Under recently-amended California law[1], an employer must not discriminate in compensation paid to employees based on the employee’s gender, race or ethnicity, with limited exceptions[2]. While gender has always been in the law, race and ethnicity were recently added to the protections afforded under state law.

These changes[3] occurred due to concerns about the adequacy of existing state law, despite the Pay Equity Act being in existence for over 65 years.[4] California law is similar to the federal Equal Pay Act.[5] Most states have equal pay laws.[6] California legislators have also advocated action by Congress on this issue.[7]

Prior California law essentially prohibited an employer from paying an employee at a wage rate less than the rate paid to employees of the opposite sex in the “same establishment” for “equal work” on jobs the performance of which required equal skill, effort and responsibility and which were performed under similar working conditions.[8]

I.  SB 358

Governor Jerry Brown signed Senate Bill (SB) 358 by State Senator Hannah-Beth Jackson into law on October 6, 2015.[9] Many practitioners call SB 358 the “strictest equal pay law” in the nation.[10] It took effect on January 1, 2016. SB 358 prohibits an employer from paying any of its employees at wage rates[11] less than those paid to employees of the opposite sex for “substantially similar work”[12] when viewed as a composite of skill, effort, and responsibility.[13] Prior language concerning the “same establishment” requirement is now considered as a possible bona fide factor.[14]

The bill made various changes to California’s Equal Pay Act related to gender wage inequality.[15] SB 358 seeks to strengthen existing California law that precludes an employer from discriminating against an employee in pay on the basis of gender.[16]  Prior to the enactment of SB 358, Section 1197.5 mandated that an employer provide equal pay for equal work unless a bona fide factor other than gender justified the differential.[17]

SB 358 changed the statutory language to require equal pay for "substantially similar work," instead of the harder to establish "equal work." The law clarified that the burden of proof is on employers to demonstrate that wage differentials are based on some factor other than sex.[18]

In an effort to eliminate the risk of a stringent interpretation of this standard, SB 358 amends the Labor Code to specify that an employee shall not be paid less than another employee who is performing “substantially similar” job duties unless a bona fide factor exists.  As such, the new language should achieve the intent of the law and eliminate any employer from seeking to justify a wage differential through meaningless differences in job duties under the guise that such positions are not “equal.”[19]

Moreover, SB 358 allows employees to overcome "pay secrecy" by prohibiting employers from taking adverse action against employees who discuss wages with one another, as well as prohibiting employers from retaliating against employees who invoke the Equal Pay Act or encourage co-workers to do so.

As explained by the Department of Industrial Relations (DIR), Governor Brown signed the California Fair Pay Act (SB 358), which strengthens the Equal Pay Act in a number of ways, including by:

• Requiring equal pay for employees who perform “substantially similar work, when viewed as a composite of skill, effort, and responsibility.”
• Eliminating the requirement that the employees being compared [must] work at the “same establishment.” 
• Making it more difficult for employers to satisfy the “bona fide factor other than sex” defense.
• Ensuring that any legitimate factors relied upon by the employer are applied reasonably and account for the entire pay difference.
• Explicitly stating that retaliation against employees who seek to enforce the law is illegal, and making it illegal for employers to prohibit employees from discussing or inquiring about their co-workers’ wages.
• Extending the number of years that employers must maintain wage and other employment-related records from two years to three years.[21]

An important aspect of SB 358 is that the measure contains several findings and declarations by the Legislature to help set the stage for why these changes to the Labor Code were made.  Specifically, the Legislature determined that:

“In 2014, the gender wage gap in California stood at 16 cents on the dollar. A woman working full-time year-round earned an average of 84 cents to every dollar a man earned. This wage gap extends across almost all occupations reporting in California. This gap is far worse for women of color; Latina women in California make only 44 cents for every dollar a white male makes, the biggest gap for Latina women in the nation.[22]”

“While the state’s overall wage gap is slightly lower than the national average of 78 cents to the dollar, the persistent disparity in earnings still has a significant impact on the economic security and welfare of millions of working women and their families. Collectively, women working full time in California lose approximately $33,650,294,544 each year due to the gender wage gap. The wage gap contributes to the higher statewide poverty rate among women, which stands at 18 percent, compared to approximately 15 percent for men, and the poverty rate is even higher for women of color and single women living with children.[23]”

