The Ninth Circuit U.S. Court of Appeals held Monday, on the eve of National Equal Pay Day, that it violates the Equal Pay Act to use pay history to justify wage gaps between male and female employees for the same or substantially similar work. The decision in Rizo v. Yovino, No. 16-15372 (9th Cir. Apr. 9, 2018) has immediate ramifications for employers in the Ninth Circuit in evaluating employee compensation.

The Equal Pay Act (29 U.S.C. § 206(d)(1)) prohibits employers subject to the Act from “discriminat[ing] . . . between employees on the basis of sex by paying wages to employees . . . at a rate less than the rate at which he pays wages to employees of the opposite sex . . . for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions.” The Act contains four exceptions where differences in pay for the same or similar work are allowed: (1) a seniority system; (2) a merit system; (3) a system which measures earnings by quantity or quality of production; and (4) a differential based on any other factor other than sex.

The Rizo opinion removes a defense previously available to employers in Equal Pay Act claims by holding that “any other factor other than sex” must be “job related,” and that “prior salary alone or in combination with other factors cannot justify a wage differential.” In so holding, the court reversed its prior decision in Kouba v. Allstate Ins. Co., 691 F.3d 873 (9th Cir. 1982), which held that pay history was a valid factor other than sex on which employers could permissibly rely. The Ninth Circuit explained its departure from Kouba by stating, “[t]o hold otherwise – to allow employers to capitalize on the persistence of the wage gap and perpetrate that gap ad infinitum – would be contrary to the text and history of the Equal Pay Act, and would vitiate the very purpose for which the Act stands.”

The Ninth Circuit’s opinion creates a circuit split over this issue. The Seventh Circuit has held in Wernsing v. Dep’t of Human Servs., State of Ill., 427 F.3d 466 (7th Cir. 2005) that prior salary is always a “factor other than sex.” Other circuits have come down somewhere between these two extremes with holdings that “a factor other than sex” could include pay history. As such, this issue is ripe for review by the Supreme Court to resolve the circuit split.

Most immediately, employers in the Ninth Circuit – Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington – should promptly evaluate their pay practices and criteria for compliance with the Rizo decision both for new hires and existing employees.

The Ninth Circuit’s decision in Rizo also comes on the heels of widespread pay equity legislation passed in various jurisdictions this past year – including California, Delaware, Massachusetts, New York City, Oregon, San Francisco, and Washington – aimed at curbing the gender gap in pay, which typically prohibit employers from asking for pay history during the application process or considering pay history when setting compensation. This is another obstacle employers in the Ninth Circuit, and elsewhere, will need to navigate in setting employee compensation.