under similar working conditions. "Equal work" no longer means the exact same job title, function or duties.
- The "same establishment" rule is gone. Employees who believe they are being paid unfairly can compare themselves to employees in other locations or geographies.
As with most laws of this kind, the burden is on the employer to prove that any pay differences are legal and justified. Wage differences between employees of different genders who perform "substantially similar work" can be justified only if the employer can show that all of the following 3 conditions apply:
Condition 1: The pay difference is based on one (or more) of these 4 factors:
- A seniority system.
- A merit system.
- A system that measures earnings by quantity or quality of production.
- A "bona fide" factor other than sex, such as education, training or experience (see "Note on Bona Fide Factors" below for important details).
Condition 3: The factor(s) relied on must account for the entire pay difference.
Note on "Bona Fide Factors": To successfully defend a pay difference based on "a bona fide factor other than sex", the employer must show that the "bona fide factor" is not gender based, is job-related and is consistent with "business necessity". “Business necessity” specifically means the employer has an "overriding legitimate business purpose" and the factor being relied upon effectively fulfills the business purpose it supposedly serves. If the employee questioning his or her pay shows that an alternative business practice exists that would serve the same business purpose without creating the pay difference, the employer cannot rely on the "business necessity" defense. It is also important to note that although market conditions and geographic differences can still be cited as "bona fide" factors, either one by itself will no longer justify a wage difference under the new law. Other provisions of significance for employers:
No Pay Secrecy: consistent with other similar laws already on the books, employers cannot prohibit employees from:
- 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 Fay Pay Act.
Protection from Retaliation: Once again echoing other similar laws, the Fair Pay Act prohibits employers from terminating, discriminating or otherwise retaliating against an employee who:
- Exercises his or her rights under the Act.
- Assists others in exercising their rights; or
- Acts in any way to invoke or enforce the Act, such as bringing a complaint with the Labor Commissioner.
- Wages and wage rates.
- Job classifications.
- Other terms and conditions of employment.
Legal Exposure
The cost of non-compliance with the California Fair Pay Act is high. An employee can file a claim with the Division of Labor Standards Enforcement (DLSE). Either the Department of Industrial Relations or the DLSE can bring a civil action on behalf of the employee for the amount of unpaid wages due to the pay difference plus an equal amount in liquidated damages. So if $25,000 were deemed owed due to an unlawful wage difference, the employee would get an additional $25,000 or $50,000 total.
An employee could also elect to file a civil law suit for the amount of wages not fairly paid plus an equal amount of liquidated damages plus interest, costs of suit and reasonable attorneys' fees. Employers are strongly encouraged to think carefully before relying on these "escape routes" and consider the strategies in the next section.
An employee could also elect to file a civil law suit for the amount of wages not fairly paid plus an equal amount of liquidated damages plus interest, costs of suit and reasonable attorneys' fees. Employers are strongly encouraged to think carefully before relying on these "escape routes" and consider the strategies in the next section.
Success Strategies
Systems, Systems, Systems
Look again at the 4 factors that justify a pay difference as lawful under the new Act: 3 of them have to do with systems (a seniority system, merit system, system for measuring production). Employers need to ensure their systems can rise to the occasion. How?
Partner with HR
Many potentially unlawful pay differences originate at the earliest possible point: the time of hire. Especially with hard-to-fill (e.g. big data ,marketing) or "life blood" positions (e.g. a sales force) it is not unusual for an employer to fill requisitions via a employee referral network (sometimes even a "good ol' boy network" of someone-who-knows-someone) that relegates Human Resources to an after-the-fact boarding role once management has already determined new hire pay. Such practices jeopardize compliance with the new Act, especially if pay grades and other compensation control are under HR's purview on paper but not in actual practice. Employers will find that HR can reduce legal liabilities much more effectively if it is allowed to partner with hiring managers proactively rather than a reactively. Hiring managers should make HR part of the total selection process, and use HR to do a reality check of proposed new hire pay to ensure compliance with the new Act.
