Will Winds of California Fair Pay Law Inspire Federal Legislation?

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By Patrick Dorrian

Sept. 22 — Momentum may be building for tougher federal equal pay legislation, and California’s experience with its new state law might point the way.

That California, which has the largest economy of any state in the country, “embraced the changes” the Fair Pay Act made to state equal pay law “was a shift in the dynamics” surrounding the pay-gap issue, Noreen Farrell, executive director of San Francisco-based Equal Rights Advocates, told Bloomberg BNA. Her group played an important role in changing the law.

She’s hopeful the state’s experience with the new law, which took effect in January, will influence federal legislators and result in passage of the proposed federal Paycheck Fairness Act or similar legislation, she said Sept. 15.

Observing that a number of states followed California’s lead, Lauri A. Damrell of Orrick, Herrington & Sutcliffe LLP agreed with Farrell, saying the momentum on the issue nationwide is “notable.”

New York, Massachusetts and Maryland, among other states, subsequently passed new laws designed to close the gender pay gap that are similar to or even stronger than California’s, Damrell told Bloomberg BNA Sept. 15.

The second two states “are purple,” she said, noting that Massachusetts and Maryland have Republican governors.

Damrell is a partner in the management-side firm’s Sacramento, Calif., office, serves as a commissioner on the California Commission on the Status of Women and Girls, and is otherwise involved in pay equity issues in the state.

What happens next at the federal level could come down to the November elections, Damrell said. Although the Paycheck Fairness Act “has been in the wind” for 20 years, it has never passed both chambers of Congress, prompting President Barack Obama to explore other avenues for delivering on his promise to close the pay gap, she said.

Pay Gap
California’s Experience Still Unfolding

But just what California’s experience will be with its new, tougher fair pay law is still unfolding, management lawyer Christopher W. Olmsted said.

“We may not have the full picture yet” of the FPA’s impact on employees and employers in the state, he told Bloomberg BNA Sept. 16.

Damrell said there haven’t been any significant decisions and only a handful of cases so far alleging FPA violations. Implementation and application of the new law are still in the preliminary stages, she said.

“So far, we’re really just seeing employers” trying to comply with the changes, said Olmsted, a shareholder in Ogletree, Deakins, Nash, Smoak & Stewart P.C.’s San Diego office.

Those changes include a new standard for determining which employees may be compared for equal pay purposes. Previously, unequal pay for workers performing “equal” work was outlawed; now, it’s unequal pay for those performing “substantially similar” work.

The FPA also shifted the burden of proof to employers when they claim the reason for the difference in pay between male and female employees doing substantially similar work is a bona fide “factor other than sex.” In addition, the law eliminated the requirement that employees whose pay is being compared all work at the “same establishment” or employer location, giving employees a potentially larger pool of similar workers to which to compare their pay.

The new law also strengthened the existing retaliation provision in California equal pay law, making it unlawful for an employer to take adverse action against an employee for discussing or asking about a co-worker’s pay, Farrell said. “Pay secrecy is culturally deep” in some companies and has long hindered women’s ability to determine whether they’re being paid equally, she said.

There’s also a bill ( A.B. 1676) awaiting Gov. Jerry Brown’s signature that would strengthen California equal pay requirements even further by making it illegal for an employer to justify a gender-based pay disparity between employees who do similar work based on their respective salary histories alone.

“I think the level of work proponents of the bill did with the California Chamber of Commerce in crafting” A.B. 1676’s language “should open a clear path for Governor Brown to sign it,” Farrell said. Brown (D) has until Sept. 30 to do so.

Federal Tests Tougher for Workers

Damrell noted that in addition to the factor-other-than-sex defense, California employers can still cite seniority, merit and a system that measures production as legitimate reasons for paying different wages to men and women who perform substantially similar work.

However, the new law additionally requires companies to show that a cited justification is “reasonable” and accounts for the entire difference in the workers’ wages, she said.

