CALIFORNIA’s Fair PAY ACT: Every EMPLOYER’S STEPS TO COMPLIANCE

Presented byRich FalconeLittler

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RFaclone@littler.com | 949-705-3037

Agenda• A Brief History• The Basic Requirements of the Fair Pay Act (“FPA”)• The Heart of the FPA: “Substantially Similar Work”• Additional Requirements of the FPA• The Remedies Available• Employer Defenses Available• The Take-Aways:

− Recommendations / Best Practices for Compliance− How to Audit Your Pay Systems

to Ensure Compliance with the FPA

First, Some History • The present version of The FPA is an

extension of the California Equal Pay Act of 1949.− Required “equal pay for equal work.”

• On October 6, 2015, Governor Brown signed the amended Fair Pay Act into law.− Requires equal pay for “substantially similar

work.”

• In October, 2017, the FPA was amended to its current version.− Added race and ethnicity as protected

categories.

− Prohibits justifying pay differences solely on the ground of prior salary.

THE BASIC REQUIREMENTS OF THE CALIFORNIA FAIR PAY ACT• The FPA prohibits an employer from paying any

employee a wage rate that is less than what it pays employees:− of the opposite sex, or− of another race, or − of another ethnicity

• For “substantially similar work”

• When viewed as a composite of:− Skill− Effort, and− Responsibility

• And, performed under similar working conditions.

WHAT DOES “SUBSTANTIALLY SIMILAR WORK”MEAN?• “Skill” refers to the experience, ability, education,

and training required to perform the work.

− Education - Previous Experience

− Certifications Held - Job Descriptions

− Standardized Testing Scores

− EXAMPLE:

Female employee, a sales person in the women's clothing department of the employer’s store, claims she is paid less than a male sales person in the men's clothing department. The employer argues that differences in skills required for the two jobs make them unequal. The investigation reveals, however, that the sale of clothing in the two departments requires the same skills: customer contact, fitting, knowledge of products, and inventory control. Therefore, the skill required for the two jobs may be substantially similar.

• “Effort” refers to the amount of physical or mental exertion needed to perform the job.− Performance Ratings - Productivity

− Work Patterns - Attendance

EXAMPLE:

A male employee and a female employee both work as “Assistant Managers,” but the male employee oversees three different stores. Although the female manager only oversees one store, that store is the employer’s largest and brings in the most revenue. The effort used by both employees may be similar.

WHAT DOES “SUBSTANTIALLY SIMILAR WORK”MEAN?

• “Responsibility” refers to the degree of accountability or duties required in performing the job.− Reporting Structure - Supervision

− Compensation tied to Accountability - Goals

− EXAMPLE:

Two employees work as “Project Managers” and have the same general job descriptions. One manages 20 employees in four different locations and actually performs duties not listed on the job description. The other Project Manager only manages one employee. The two jobs may not be substantially similar due to the difference in responsibility.

WHAT DOES “SUBSTANTIALLY SIMILAR WORK”MEAN?

• “Working conditions” has been interpreted to mean the physical surroundings (temperature, fumes, ventilation), and hazards.− EXAMPLE:

A female assembly worker is paid less than a male assembly worker in the same department. That he works the night shift does not render their jobs substantially dissimilar. [However, the employer may have a defense if the employer pays all employees who work the night shift higher wages, regardless of gender.]

WHAT DOES “SUBSTANTIALLY SIMILAR WORK”MEAN?

ADDITIONAL REQUIREMENTS OF THE FPA

• Coverage: − Includes race and ethnicity

• Salary History Restrictions: − Salary History, by itself, cannot justify disparity in compensation.−Rizo v. Yovino, (9th Cir., April, 2018)

Background Holding: Employers may not consider previous salary history when

deciding whether a gender wage disparity is permissible. Nothing about one’s prior earnings is a “legitimate measure of work

experience, ability, performance, or any other job-related quality.”

ADDITIONAL REQUIREMENTS OF THE FPA

• Same Establishment: − Deletes the “Same Establishment” requirement− Prohibits wage differentials for substantially similar work in any of the

employer’s establishments.