Be Transparent
Just because an employer is not legally required to disclose wages or even respond to an employee internal complaint under the Fair Pay Act does not mean that's a good compliance strategy. Being evasive on the grounds a given employer behavior is not legally required will only frustrate employees, lead them to think the company has "something to hide" and encourage them to go to outside and get a lawyer. Being transparent will promote credibility among employees and help foster the belief that they are, in fact, being treated fairly and lawfully. Effective transparency simply requires a little creativity (for example, employers may not have to disclose specific wages but they can certainly disclose wage ranges for the jobs in question) and preparation (e.g., training managers and/or HR how to make pay decisions that are truly objective and comply with requirements of the new Act.)
In closing, these strategies are effective, but doing them right can consume bandwidth. For small and medium sized employers with no HR - or HR staff with limited time or expertise - PhoenixHR LLC can help with a wide range of relevant services such as:
Click here to learn more about our HR consulting services.
Click here to request a Free Quote for HR Services.
Related: The Amazon Debate & Restoring Balance to the (Work) Force
Link to Los Angeles Times article on California Fair Pay Act
Look again at the 4 factors that justify a pay difference as lawful under the new Act: 3 of them have to do with systems (a seniority system, merit system, system for measuring production). Employers need to ensure their systems can rise to the occasion. How?
- Document: All too often, pay-related systems are verbal practices or, if documented, not maintained correctly.
- Honor Published Policy or Update It: Another dangerous scenario is when pay-related systems are documented and published, but then ignored...such as merit systems that go unimplemented year over year due to company financial issues but without resetting employee expectations.
- Audit and Get a Solid Baseline: do a thorough HR audit...examine/update job descriptions, review any existing pay ranges for internal and external equity and proactively identify where you might have unlawful pay differences - then develop action plans to fix them. If an employer ever has to defend a equal pay wage claim before the state, it plays well to be able to show that the company was already taking corrective action without being "forced" to.
Partner with HR
Many potentially unlawful pay differences originate at the earliest possible point: the time of hire. Especially with hard-to-fill (e.g. big data ,marketing) or "life blood" positions (e.g. a sales force) it is not unusual for an employer to fill requisitions via a employee referral network (sometimes even a "good ol' boy network" of someone-who-knows-someone) that relegates Human Resources to an after-the-fact boarding role once management has already determined new hire pay. Such practices jeopardize compliance with the new Act, especially if pay grades and other compensation control are under HR's purview on paper but not in actual practice. Employers will find that HR can reduce legal liabilities much more effectively if it is allowed to partner with hiring managers proactively rather than a reactively. Hiring managers should make HR part of the total selection process, and use HR to do a reality check of proposed new hire pay to ensure compliance with the new Act.
Be Transparent
Just because an employer is not legally required to disclose wages or even respond to an employee internal complaint under the Fair Pay Act does not mean that's a good compliance strategy. Being evasive on the grounds a given employer behavior is not legally required will only frustrate employees, lead them to think the company has "something to hide" and encourage them to go to outside and get a lawyer. Being transparent will promote credibility among employees and help foster the belief that they are, in fact, being treated fairly and lawfully. Effective transparency simply requires a little creativity (for example, employers may not have to disclose specific wages but they can certainly disclose wage ranges for the jobs in question) and preparation (e.g., training managers and/or HR how to make pay decisions that are truly objective and comply with requirements of the new Act.)
In closing, these strategies are effective, but doing them right can consume bandwidth. For small and medium sized employers with no HR - or HR staff with limited time or expertise - PhoenixHR LLC can help with a wide range of relevant services such as:
- Conducting HR Audits.
- Constructing job descriptions, pay ranges and integrating them into meaningful, defensible compensation plans.
- Training managers and HR staff to handle employee complaints more effectively.
- Effectively resolving complaints by conducting third-party investigations that help prevent litigation and build company credibility.
Click here to learn more about our HR consulting services.
Click here to request a Free Quote for HR Services.
Related: The Amazon Debate & Restoring Balance to the (Work) Force
Link to Los Angeles Times article on California Fair Pay Act
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