“California has prohibited gender-based wage discrimination since 1949. Section 1197.5 of the Labor Code was enacted to redress the segregation of women into historically undervalued occupations, but it has evolved over the last four decades so that it is now virtually identical to the federal Equal Pay Act of 1963 (29 U.S.C. Sec. 206(d)). However, the state provisions are rarely utilized because the current statutory language makes it difficult to establish a successful claim.[24]”

“Pay secrecy also contributes to the gender wage gap, because women cannot challenge wage discrimination that they do not know exists. Although California law prohibits employers from banning wage disclosures and retaliating against employees for engaging in this activity, in practice many employees are unaware of these protections and others are afraid to exercise these rights due to potential retaliation.[25]”

“To eliminate the gender wage gap in California, the state’s equal pay provisions and laws regarding wage disclosures must be improved.”[26]

The proponents argued that “The California Fair Pay Act will strengthen the state’s existing equal pay laws by eliminating loopholes that prevent effective enforcement and by empowering employees to discuss their pay without fear of retaliation.”[27] Proponents of SB 358 also claimed that the wage gap would cut the poverty rate for working single mothers by nearly half, from 28.7 percent to 15 percent.[28]

Proponents specifically argued that SB 358 will ensure employees performing substantially equivalent work are paid fairly by requiring equal pay for work of a comparable character, eliminating the outdated same establishment requirement, by replacing the any bona fide factor other than sex catch-all defense with more specific affirmative defenses, and strengthening protections for workers who inquire about or discuss their wages or those of their coworkers.[29]

SB 358 requires employers to affirmatively demonstrate[30] that a wage differential is based upon one or more specified factors including a seniority system, a merit system, a system that measures earnings by quantity or quality of production, or a bona fide factor[31] other than sex.[32] Moreover, the new law requires the employer to demonstrate that each factor relied upon is applied reasonably and that the factor(s) relied upon account for the entire wage differential.[33]

As a separate matter, SB 358 prohibits an employer from discharging or in any manner discriminating or retaliating against any employee by reason of any action taken by the employee to invoke or assist in any manner the enforcement of these provisions of the Labor Code.[34] The new law authorizes an employee who has been discharged or discriminated or retaliated against to recover in a civil action reinstatement and reimbursement for lost wages and work benefits caused by the acts of the employer, including interest and equitable relief.[35] It also requires a civil action to recover wages for retaliation to be commenced no later than one year after the cause of action occurs.[36]

Finally, the bill prohibits an employer from prohibiting an employee from disclosing the employee’s own wages, discussing the wages of others, inquiring about another employee’s wages, or aiding or encouraging any other employee to exercise his or her rights under these provisions.[37] And the new law increases the duration of employer recordkeeping requirements from 2 years to 3 years. [38] SB 358 extends existing enforcement mechanisms for wage discrimination to claims for retaliation and provides a one-year statute of limitations for retaliation claims.[39]

SB 358 provides further clarity to the term “bona fide factor” under which an employer may provide differential pay for a legitimate business purpose, such as to compensate an employee that has more extensive training, education or experience.[40]  Proponents believe this clarification will help employers navigate their pay structure and avoid unnecessary litigation regarding what business purposes qualify as a “bona fide factor”.[41]

This factor applies only if the employer demonstrates that the factor is not based on or derived from a sex-based differential in compensation, is job-related with respect to the position in question, and is consistent with a business necessity.[42] A business necessity is defined as an overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve.[43]

There are some who believe that the changes made by SB 358 eliminated some justifications for a difference in pay.  However, those examining the changes to Section 1197.5 need to be aware of the statement of legislative intent provided by the author’s Letter to the Senate Daily Journal set forth below:

May 26, 2015 SENATE JOURNAL 1099

MOTIONS, RESOLUTIONS AND NOTICES

MOTION TO PRINT IN JOURNAL

Senator Jackson moved that the following letter be printed in the journal.

Motion carried.