• Wage Transparency:− Employers cannot prohibit employees from discussing their wages

with other employees.− Upon “reasonable request,” employers are required to provide a “pay

scale” for an applied-for position to an applicant. − Employers may want to be prepared in advance to disclose the

company-approved pay range for the position in question.

ADDITIONAL REQUIREMENTS OF THE FPA

• No Retaliation:− Employers cannot retaliate against

an employee for exercising rights under the FPA.

− Six (6) month statute of limitations

• Record Retention Requirement:− Increased from 2 to 3 years.

ALERT! PAY DATA REPORTING

ON THE HORIZON• SB 1284

• Would require employers to:

− Annually report pay data from employees’ W-2 forms

− Within broad specified job categories and pay bands

− Broken down by sex, race and ethnicity

• Would also impose civil penalties for non-compliance.

Coverage:

• Would apply to employers with 100+ employees.

Status:

• June 26, 2018

• Sent by Assembly Judiciary Committee to the “fiscal committee.”

ALERT! PAY DATA REPORTING

ON THE HORIZON• Strongly Opposed by CalChamber:

− “Unfairly requires employers to submit pay data to the DIR potentially creating a false impression of wage discrimination or unequal pay where none exists ….”

− The broad categories required do not track the FPA requirement of equal pay for employees who are similarly situated in terms of skill, effort, and responsibility.

− The W-2 income data omits certain types of compensation:

Stock compensation.

− W-2 earnings also reflect employees’ own decisions.

Whether to work additional shifts.

Whether to take pre-tax deductions (e.g., 401k).

AH! SAN FRANCISCO! “PARITY IN PAY ORDINANCE”

• Effective July 1, 2018

• Covers any employer who conducts business in San Francisco.

• Salary History−Cannot be considered even if

volunteered. − Employers cannot disclose a current or

former employee’s salary history.

• Post Notice of the Ordinance

THE REMEDIES AVAILABLE UNDER THE FPA

• File with the DLSE, or

• Private right of civil action for discrimination and retaliation claims.

THE REMEDIES AVAILABLE UNDER THE FPA• Remedies for proven claims include:

− Reinstatement

− Recovery of lost wages (the lost differential) and benefits

− Interest

− Penalties

$100 per employee, per violation

$200 for subsequent or intentional violations

− Willful violations

6 months’ jail.

Fines up to $10,000

− Equitable relief

− PAGA

− Attorneys’ fees / costs

EMPLOYER DEFENSES AVAILABLE

• Wage differentials are permitted by proving that the difference in pay for substantially similar work is due to:− Seniority

In order for a seniority system to be considered a valid basis for paying employees different wage rates, it must be:

• well established,

• consistently utilized,

• and based upon the length of service.

EMPLOYER DEFENSES AVAILABLE

• Example: A salary retention policy for an employer that rewards an employee based upon length of service may justify a wage disparity if it is applied equally amongst female and male employees and explains the entire wage difference.

EMPLOYER DEFENSES AVAILABLE

• Merit− A valid merit system requires employers to show that there is well-established,

organized and structured procedure to evaluate an employee’s performance according to predetermined criteria.

− To be a bona fide system:

• it must not have been adopted with discriminatory intent;

• it must be based on predetermined criteria;

• it must have been communicated to employees;

• and it must have been applied consistently and even-handedly to employees of both sexes.

EMPLOYER DEFENSES AVAILABLE

• A system that measures production:− An incentive or production system provides

compensation on the basis of the quality or quantity of production.

− Example: An employer may assert a wage disparity is justified on a factor other than sex where its compensation structure is a merit or reward system that bases salaries for branch managers at a specific, uniform percentage of the branch’s projected earnings.

WHAT IS A “BONA FIDE FACTOR OTHER THAN SEX, RACE OR ETHNICITY?”

• And / or, a “bona fide factor other than sex, race or ethnicity.”

• Examples of factors other than sex, race or ethnicity:− Education

−Training

− Experience

WHAT IS A “BONA FIDE FACTOR OTHER THAN SEX, RACE OR ETHNICITY?”

