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California's New Fair Pay Act: What Should Your Company Do Next?


As many employers know, California has recently amended its Labor Code to enact the strictest fair pay law in the country. After finding that the wage gap between men and women in California was 16 cents on the dollar in 2014, the Legislature described the wage gap as a "persistent disparity in earnings" that has a significant impact on the economic security and welfare of millions of working women and their families. As a result, the Fair Pay Act was passed to eliminate the gender wage gap in California in a meaningful way.

Although California passed the prohibition of gender-based wage discrimination in 1949, it has not resulted in pay equity. The Fair Pay Act attempts to successfully eliminate the wage gap by making it easier for plaintiffs to bring claims under Labor Code section 1197.5, to increase awareness of the pay equity law, and to stop employers from banning their employees from disclosing their wages. The law also has an anti-retaliation clause, which allows employees to ask about and discuss co-workers' wages without fear of punishment. Supporters of the law believe that access to more information about salaries will eventually help to narrow - or explain - the wage gap.

The new law provides that employers should not pay their 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. Wage differentials are legal, however, when they are based on one or more of the following: (a) a seniority system; (b) a merit system; (c) a system that measures earnings by quantity or quality or production; or (d) a bona fide factor other than sex, such as education, training, or experience. This last factor applies only if the employer demonstrates that it 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." See the full text of the Fair Pay Act here.

Because the law went into effect in January of this year, there's not much information about how courts will interpret the various terms in the amended law, and companies are grappling with how to comply with the new law. For these reasons, companies should proceed cautiously and thoughtfully. Here are some items to consider while awaiting interpretation:

What should companies do now?

1.    Review compensation. If your company has the resources, you may consider hiring a third party company to audit your pay practices. Many companies, such as SharedHR, are offering these services in light of the new law. If that is not feasible, undertake an internal review of compensation.

2.    Be sure that if you do have wage differentials, they are based on a seniority system, a merit system, a system that measures earnings by quantity, quality, or production, or a bona fide factor other than sex. Document the reasons for any wage differentials, both after your review of compensation and on an ongoing basis.

3.    If you have questions, consult with an attorney. This is an area that is new and complex, and paying an attorney to help your company comply with this law will be far less expensive than defending a lawsuit.

4.    Keep in mind that most companies are taking the new law seriously and making changes. Salesforce recently ordered a review of the salaries of 17,000 employees. Following the review, they are paying $3 million more in salaries in 2016 to eliminate any gender pay gaps. Most companies can - and should - comply with the new California Fair Pay Act by making a much smaller investment.