May 26, 2015

The Honorable Kevin de León

President pro Tempore of the Senate

Dear Senator De León: SB 358 is a measure intended to narrow the gender wage gap by modifying California’s equal pay law. I write this letter to clarify my intent of striking “work is performed at different geographic locations” and “work is performed on different shifts or at different times of day” from the bill. I would like to request that this letter be printed in the Senate Daily Journal regarding Senate Bill 358. Although the introduced  version of the bill listed “work is performed at different geographic locations” and “work is performed on different shifts or at different times of day” as statutory exceptions to the equal pay law that could be claimed by an employer in response to a complaint alleging a gender-based wage differential, the current version does not specifically list those factors because each of those factors may be a “bona fide factor,” as that factor is defined in this bill. Accordingly, the amendments to this bill that strike “work is performed at different geographic locations” and “work is performed on different shifts or at different times of day” should not be construed as the Legislature’s intent to make those factors unavailable to an employer responding to an equal pay complaint. Rather, the employer may claim a “bona fide factor,” that may be specifically described by the employer as work that is performed at different geographic locations or work that is performed on different shifts or at different times of day, so long as the employer can prove that the factor is consistent with business necessity, as specified on in the bill.

Sincerely,

HANNAH-BETH JACKSON

Senator, 19th District

As set forth in the author’s statement of legislative intent, SB 358 provides additional guidance to employers regarding justifications for wage differentials.[44]  The author’s letter makes clear that work performed on different shifts or in different establishments still exist as justifications for a difference in pay.[45] As a result, the business community actively supported the passage of SB 358 because the bill will provide clarity to the law and reduce the potential for costly litigation, and it strengthened the “bona fide factor” language.[46]

This letter by Senator Jackson was submitted the day that SB 358 passed off the Senate Floor with a unanimous vote. As such, it was done contemporaneously with the vote of the full Senate and should be afforded considerable weight by a court of law when interpreting the changes made to Section 1197.5 by SB 358.

Finally, the California National Organization for Women (CA NOW) opposed SB 358 unless the bill was amended to include protections for wage discrimination for categories such as race, ethnicity, LGBTQ and disability status.[47]  According to CA NOW, it is wrong to deny certain employees full protection under the California Equal Pay Act because these groups are afforded protections from other anti-discrimination laws.[48] This position set the stage for the following year’s enactment of SB 1063.

II. SB 1063

On September 30, 2016, Governor Jerry Brown signed SB 1063[49] by State Senator Isadore Hall and Assembly Bill (AB) 1676 by Assemblywoman Nora Campos.  SB 1063[50] expands the Equal Pay Act to include a new basis for wage equality, while AB 1676 prohibits employers from basing an employee’s pay on prior salary alone.  Although both bills contain the same statutory language, SB 1063 was chaptered last by the Secretary of State.[51] Because both bills contained “chaptering language” and SB 1063 was chaptered last, SB 1063 is the operative law.[52]

SB 1063 became effective on January 1, 2017, and it prohibits an employer from paying any of its employees at wage rates less than the rates paid to employees of another race or ethnicity for substantially similar work.[53] In addition, the new law specifies that prior salary cannot, by itself, justify any disparity in compensation under the “bona fide factor” exception contained in existing law.[54]  These changes in the bill were made to Labor Code Section 1197.5.[55]

SB 1063 adds the following language to Labor Code Section 1197.5(b)[56]:

(b) An employer shall not pay any of its employees at wage rates less than the rates paid to employees of another race or ethnicity for substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions, except where the employer demonstrates:

(1) The wage differential is based upon one or more of the following factors:

(A) A seniority system.

(B) A merit system.

(C) A system that measures earnings by quantity or quality of production.

(D) A bona fide factor other than race or ethnicity, such as education, training, or experience. This factor shall apply only if the employer demonstrates that the factor is not based on or derived from a race- or ethnicity-based differential in compensation, is job-related with respect to the position in question, and is consistent with a business necessity. For purposes of this subparagraph, “business necessity” means an overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve. This defense shall not apply if the employee demonstrates that an alternative business practice exists that would serve the same business purpose without producing the wage differential.

(2) Each factor relied upon is applied reasonably.

(3) The one or more factors relied upon account for the entire wage differential.

