California’s new Fair Pay Act amends existing law to enact what is widely being considered as the most stringent equal pay law in the country.  The Fair Pay Act will amend existing law in a number of significant ways, making it easier for employees to bring equal pay suits against their employers.  Under previous law, an employee had to show that he or she was being paid less than an opposite sex colleague who was performing “equal work.”  The new law will allow employees to compare their pay with colleagues who hold different, but “similar” positions, regardless of job title. It goes into effect January 1, 2016.

The amendment broadens the provisions by allowing an employee to show that a colleague receives greater pay for performing “substantially similar work,” in light of the “skill, effort, and responsibility” involved.  It is yet to be seen how similar work must be for courts to deem it “substantially similar.”

The new law also allows employees to make comparisons with colleagues throughout the company, even if they work in different geographic locations or business divisions.  It also makes it unlawful for an employer to prohibit an employee from disclosing his or her own wages, discussing the wages of others, making inquiries about other employees’ wages, or aiding and encouraging any other employee to exercise his or her rights.  However, nothing in the law creates an obligation that employees must disclose their wages.

While for some, this may come as a long-awaited clearing of barriers for employees seeking pay equity, many employers are bracing for the increased scrutiny on existing pay structures and the fewer compensation options that may result. The law may affect, for example, an employer’s ability to offer merit-based or incentive raises, increase compensation in response to competitive offers, and to offer higher salaries to employees in high-value positions without increasing salaries throughout the company.  Further, since the Fair Pay Act does not contain any geographic limitations, it may prevent employers from raising salaries in high cost of living areas without doing so across the board.

While the full impact of the new law is unclear, now, more than ever, employers should take special care to document compensation decisions, such as starting pay, salary increases and bonuses.