California Businesses Struggle with Fair Pay Act One Year Later

By June Bell Dec 8, 2016
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California's Fair Pay Act—requiring employers to explain differences between male and female employees' pay—took effect nearly a year ago, but few businesses feel confident they're in compliance. Most continue to grapple with how to compare work duties in various jobs and how to tweak salaries. These tasks will only become more difficult in 2017 when race and ethnicity are thrown into the mix in addition to gender.

"A lot of people have been downplaying this because I think they are freaked out," said Jennifer Shaw, an attorney with Shaw Valenza in Sacramento, Calif. "Because they don't know what to do, they're doing nothing."

The toughest fair-pay law in the country, California's legislation tasks employers with the burden of showing that any disparities in pay between men and women doing "substantially similar" work are based on a limited number of acceptable factors, including seniority, education, and "quantity or quality of production" of goods.

[SHRM members-only toolkit: Preventing Unlawful Workplace Discrimination in California]

Determining what constitutes substantially similar work is proving a daunting chore for businesses.

"Companies have been spending a good deal of their time trying to make that fundamental assessment," said Susan Groff, an attorney with Jackson Lewis in Los Angeles, "because how can you compare folks' pay without knowing who you should be comparing?"

She has advised her clients to review job descriptions to be sure they accurately reflect the specific duties, skills and experience needed for each position. If an employee can easily be transferred from one job to another, that's a strong indicator that the positions are substantially similar, making any pay disparity suspect, she said.

Calling All Compensation Analysts

The Fair Pay Act, which took effect Jan. 1, has triggered waves of anxious calls to compensation analysts and consultants.

The analysts drill deep to determine how salaries are set, how raises and bonuses are awarded, and how pay classifications are determined. Thorough salary audits examine pay by gender across various salary bands, taking education, experience and other permissible factors for pay disparities into account.

The question of how to categorize employees perplexes even these analysts, said Kristina Launey, an attorney with Seyfarth Shaw in Sacramento, Calif. "What does the substantially similar standard mean?" she said. "How is it going to play out if and when it is litigated? Because it's not the clearest standard, to put it mildly."

Industry-Specific Discrepancies

Overall, the health care industry has fewer problems with gender-based pay disparities than other fields, Shaw said, because the sector is very competitive and pay rates don't differ dramatically from one employer to another. Audits also don't typically vex health care executives because they're comfortable with doing them for accreditation.

Pay inequities are more likely to crop up in audits of financial institutions and manufacturers because those employers exercise more discretion in setting pay. In some cases, analysts have found that companies have reverse-engineered the hiring process, first determining what they wanted to pay a candidate and then giving him or her a title to support that salary. Businesses have also attempted to justify unlawful disparities in pay by classifying workers in different pay grades despite assigning them similar duties.

Prior Pay

Some employers have been flummoxed by disparities they can't explain or justify, Shaw said. Many are finding that salaries had been set based on a job candidate's prior pay.

"What that means is, we have a problem," she said, "because that's no longer a legitimate basis for making a decision."

An amendment to the Fair Pay Act, which will take effect on Jan. 1, 2017, specifies that employers cannot use a worker's prior salary as the sole justification for any pay disparity.  However, employers will still be able to request that candidates provide their salary history before making a job offer.

In what may be the beginning of a trend, starting Jan. 1, 2018, Massachusetts employers will no longer be able to ask job candidates for their prior salaries (though employees can provide that information after receiving a job offer that includes a salary amount).

Thinking that California might eventually follow suit, some Golden State-based businesses are mulling whether to continue requesting applicants' salary histories.

"It's becoming an increasingly risky question to ask," Groff said.

In addition, another new law—which will  also take effect on Jan. 1 , 2017—will forbid California employers from using workers' race or ethnicity to justify paying them differently when doing substantially similar work. Ensuring compliance with this measure may be a challenge because employees may choose not to reveal their ethnicity or may have multiple ethnicities.

Concerns About Liability

HR professionals are tight-lipped about what measures, if any, their companies are taking to comply with the Fair Pay Act. Several HR professionals for California businesses said they were wary of discussing their processes—even when they were confident their employers were compliant—because of concerns about potential liability.

Software giant Salesforce.com has been a notable exception. Last year, it announced pay adjustments for about 1,070 men and women—roughly 6 percent of its 17,000-person workforce—after a salary audit uncovered gender-based pay discrepancies.

The San Francisco-based company spent about $3 million to correct those inequities even before the Fair Pay Act took effect, according to a blog post on the company's website. Salesforce declined to make an executive available for an interview for this article.

Other companies have faced litigation involving gender-based pay inequities. Farmers Insurance agreed in June to pay a $4 million settlement to nearly 300 female attorneys who alleged the company violated federal and state laws—including the Fair Pay Act—by paying them significantly less than their male counterparts despite comparable experience and skills. The settlement was approved by a federal judge in San Jose.

"All employers can do is look under the hood," Launey said, "and make sure there aren't any big red flags that they should be correcting and then make sure they have the policies and procedures in place so that, going forward, no new issues arise."

June D. Bell covers California labor and employment issues for SHRM. Contact her at june@junebell.com.

 

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