Numerous business groups opposed SB 1063, but were neutral on AB 1676, because these groups favored allowing last year’s significant Equal Pay Act measure time to be tested and evaluated.[57] They argued that SB 358, which enacted the FPA changes, should not be expanded until the law’s scope is fully known as the statutory changes only took effect on January 1.[58]  SB 358 was hailed “as the strongest equal pay law for women in the country.”[59]

In opposing SB 1063, business groups argued that, while no employee should be paid differently based upon any protected classification contained in California’s Labor Code, the Legislature should allow time for a newly-created task force, as well as time for the courts through pending litigation, to interpret and implement the new boundaries of the equal pay law before seeking to expand it even further.[60]

According to the legislative policy committee’s bill analysis, “SB 1063 expands the prohibitions set forth in California’s Equal Pay Act to include discrimination based on race or ethnicity. By adding these provisions, this bill, among other things: (1) duplicates the provisions laid down in the Equal Pay Act regarding gender, but restates them to prevent wage rate discrimination based on race or ethnicity, and (2) mirrors the enforcement mechanism and penalties for wage rate discrimination based on gender and includes discrimination based on race or ethnicity.”[61]

Senator Hall, as the author of SB 1063, argued that current state law does not recognize that wage discrimination is confined to women. Women of color, who are paid less than white women, should be able to make a claim under California's Equal Pay Act. Men of color, who are paid less than white men, should be able to make a claim under California's Equal Pay Act as well. Ideally, he argued, other protected classes, such as members of the LGBTQ or disabled community should be included in this remedy, but the addition of race and ethnicity begins the process of making pay equity in California more inclusive.[62]

According to the Assembly Appropriations Committee fiscal analysis of SB 1063, there will be unknown, likely significant costs (at least half a million dollars annually) to the Department of Industrial Relations (DIR) to process claims associated with wage discrimination based on race or ethnicity.[63]

III: AB 1676

SB 1063 also incorporates changes made to Labor Code Section 1197.5 by AB 1676 (Campos)[64]. These changes clarify that prior salary, by itself, must not justify any disparity in compensation between workers of the opposite sex and the bill makes findings and declarations on the wage differential between men and women, recent case law, and that this bill is a codification of existing law.[65]

The author of AB 1676, Assemblywoman Campos, argued that “the practice of paying someone solely based on their prior salary was not specifically addressed, recent administrative court decisions have made clear this is discriminatory and locks in a low level of pay for many women. AB 1676 addresses this by making explicit and clear that paying someone less on the basis of a prior salary is discriminatory.”[66]

In terms of enforcement, existing law authorizes an employee paid lesser wages in violation of the law to file a complaint with the DLSE and authorizes the employee, the DLSE or the Department of Industrial Relations to commence a civil action for the wages the employee was deprived of because of the violation, interest on those wages, and liquidated damages.[67] In addition, under current law, an employer or another person who violates or causes a violation of that prohibition, or who reduces the wages of any employee in order to comply with that prohibition, is guilty of a misdemeanor.[68]

IV. Other Provisions of Existing Law

Existing law provides that any employer who violates the law is liable in the amount of the employee's wages and interest that the employee is deprived of, which is in addition to liquidated damages.[69]

The DIR or the DLSE may commence and prosecute, unless otherwise requested by the employee or affected group of employees, a civil action on behalf of the employee and on behalf of a similarly affected group of employees to recover unpaid wages and liquidated damages for violations of the Act, and are entitled to recover costs of suit.[70]

In addition, existing law provides that any employee receiving less than the wage to which the employee is entitled may recover in a civil action the balance of the wages, including interest and an equal amount as liquidated damages, together with the costs of the suit and reasonable attorney's fees, notwithstanding any agreement to work for a lesser wage.[71]

V. Further Guidance Forthcoming

In July 2016, a Task Force was created by the California Commission on the Status of Women and Girls[72] to specifically develop guidelines for employees and employers regarding the new standards established in SB 358. [73]  The Task Force is seeking to identify challenges to both employers and employees with regard to the implementation of SB 358, as well as explore potential definitions for the new terms incorporated into the law by SB 358.  This guidance provided by the Task Force will hopefully provide employers with resources to proactively ensure their pay structure is compliant with these laws and thereby limit costly litigation.