• To succeed on this defense, the employer must prove that the factor is:− Not based on or derived from a sex, race, or ethnicity-based factor;− Job related; and,− Consistent with a business necessity

“An overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve.”

Examples:• Prior job-related work experience

• Job specific training

• Geographical location

• Cost of living considerations

WHAT IS A “BONA FIDE FACTOR OTHER THAN SEX, RACE OR ETHNICITY?”

• Example: An employer may assert a defense to a claim of wage disparity based on a factor other than sex between a male art college professor who has significantly more years of experience in teaching and has a master’s degree in art, than a female music college professor, with fewer years of prior teaching but similar education.

THE EMPLOYER HAS THE BURDEN OF PROOF

• The employer must show it applies the above factors:−Reasonably, and

−The factors account for the entire difference in wages.

• If the employer carries its burden, the employee can defeat the “bona fide factor” defense by:−Demonstrating the existence of an alternative business practice,

−That would serve the same business purpose,

−Without creating a wage difference.

RECOMMENDATIONS / BEST PRACTICES FOR COMPLIANCE1. Instill a Culture of Compliance

− Train Decision-Makers who make compensation decisions. Recruiters, Managers, HR

About “fair pay” requirements.

How to make valid compensation decisions based on objective, job-related factors.

Reminder: Cannot ask about salary history.

− Confirm there is an Adequate Complaint Procedure Investigate any complaint.

− Ensure everyone knows employees can ask co-workers about compensation. Edit the Handbook

• Right to inquire about employee’s own compensation.

• Right to discuss compensation with others.

• No retaliation.

RECOMMENDATIONS / BEST PRACTICES FOR COMPLIANCE

2. Employment Application:−Remove any questions about salary

history.

3. Establish a Pay Scale / Salary Bands for Each Position

− Standardize Compensation

− Based on objective criteria.

− Qualify the pay scale / bands by noting that the salary / wage identified will be based on appropriate factors such as qualifications and experience.

− Remove negotiation over compensation.

− Require that compensation decisions are reviewed and approved by HR.

RECOMMENDATIONS / BEST PRACTICES FOR COMPLIANCE

RECOMMENDATIONS / BEST PRACTICES FOR COMPLIANCE

4. Regularly Review Job Descriptions−Do they accurately describe the job duties performed?

−Do the qualifications required for the job match with the duties performed?

−Do they accurately identify and describe the “skill, effort and responsibility” required for the job?

−Have the employee review, edit, and sign / date the job description (Annually).

− Ensure performance evaluations track job descriptions.

RECOMMENDATIONS / BEST PRACTICES FOR COMPLIANCE

5. Avoid similar job titles for employees doing completely different work.−Consider using “pay grades.”

Security Analyst 1, Security Analyst 2, etc.

RECOMMENDATIONS / BEST PRACTICES FOR COMPLIANCE6. Ensure that any wage differences can be explained by:

− Seniority

− Merit

− Quantity or quality of production, or

− Another bona fide factor other than sex, race or ethnicity.

Higher cost of living due to geography

Market restraints: difficulty filling the position.

Education

Licenses

Training

Experience

• Document the “bona fide” factors for wage differences.

RECOMMENDATIONS / BEST PRACTICES FOR COMPLIANCE

7. Document Pay Decisions−The date of the decision

−The decision-makers

−The objective factors considered for the compensation decision.

−Any other bases for the decision.

−Review overtime and shift arrangements to ensure equity.

RECOMMENDATIONS / BEST PRACTICES FOR COMPLIANCE

8. Revise Record Retention Policies−Retain compensation records at least 3

years.

9. Conduct a Privileged Self-Audit

HOW TO CONDUCT A FAIR PAY ACT AUDIT

Preliminary Steps

• Audits should be attorney-client privileged!

• Understand the purpose and focus of the audit:−We are measuring whether there are compensation

differences between demographic groups: Male / Female

Races

Ethnicities

HOW TO CONDUCT A FAIR PAY ACT AUDIT

• If differences exist, we need to identify if those differences are “statistically significant.”

• If differences exist, determine the extent to which those differences reflect legitimate business considerations.

• If an available defense under the FPA doesn’t apply, correct the problem.