That’s a departure from the California Equal Pay Act and its long-standing federal counterparts, the Equal Pay Act and Title VII of the 1964 Civil Rights Act. Those laws have long imposed more onerous burdens on women looking to prove pay discrimination than the new laws that have cropped up in California and elsewhere.

The new California law is aimed at trying to make pay bias claims harder for employers to defend, Damrell said. The argument is that it’s too easy for employers to defend pay bias claims under existing state—and federal—law because there are too many loopholes, she said.

That’s why supporters have long lobbied for the proposed federal Paycheck Fairness Act (H.R. 1619, S. 862), which is similar in many respects to the FPA.

In addition, a new federal bill, the Pay Equity for All Act of 2016, which is similar to California’s A.B. 1676, was introduced in the U.S. House Sept. 14.

‘Wave’ of Audits

The impact of the change in California from an “equal work” to a “substantially similar work” standard is that “employers now must look beyond” job titles, classifications and descriptions when considering who is substantially similar, Farrell said.

“This should result in less litigation,” as the easier standard for proving pay bias prompts employers to engage in more efforts to ensure they aren’t paying male and female employees unequally, she said. “There’s been a wave” of California employers auditing their pay practices as part of those efforts, she said.

Employers are making sure they have clear pay practices in place, with salary or pay bands with upper, middle and lower ranges, Olmsted said. And employers are discouraging managers from straying from those bands or ranges, he said.

More structure in employer pay practices is likely to emerge as companies work to establish objective and quantitative pay criteria for setting starting salaries and awarding raises, he said. Part of that process is determining whether any gender-based pay disparities found during an audit are based on merit, experience or one of the other factors permitted by the FPA, Olmsted said.

Employers also want to make clear how they measure those factors, he added.

The pay gap is smallest in industries or employment settings, such as the government, where salary ranges are published, Farrell said.

Companies Also Focused on Documentation

Damrell said employers are similarly focused on documenting the factors used in establishing a worker’s salary, and changing how that documentation is maintained so that it’s more searchable.

In addition, they’re thinking more about diversity practices in general and about holding managers more accountable, she said.

Some companies also are looking at “job steering,” or the funneling of women into lower-paying or less desirable jobs on the basis of sex, Damrell said.

That’s been more of an issue at the federal level thus far, according to Damrell. But that some California companies are considering the problem shows that employers in the state “aren’t just looking at California law in a vacuum,” she said.

They’ve also been spurred by pressure from activist investors, an emerging sense of corporate responsibility and other factors, Damrell said.

Many companies have been relying on market salary and market wage rate information to ensure that employees are being paid fairly, Olmsted said. Doing so has become increasingly important with the changes in California law, he said.

If A.B. 1676 becomes law, reliance by employers on market salary rates, rather than a worker’s salary history, will become even more necessary, he said.

Is More Law Necessary?

Whether new law on pay equity was needed in California and the other states that have recently passed it, and whether it’s needed at the federal level, has been the subject of continued debate among legislators and stakeholders.

The Obama administration responded to what it sees as congressional inertia on the issue with a series of executive measures, including at least nine aimed directly at how women are paid (see table).

But whether the federal government has been uncovering more equal pay violations as a result of those and other measures has also been subject to debate.

Moreover, some studies show the majority of the pay gap stems from decisions that women make themselves about working and other factors, rather than discrimination, management lawyer Lauri A. Damrell told Bloomberg BNA.

The more liberal California standard may lead employers to adopt quotas and the like just to avoid litigation under the new law, she said. “That’s a disservice to men and women,” Damrell said.

But Noreen Farrell, executive director of Equal Rights Advocates, said that for proof changes to the law were necessary, “you don’t need to look any further” than recent Census data showing that nationwide, women still are paid on average 80 cents for every dollar paid to a man. In California alone, women lose $39 billion a year because of the gender pay gap, she said.

The Obama administration cites the same data in support of its views and actions on the gender-pay-gap issue. But critics say that view is simplistic and that studies show the pay bias that remains in the U.S. accounts for only a portion of the current 20-cent pay gap.

