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The Equal Pay Act, Pay Differentials, and Gender

Employers can assert as an affirmative defense to a claim under the Equal Pay Act (EPA) that a pay differential is “based on any other factor other than sex.” In Rizo v. Yovino (9th Circuit, April 27, 2017), the employer-county presented evidence that it legitimately based its pay structure on a factor other than gender, arguing that its use of an employee’s most recent prior salary was such a factor. 

The Ninth Circuit found its earlier EPA case, Kouba v. Allstate Ins. Co., 691 F.2d 873 (9th Cir. 1982), “controlling”; under Kouba, prior salary can qualify as a “factor other than sex,” provided that the employer shows that prior salary “effectuated some business policy” and the employer used prior salary “reasonably” in light of its stated purpose and other practices. 

The county offered multiple business reasons for its use of prior salary: “(1) the policy is objective, in the sense that no subjective opinions as to the new employee’s value enters into the starting-salary calculus; (2) the policy encourages candidates to leave their current jobs for jobs at the County, because they will always receive a 5% pay increase over their current salary; (3) the policy prevents favoritism and ensures consistency in application; and (4) the policy is a judicious use of taxpayer dollars.”  The district court erred in declining either to evaluate whether these reasons effectuated a business policy or to determine whether the county used prior salary “reasonably,” as required by Kouba.

The holding of Rizo is relatively narrow: The district court’s conclusion that prior salary alone can never be a “factor other than sex” is incorrect as a matter of law.  Moreover, despite the availability of the “other factor other than sex” affirmative defense, employers should be prepared to justify and defend such policies in the face of increased pay discrimination claims under the EPA and similar state antidiscrimination statutes (e.g., the California Equal Pay Act, Cal. Lab. Code § 1197.5).  In particular, determining whether the employer acted “reasonably” in using prior salary to determine salaries for all new hires, regardless of its potential disparate impact on employees in protected classes, may prove difficult.  At the very least, the “reasonableness” inquiry may raise a triable issue of material fact sufficient to defeat the employer’s summary judgment motion, requiring an expensive trial on the merits, with its attendant publicity.

The Ninth Circuit noted in a footnote that the county-employer also considered a new hire’s education in setting initial salaries: “[I]f an employer’s use of prior salary alone were unacceptable under the Equal Pay Act, but the employer’s mere consideration of some other factor in addition to prior salary (other than sex) cured the problem, then in the present case the County’s pay structure would be lawful.  That is because, in addition to prior salary, the County considers a new hire’s education when setting pay, as reflected in the ‘stipend’ that the plaintiff received for holding a master’s degree.” 

Employers using or considering using prior salary to set initial salaries should therefore consider using other “neutral” factors, such as education and relevant work experience.