Closing the Pay Gap
by Chuck Thompson
Social awareness, changing demographics and shifts in the job market have resulted in legislators aggressively trying to close the gap in pay between men and women. A flurry of new state and local laws have been passed; while the federal Equal Pay Act was enacted in 1963, recent laws are more far reaching and potentially disruptive.
New legislation will undo business practices that, even if benevolently motivated, result in disparate pay, without regard to particular employers practices. They do so, by shifting the focus from identifying discriminatory actors (disparate treatment) to undoing sex-neutral practices that create pay disparities (disparate impact). Despite this laudable objective, these laws create a litany of challenges for employers and will necessitate a wholesale revision of policies and practices related to employee compensation.
The Equal Pay Act and Disparate Impact
In 1963, President Kennedy signed the Equal Pay Act (EPA), which generally barred unjustified sex-based pay disparities between employees performing “equal work” in the same establishment. While there has been a significant reduction in the pay gap since the passage of the EPA, it has not been as successful as originally hoped.
Under the federal EPA, a sex-based pay disparity is legally justified if it is based on: “(i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production; or (iv) a differential based on any other factor other than sex[.]” Many commentators have objected that courts have over-broadly interpreted the “factor other than sex” provision to “permit employers to pay discriminatory wages for a limitless number of reasons.” For example, courts have found that the following are permissible grounds for a sex-based pay disparity:
· General market forces (e.g., a need to offer a higher salary to induce a candidate to accept an offer of employment).
· Prior salary with either the current employer or prior employers even if the present work does not warrant a higher wage.
Some courts have held that the “factor other than sex” need not be “related to the requirements of the particular position in question” or “even be business-related.”. Based on this interpretation, courts have concluded that the “factor other than sex” defense “preclude[s] actions based on disparate impact theories[.]” Here, an employer can base pay decisions on a “limitless number” of non-job related factors that correlate with sex without running afoul of the federal EPA.
Under the theory of disparate impact (which has long existed under Title VII) the neutrality of the challenged practice is not dispositive. Rather, if a neutral practice disproportionately impacts a particular group (e.g., blacks, women, etc.) the employer must demonstrate that the challenged practice is job related and consistent with business necessity.
Applying this framework, the Supreme Court in Griggs v. Duke Power Co. concluded that the employer’s high school diploma and aptitude test requirement created a disparate impact on black applicants in violation of Title VII. While the employer believed the requirements “improve the overall quality of the work force” this was insufficient warrant their use – i.e., the employer did not demonstrate job relatedness and business necessity.
Since Griggs, courts applied the disparate impact theory to employment programs that rely upon subjective criteria. In Watson v. Fort Worth Bank & Trust, the Supreme Court – while recognizing potential complications of its holding – concluded that “disparate impact analysis is … no less applicable to subjective employment criteria than to objective or standardized tests. In either case, a facially neutral practice, adopted without discriminatory intent, may have effects that are indistinguishable from intentionally discriminatory practices.” Courts throughout the country have relied up Watson and later cases to challenge subjective employment practices that have a disparate impact based on a protected characteristic (e.g., sex, race, etc.).
After 54 years, equal pay for men and women is still not a reality. At its essence, there are three critical aspects of disparate impact cases: (1) the irrelevance of intent; (2) the requirement of job relatedness; and (3) the requirement of business necessity. As discussed below, the introduction of this doctrine, in whole or in part, into the equal pay lexicon may transform employer compensation practices and create a slew of new human resource challenges.
Equal Pay Statutes
Dissatisfied with existing equal pay protections, states and localities have embarked on ambitious efforts to strengthen their equal pay protections. Many states have adopted the disparate impact analytical framework to address pay discrimination. In doing so, the laws may complicate employers’ ability to justify sex-based pay disparities with reference to subjective factors.
Numerous states and localities, including California, Oregon, Massachusetts, New York City, Philadelphia, New Orleans, and Puerto Rico have passed laws limiting employers’ ability to request or consider prior salary in making compensation decisions. Connecticut, Delaware, New Jersey, Pennsylvania, Rhode Island, Berkeley, and Washington D.C. are contemplating similar laws. These laws are premised not on identifying discriminatory actors. Rather, they restrict the widespread and facially neutral practice of basing compensation on an employee’s prior salary in order to prevent the reification of prior discriminatory compensation decisions. Therefore, they are premised on the disparate impact framework.