Employers See ‘Ambiguities.’

It’s too soon to say what the overall impact of the FPA will be for California workers and employers, but more transparency in pay practices is already emerging, Olmsted said. That should benefit both employees and employers, he said.

It may incentivize employees, leading to better effort and performance, which in turn will benefit their employers, he said.

However, ambiguities in the new law have employers worried that it’s really designed more to broaden the ability of workers to bring claims than to necessarily close the gender pay gap, he said.

“What does ‘substantially similar’ mean?” What counts as a “bona fide factor other than sex” under the new law? he asked. The new standards are “frustratingly vague” for California employers, and they’re struggling to understand them, according to Olmsted.

From Farrell’s perspective, a chief benefit of the new law is that employers have become wise to the fact that simply changing employees’ job titles isn’t enough to insulate a company from liability for pay bias.

That’s a positive step in closing the gender pay gap, she said.

Litigation—If Not Other—Costs Sure to Rise

Many managers have been relying on the newly mandated factors to make pay decisions for years, they just haven’t previously tracked or documented their decision-making process, according to Olmsted.

That makes it more difficult to calculate or predict the added costs to employers of upgrading their record-keeping systems and payroll functions to comply with the new law, he said.

It’s also hard to say whether an employer will need to hire more personnel or provide more training—and to gauge the attendant costs—to improve its documentation and decision-making processes, Olmsted said. Any additional tracking and documentation may just be another facet of what existing personnel have already been doing, he said.

Training human resources and hiring managers on the new law and how to properly document pay decisions, though, is a real cost, he said. In the long run, however, savings will be realized in an employer’s ability to respond to inquiries into their pay practices with documentation more easily, quickly and cost-efficiently, he said.

But while Farrell sees the new law leading to less litigation, Olmsted disagrees.

One area in which costs are sure to increase under the FPA, he said, is litigation given that it’s now easier for workers to make pay bias allegations and to get to court. However, it’s hard to quantify how much these costs have risen thus far or will rise in the future, he said.

“You can’t really estimate it,” Olmsted said. It probably will depend in part on whether pay bias claims under the FPA can be brought as class lawsuits, he said.

“It’s too early to tell,” he said, but there’s been a lot of preliminary talk that the plaintiffs’ bar will try to frame pay bias allegations as class claims in part because of the potential for higher recoveries in such cases. It remains to be seen whether courts will allow them to do so, Olmsted said.

On the plus side, he said, the more frequent self-audits employers are doing of their pay practices should minimize the risk of litigation and the costs of potential pay bias claims.

Might California’s Experience Spur Federal Action?

According to Farrell, the biggest influence of the FPA, “which was somewhat unexpected,” was the very strong support it received from the business community and “how that played out.”

“The level of cooperation seen in California in passing the FPA bodes well for other states and federally,” she said, noting that the law was endorsed by the California Chamber of Commerce.

Farrell also chairs the Equal Pay Today! Campaign, which is devoted to closing the gender wage gap nationwide. “We’re building momentum state by state,” she said.

The experience in California will show that the “sky doesn’t fall” when you have pay equity, she said. Farrell said she’s “very hopeful for what California is showing the folks in Washington.”

Pointing to the fact that Apple Inc., Target Corp., Visa Inc., the Coca-Cola Co. and 50 or so other employers have signed the White House’s Equal Pay Pledge, she said “it’s pretty much unprecedented to have so many companies support a workers’ rights issue.”

The new state laws, particularly those signed by Republican governors in Massachusetts and Maryland, show that the landscape has changed from equal pay just being a liberal issue to it becoming more mainstream, according to Damrell.

What happens now federally may be tied to the election, but there is momentum given the combination of cultural change on the issue, activist investor pressure and state-law developments, she said.

“We’re certainly in a different place” on the gender-pay-gap issue than we were just five years ago, Damrell said.

To contact the reporter on this story: Patrick Dorrian in Washington at mailto:pdorrian@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

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