Improve Employee Databases to Ensure Pay Equity

Employers need to make sure they are accounting for employees’ past work history in their HR databases to defend against pay discrimination claims.

By Allan G. King and Tara L. Presnell August 30, 2018
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Improve Employee Databases to Ensure Pay Equity

If recent state legislation regarding pay equity hasn’t prompted you to take another look at your employee database, a landmark court decision should. In Rizo v. Yovino, the 9th Circuit held earlier this year that a person’s previous compensation could not be used as a legitimate reason to justify pay disparities between men and women. 

What can be lawfully considered when setting salary is employees’ past experience. The problem, of course, is that most companies don’t capture work history in their databases. 

The Decision

Aileen Rizo, the plaintiff in the case who worked as a math consultant at a school, sued the school district under the federal Equal Pay Act after discovering that she was paid less than a man in a similar position. The county had a policy of compensating newly hired employees 5 percent more than what they had earned previously. Rizo alleged that the practice could not be considered a “factor other than sex” that justified offering her lower compensation than others who performed work of equal skill, effort and responsibility. 

Prior to Rizo, some courts held that employers could lawfully consider prior salary in setting pay, even when such compensation was based on roles that were unrelated to the duties of the employee’s current position. Other courts allowed it but urged caution, recognizing that, standing alone, using previous compensation might perpetuate pay inequities. 

The 9th Circuit previously was among the courts that allowed prior pay as a legitimate factor in deciding salary. In its 1982 decision Kouba v. Allstate Insurance Co., it advocated a “pragmatic standard” and ruled that an employer’s policy of setting pay could be considered “reasonable” if it aligned with the company’s stated purpose and practices. So fair compensation could be set for new employees based on their ability, education, experience and prior salary.

Rizo overruled Kouba, going further than any other court in holding that prior salary could not be considered in deciding pay. That’s because, to be legitimate, the determining factor must be job-related. Since prior pay relates to a different job, by definition it cannot be related to a person’s present position, according to the ruling. Moreover, the court viewed employers’ reliance on prior pay as inconsistent with the Equal Pay Act’s remedial purpose—“to put an end to historical wage discrimination against women.” 

[SHRM members'-only toolkit: Managing pay equity]

Considering Prior Salary

In light of Rizo, HR professionals who work for employers in the 9th Circuit—Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, Nevada, Northern Mariana Islands, Oregon and Washington—may not set pay based on an employee’s prior salary. This applies to both male and female workers. As a preventive measure, it’s a good idea to refrain from inquiring about a person’s prior pay at all, because once you receive that information, you won’t be able to prove that you haven’t considered it. Also, remove the question from employment applications and interview schedules.

In addition, if your company has a history of basing its starting pay on prior salary, you may want to look into whether current gender pay differences among your workforce could require remediation. 

Factoring In Experience 

But there is a subtler lesson as well. 

In many cases, the employees who rose most quickly in their prior employment are likely to have been better compensated because of their skills and work ethic. So compensation may indicate, in part, the previous employer’s assessment of an employee’s contribution to the company. But since it can also reflect discrimination, a better way to gauge that is to look at an employee’s experience in a prior job. In fact, in the Rizo decision, the court acknowledged that experience can be considered a relevant factor in assessing an applicant’s potential. 

That’s where there’s an opportunity for HR. Most employee databases fail to include employees’ experience prior to joining the company—which leaves company leaders at a loss when they are challenged to explain pay differences, particularly on a classwide basis. 

One way to capture this information is to merge the data maintained in applicant databases, which includes work history, with main HR databases when applicants are hired. This may be the key takeaway from Rizo. After all, it would be unfortunate for employers to lose or be forced to settle an Equal Pay Act claim simply because they aren’t able to access the required data. 

Gray Area

The Rizo decision acknowledged one gray area for employers that it did not resolve: what to do when “past salary may play a role in the course of an individualized salary negotiation.” 

In light of the wave of “salary ban” laws sweeping across many states and a few cities, some HR leaders have eliminated inquiries about prior salary during the hiring process and replaced them with questions about salary expectations for a particular role. While questions related to “expectations” appear to be lawful in most jurisdictions, what happens when a candidate bases his or her expectations on prior salary? 

The court noted that it was not deciding this issue but would reserve it for future cases. 

It’s common sense that prior salary influences salary expectations. 

Taking it a step further, what happens if the candidate voluntarily discloses his or her salary during negotiations? It is difficult to “unsee” that information—although Rizo requires employers to do exactly that.

Allan G. King is an attorney with Littler in Austin, Texas, and Tara L. Presnell is an attorney with Littler in Walnut Creek, Calif. 

Illustration by Adam Niklewicz

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