In addition, the private sector has been given a great deal of advice by practitioners on how to comply with the new laws.[74] For example, employers should prepare to:

1. Conduct or review job evaluations of substantially similar jobs based on a composite of skill, effort, and responsibility system-wide
2. Ensure that any wage differences can be explained by seniority, merit, quantity or quality of production, or another bona fide factor other than sex
3. Document that the bona fide factors for wage differences are reasonably applied
4. Add the Fair Pay Act to policies, procedures, and handbooks prohibiting non-discrimination and retaliation
5. Eliminate any policies and procedures prohibiting disclosure or discussion of, inquiry or organizing about wages
6. Update recordkeeping to at least three years
7. Train managers, supervisors, human resources professionals and others in the enterprise on compliance with the California Fair Pay Act[75]

VI.  Addressing Criticisms about SB 358

California businesses will need to closely examine their wage policies, along with justifications they utilize for paying employees different wage amounts. In order to meet the burden of proving a “bona fide factor” exists, proper documentation will be required to demonstrate pay is not in any way based upon the employee’s sex, race or ethnicity.

California’s statute requiring equal pay has been on the books for over 65 years[76] and, as such, the state has a long history of discouraging unequal pay rates between male and female employees doing essentially the same job. There is a debate in the legal community whether SB 358 will make it easier to sue California employers and impose additional legal burdens upon businesses or not.

The following are some of the criticisms of SB 358:

The term "substantially similar" work is broader than the prior standard of "equal work." The change from "equal work" to "substantially similar work" essentially codifies existing interpretations of the former term. A strict interpretation of the prior law is not how the law’s federal counterpart[77] or similar anti-discrimination laws[78] have been interpreted to preclude gender-based wage discrimination in California.

In addition, the introduced version of SB 358 would have changed “equal work” to “comparable work,” a more difficult standard for employers to meet and one that was rejected at the federal level. As a result, the business community was successful in narrowing the language contained in SB 358.

Another criticism is that SB 358 expands obligations upon employers in this state. There are only two instances where there are substantive changes to employer obligations in the bill because the other provisions of SB 358 are a codification of existing court decisions and practice:

• The bill increases the period of time that an employer must retain records from two years to three years.
• The bill adds an existing cause of action for retaliating or discriminating against employees for exercising their rights under this section of the Labor Code.

The next criticism of SB 358 is that the "bona fide factor" language has been narrowed. While additional language was added to the Labor Code to explain what constitutes a bona fide factor and how an employer can demonstrate that such a factor justifies a wage differential, for the first time, California has codified three additional factors that fall under the bona fide factor affirmative defense: training, education and experience.

This new statutory language represents a significant improvement over existing law and the vast majority of wage differentials in practice are based on one or more of these factors. The business community was successful in getting these additional factors enumerated in the statute.

Another criticism of SB 358 is that the “same establishment” limitation has been eliminated from the law. While much has been made about the removal from the introduced version of SB 358 of the “different geographic location” and “shift differential” language, those affirmative defenses are still viable. The Legislature intended those affirmative defenses to fall under the bona fide language.[79]

The final criticism is that employers now have the burden of demonstrating that the wage differential was justified. Although existing law was silent, and SB 358 adds language that “the employer demonstrates…,” the employer has always had the burden to affirmatively demonstrate that a wage differential is based upon one or more specified factors including a seniority system, a merit system, a system that measures earnings by quantity or quality of production, or a bona fide factor other than gender.

Although SB 358 has additional language that is not in current law, such as “each factor is applied reasonably” and “one or more factors account for the entire wage differential,” these showings had to be made by employers under existing practice. It is not as if, under existing law, an employer could claim that a bona fide factor accounted for 80% of the wage differential and the remainder was due to gender and, therefore, no violation of the law had occurred.

While SB 358 is an important tool in the fight against unequal pay based upon gender, most of the statutory changes made by the bill are consistent with court interpretations and existing litigation practice in this area of the law. With nearly half the workforce comprised of women, the California business community supports efforts to ensure that workers in this state are not paid differently based solely upon their gender. SB 358 attempts to strike a fair balance between the interests of employers and employees in this state to address a very real problem.