The new law expands the equal pay requirement for men and women to "substantially similar work" regardless of location, modifies employers’ business justification defense, and increases employers’ recordkeeping obligations to three years.

On October 6, California Governor Jerry Brown signed into law the California Fair Pay Act (SB 358 or the Act) after unanimous passage with a 39-0 vote by the California Senate on August 31.

The new law makes several notable changes to the preexisting law, codified at Labor Code Section 1197.5. Specifically, the new law

• requires that men and women receive equal pay for “substantially similar work” (not the “same work” as previously required), regardless of whether they work at the same physical location;
• modifies the business justification defense that may be asserted by employers to except an otherwise-prohibited pay discrepancy from the equal pay requirement based on a recognized justification (e.g., a seniority, merit, or quality/quantity-based pay system) by requiring the employer to establish that the business justification (i) accounted for the entire wage discrepancy and (ii) was reasonably relied upon by the employer;
• prohibits employers from precluding employees from discussing their wages, discussing the wages of others, inquiring about others' wages, or aiding or encouraging any other employee to exercise his or her rights under the Act; and
• increases employers’ recordkeeping obligations from two to three years.

The new law also allows employees to file civil actions or complaints with California’s Division of Labor Standards Enforcement to obtain relief for violations of the Act or for retaliation against employees who engages in conduct protected by the Act.

Changes to the Law Related to Gender-Based Pay Discrepancy Claims

The Act’s most-discussed change to existing law is its expansion of California’s equal pay requirement to all “substantially similar work,” regardless of location. The prior California Labor Code § 1197.5 (a) was less broad, requiring equal pay “in the same establishment for equal work.” The updated law takes that a step further, permitting employees to allege claims for improper pay discrepancies by comparing similar jobs—even when such jobs are conducted in different locations throughout the state.

Employers will still be able to assert that an otherwise-prohibited pay discrepancy was excepted from the equal pay requirement based on a recognized justification (e.g., a seniority, merit or quality/quantity-based pay system), but the employer will bear the burden to demonstrate that the “entire” pay discrepancy is accounted for by the employer’s “reasonabl[e]” reliance on one or more valid justifications. Recognized justifications include a “seniority system,” a “merit system,” a “system that measures earnings by quantity or quality of production,” or “a bona fide factor other than sex, such as education, training, or experience.”

An employer relying on one of the non-specified “bona fide factor[s] other than sex, such as education, training, or experience” will bear the additional burden of demonstrating that the factor was 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. Further, such a factor will not serve as a legitimate defense if the employee “demonstrates that an alternative business practice exists that would serve the same business purpose without producing the wage differential.”

Employees may file civil actions to recover wages or file complaints with California’s Division of Labor Standards Enforcement for unlawful wage discrepancies. The statute of limitations is two years “after the cause of action occurs” or three years for willful violations. The Act also prohibits retaliatory actions against employees who “invoke or assist” in the enforcement of the equal pay requirements and allows civil claims for reinstatement, lost wages and benefits, interest and “appropriate equitable relief” against employers who do take retaliatory actions.

Protections for Employees Who Discuss Wages

Existing law prohibits employers from retaliating against employees who “disclose” their own wages to others. Section 2 of SB 358 arguably expands that protection by adding new Labor Code §1197.5 (j) (1), which prohibits employers from prohibiting an employee from discussing his or her wages, discussing the wages of others, inquiring about others' wages, or “aiding or encouraging any other employee to exercise his or her rights under this section.” 

New subsection 1197.5 (j) (2) creates a civil action for reinstatement, reimbursement of lost wages and benefits, interest and “appropriate equitable relief” against an employer who takes retaliatory action against an employee who engages in any of the conduct protected by subsection 1197.5 (j) (1).

Recommended Steps for Employers

In response to the new law, employers should consider taking the following steps:

• Review statewide compensation records and systems to identify positions where there is potential unequal pay for similar work—even if at different physical locations—and determine whether the entirety of that pay discrepancy is justified based on one of the recognized justifications.
• Consider documenting the appropriateness of reliance on such justifications for potential pay discrepancies.
• Revise existing handbooks, policies, and harassment trainings to (1) prohibit gender-based pay discrimination for similar work, (2) ensure that employees are not prohibited from discussing their wages, and (3) prohibit retaliation against employees who “invoke or assist” in the enforcement of California’s equal pay requirements or discuss their wages.
• Ensure that, going forward, wage records (including the records of wages, wage rates, job classifications, and “other terms and conditions of employment of the persons employed by the employer”) are retained for three years—not two as previously required.