Multiple states have narrowed the scope of available defenses to equal pay claims. Both Oregon and Massachusetts have eliminated any version of the catch all “any factor other than sex” defense. In Oregon and Massachusetts, a sex-based pay disparity is only permissible if it is based on: (1) a seniority system; (2) a merit system; (3) a system based on quantity or quality of production; (4) workplace location; (5) travel; (6) education; (7) training; or (8) experience. Oregon employers must also show that the factor(s) relied upon are job related for the position in question. Massachusetts employers need only make the job relatedness showing if it seeks to explain a disparity by education, training or experience (the remaining factors appearing to be job related on their face).
Neither Oregon nor Massachusetts explicitly permit employers to rely upon subjective assessments (e.g., good judgment, originality, ambition, loyalty, tact, etc.) in making pay decisions insofar as they create a sex-based disparity. Whether the enumerated factors are sufficiently broad to encompass subjective assessments will turn on future judicial decisions. Nevertheless, given the state legislatures’ decision to eliminate the “catch all” employers should not expect courts to capaciously read the enumerated defenses in a way that incorporates the full panoply that were previously available.
Similarly, California, New York, and Maryland have passed equal pay laws that limit or at least complicate the use of subjective decision making in the context of compensation. These laws retain the pre-existing seniority, merit, quantity and quality of production, and the bona fide factor other than sex defenses (Maryland also enumerates skill and timing of work). However, the laws substantially limit the allegedly overbroad “catch all” defense and in doing so, appear to impede employers’ ability to rely upon subjective factors.
Employers in California, New York, and Maryland can only rely upon the bona fide factor defense if the relied-upon factors are job related and consistent with “business necessity.” While the laws slightly vary in the way they define business necessity, they generally require a close relationship between a critical business objective that is fulfilled by the factor (e.g., an employee’s experience in the industry) relied upon to create the pay disparity. Massachusetts has gone as step further by mandating a showing of business necessity when an employer seeks to justify a pay disparity based on education, training, or experience (while jettisoning the “catch all” defense).
A showing of job relatedness and business necessity are still not enough in California, New York, and Maryland. Even if an employer satisfies this heavy burden, an employee can still prevail if he or she identifies and alternative business practice that would serve the employer’s business purpose without producing the wage differential.
While the equal pay laws in California, Oregon, Maryland, Massachusetts, and New York vary in their particulars, they all incorporate, to varying degrees, the disparate impact framework – i.e., sex-based pay disparities must be based on factors shown to be job related. Similarly, the various local ordinances limiting employers’ ability to obtain or rely upon salary history do not seek to uproot discriminatory practices. Rather, they target facially neutral – indeed, fully rational – business practices because of potential for a disparate impact.
These laws also loosen one or both the much objected to “same establishment” and “equal work” requirements. For example, California’s and Oregon’s equal pay laws eliminate any geographic limitations (i.e., the same establishment requirement), thus allowing employees to predicate equal pay claims on disparities between themselves and employees in different regions (although location can be a legitimate factor in the employer’s defense). New York and Maryland loosen the same establishment requirement by allowing employees to make comparisons within limited geographic regions (e.g., within the same county). These states all jettison any pre-existing “equal work” requirement, each adopting something akin to a “substantially similar work” standard.
While these laws have been the subject of much commentary, few consider the practical implications they may have for employer’s compensation systems, particularly those that incorporate subjectivity and decentralized decision making.
Challenges for Employers – Can You Be Subjective?
Many employers rely on at least some subjective factors in making employment and compensation decisions. These practices are facing considerable headwinds in some states, as the use of disparate impact doctrine to target pay disparities makes reliance on subjective factors an increasingly risky proposition. The concern is particularly acute, given that the pay gap is wider “where pay is primarily based on subjective, discretionary decisions.” Of course, reliance on subjectivity is essential for some employers. However, employers may find it difficult to satisfy their burden to explain pay disparities (i.e., demonstrate job relatedness and business necessity) with reference to such criteria.
Scholars have recognized the complications and uncertainty of making this demonstration. Disparate impact litigation often devolves into unpredictable “battle of the experts” using complicated statistical methods to demonstrate job relatedness and business necessity. Thus, “defending a business practice with an adverse impact will … be a costly, burdensome, and risky process.” Even the Supreme Court has recognized the complicated nature of validating the use of subjective criteria in the context of disparate impact.