STEP 1GATHER RELEVANT DATA FOR ALL EMPLOYEES

1. Name

2. Gender

3. Race

4. Ethnicity

5. Job Title

6. Business Unit Division / “Substantially Similar Group” (“SSG”)

STEP 1GATHER RELEVANT DATA FOR ALL EMPLOYEES

7. External Controls − Legitimate, non-discriminatory determinants of variations in

compensation and that may drive pay differences. Market pay rates

Work city / state

Seniority / tenure

Job related education

Certifications / licenses

Performance history / evaluation scores

Labor market experience

STEP 1GATHER RELEVANT DATA FOR ALL EMPLOYEES

8. Organizational Factors−Grade / Level

− Job Family / function

9. Total Compensation−All components of compensation:

Salary / Base wage rate

Bonus

Fringe benefits

STEP 2GROUP THE DATA INTO SUBSTANTIALLY SIMILAR

GROUPS(“SSGs”) • What Is a “Substantially Similar Group?”

− More broad than job title.− More narrow than job family or grade.− Include: Functions & Roles

• Functions are larger organizational segments. Examples:

• Operations• Sales• IT• HR

STEP 2GROUP THE DATA INTO SUBSTANTIALLY SIMILAR

GROUPS(“SSGs”) − Roles are substantially similar job titles based on:

Skill Effort Accountability / Responsibility

− For example, call center operators, receptionists, assistants, and executive assistants might be considered to be “one role” if their jobs require substantially similar:

• Skill

• Effort

• Accountability / Responsibility

Step 3The relevant Data Fields for the audit

Employee name and employee identification number Pay type (salary, hourly, etc.)

Gender Annualized salary or hourly rate

Work location, including state Shift differentials, if any

Status, i.e., full-time, part-time, temporary Bonus eligibility

Exempt/non-exempt status Bonus(s) paid, separated by type of bonus

Date(s) of hire Hours worked/type (regular, OT, etc.)

Job title Total compensation

Job code/grade/band Performance ratings/evaluations

The date the employee first moved in to his or her current job code/grade/band

Highest level of education

Division/department/business unit Special licenses, certifications, etc.

Job function/family

Supervisor name and title

STEP 4 DO A STATISTICAL ANALYSIS

1. A Compensation Expert / Statistician Most Likely Needs to be Retained.

2. Purpose: To evaluate if there is a problematic disparity in pay based on:

− Sex

−Race

− Ethnicity

STEP 4 DO A STATISTICAL ANALYSIS

3. Use an Excel or similar spreadsheet to group and visualize the data.

4. What’s The Outcome When We Do a Statistical Analysis?− Is the observed gap between the sexes / races/ ethnicities

“statistically significant?”

STEP 5 IDENTIFY AND CORRECT PROBLEMATIC GAPS

1. Evaluate whether there are factors that have not been considered that could legitimately explain any disparities.

2. If there are no legitimate explanations for any disparities, corrective action must be taken:−Adjust employee pay.

“The pay adjustment is being made following an evaluation of various positions to ensure that the pay matches the value of the job.”

STEP 5 IDENTIFY AND CORRECT PROBLEMATIC GAPS −Consider the legitimacy of factors being used to set pay rates.

−Consider paying under-compensated employees for historic pay disparities If you do, also consider a “waiver of claims” agreement.

3. Prepare a privileged summary of the audit’s findings.

Closing thoughts

• Be certain to use experienced experts in undertaking the audit− “Joe or Mary” in accounting may not be the expert you want to use.

• Undertake the audit with a willingness and plan to correct problems identified.

• Adopt a plaintiff’s / employee’s perspective in undertaking the audit/review.

• Always ask yourself, “How would a jury or arbitrator regard our audit and analysis?”

Recommended resources

• CALIFORNIA PAY EQUITY TASK FORCE (January 10, 2018 Agenda)−https://women.ca.gov/california-pay-equity-task-force

• https://www.littler.com/service-solutions/littler-pay-equity-assessment

• https://www.littler.com/publication-press/publication/youre-gonna-need-bigger-boat-pay-equity-initiatives-flood-state

Questions?

Thank You!