The California Fair Pay Act: What Businesses Can Do to Prepare and Comply

On October 6, 2015 the California Fair Pay Act (SB 358) was signed into law to much fanfare. Politicians from both sides of the aisle lauded the new law as a bold step towards the noble goal of eliminating gender income inequality. In a signing ceremony, Governor Brown celebrated California for leading the nation on this important issue and national media outlets praised California for enacting the toughest gender pay law in the Country. Despite the undeniable importance of the gender income equality issue, the California Fair Pay Act is not without its critics who suggest that new law would create an unpredictable environment for business and incentivize companies to move their operations out of California. This critique is not without merit as there exists a tremendous degree of uncertainty as to how California Courts will ultimately interpret and apply the new Fair Pay Act.

Photo by Gutzemberg/iStock / Getty Images
Photo by Gutzemberg/iStock / Getty Images

California has had a gender wage protection law on the books since 1949 in the form of the California Equal Pay Act (Cal. Lab. Code § 1197.5). Unfortunately, this law has significant limitations and consequently was seldom used by victims of gender based wage discrimination. One limitation that was addressed by the new Fair Pay Act was the expansion to the “substantially similar work” standard. The former Equal Pay Act prohibited gender based wage discrimination for employees for “equal work.” The new law expands this concept to apply to “substantially similar work.” This expansion will seemingly eliminate the distinctions that employers could rely on to justify differences of salary between employees with comparable, but not identical job duties. In a further expansion, the Fair Pay Act eliminated the “same establishment” language that confided the former Equal Pay Act to a comparison of the employees within a single physical location to include employees spread across a company with multiple locations.

The Fair Pay Act also sets forth an affirmative duty for the employer to establish that a gender wage differential is based on a seniority system, a merit system, a system that measures earning by the quantity or quality of employee production or a “bona fide factor other than sex.” The “bona fide factor other than sex” analysis is only available when there is an overriding “business necessity”. Further, the “bona fide factor other than sex” defense is not available to an employer when there exists an alternative business practice that would serve the same function without contributing to the gender wage differential.

Perhaps the most powerful component of the new Fair Pay Act, lies in the Legislature’s attempt to pull back the veil of pay secrecy to shed light on wage gender inequality. The Fair Pay Act explicitly protects an employee who discloses, discusses, or inquiries about the wages of their co-workers for the purpose of enforcing their rights under the Fair Pay Act from retaliation or discrimination. Proponents hope that this will empower employees to inquire about wage discrepancies and get the information they need to assert their rights under the Fair Pay Act.

There are important steps that California businesses can take to minimize their exposure to litigation under the Fair Pay Act. At the outset, California business should conduct a comprehensive organizational audit. The purpose of this audit is to identify all “substantially similar” positions by assessing the various commonalities that exist between positions, including but not limited to, skill, working conditions and responsibilities. These findings should be compiled and incorporated into a detailed salary survey and written wage setting program. If a gender wage discrepancy is discovered, an examination of all systems and “bona fide factors other than sex” that contribute to the discrepancy should be conducted and documented.

Employee handbooks should be modified to inform employees and management of the provisions of the new Fair Pay Act. Specifically, all employees should be informed in writing of their right to inquire as to the compensation of their co-workers without fear of retaliation or discrimination. Procedures must also be put in place to ensure that company document retention policies comply with the Fair Pay’s Act requirement that job descriptions, wage reports and compensation records are maintained for at least three years.

Given the lack of definitions included within the new Fair Pay act for terms such as “substantially similar work” and “similar working conditions”, business owners and employment attorneys will be navigating unchartered waters after the Fair Pay Act takes effect on January 1, 2016. Time will tell how California Courts apply the new law. However, California business owners can protect themselves by proactively taking steps to comply with the Fair Pay Act and establish systems that minimize their potential exposure to litigation.