To succeed, ensure compliance through pre-litigation self-audits. Evaluating hiring pay practices is complicated not only by the structure of the underlying disparate impact doctrine, but on the expanding the number of potential “comparators” (due to the elimination of the same establishment and equal work requirements) from which to derive a pay differential. Employers must compare employees across positions (i.e., all those performing substantially similar work) across multiple facilities. They must then seek to explain any sex-based pay disparities with reference to identifiable business functions consistent with the job in question. This may a tough task, particularly when pay decisions are made by different managers using a variety of unstated criteria, however, success can be achieved through an aggressive management training program.
Management must strive to adapt to new legislation and adjust pay practices accordingly. It is undoubtedly true that it is “unrealistic to suppose that employers can eliminate, or discover and explain, the myriad of innocent causes that may lead to statistical imbalances” with respect to compensation. But depending on how courts apply these new statutes, employers may nevertheless be thrust into challenging situations.
Some employers may respond by formalizing and centralizing their employee evaluation and compensation processes. In doing so, they may undervalue subjective but important qualities in order to reduce liability. Employers resistant to formalization may “back in” to compliance by equalizing pay even when doing so is not justified. The Supreme Court recognized the potential of disparate impact to create this very result in the context of hiring, stating:
Respondent and the United States are thus correct when they argue that extending disparate impact analysis to subjective employment practices has the potential to create a Hobson’s choice for employers and thus to lead in practice to perverse results. If quotas and preferential treatment become the only cost-effective means of avoiding expensive litigation and potentially catastrophic liability, such measures will be widely adopted. The prudent employer will be careful to ensure that its programs are discussed in euphemistic terms, but will be equally careful to ensure that the quotas are met. Allowing the evolution of disparate impact analysis to lead to this result would be contrary to Congress' clearly expressed intent, and it should not be the effect of our decision today.
This method of compliance will likely result in salary “leveling” and thus cause a systematic underpayment of top performers and overpayment of poor performers regardless of gender. Applied scrupulously, this could negatively impact employee morale and retention, with top performers seeking exits. Here, employers need to factor in the value of high performing individuals in a gender neutral pay structure and insure they are properly compensated.
The future of equal pay laws remains in flux as laws proliferate and we await clear guidance from state courts. In the meantime, must be vigilant in adapting to new laws and regulations with well-trained HR partners and legal support. Develop a strategy consistent with applicable law and train managers to execute it uniformly.
Chuck Thompson is a partner in Polsinelli’s Labor and Employment Group and is the Managing Partner in the San Francisco office.
 29 U.S.C. § 206(d); 29 C.F.R. § 1620.13.
 29 U.S.C. § 206(d)(1).
 Paycheck Fairness: Closing the “Factor other than Sex” Gap in the Equal Pay Act, National Women’s Law Center, National Women’s Law Center (July 2009), available at
 Glunt v. GES Exposition Services, Inc., 123 F. Supp. 2d 847 (D. Md. 2000); Merillat v. Metal Spinners, Inc., 470 F.3d 685, 687 (7th Cir. 2006); Grove v. Frostburg Nat'l Bank, 549 F. Supp. 922 (D. Md. 1982).
 Glunt, 123 F. Supp. 2d at ___; Rizo v. Yovino, _______ (9th Cir. 2017); Sparrock v. NYP Holdings, Inc., 2008 WL 744733 (S.D.N.Y. Mar. 4, 2008).
 Dey v. Colt Const. & Development Co., 28 F.3d 1446, 1462 (7th Cir. 1994); Wernsing v. Dep’t of Human Servs., 427 F.3d 466, 470 (7th Cir. 2005); Fallon v. Illinois, 882 F.2d 1206 (7th Cir. 1989); Covington v. S. Ill. Univ., 816 F.2d 317, ___ (7th Cir. 1987); Taylor v. White, 321 F.3d 710, 719 (8th Cir. 2003).
 Smith v. City of Jackson, 351 F.3d 183 (5th Cir. 2003); see also Hyman v. First Union Corp., 980 F. Supp. 38, 43 (D.D.C. 1997); Teninty v. Geren, 776 F. Supp. 2d 725, 735 (N.D. Ill. 2011); Wernsing v. Dep’t of Human Servs., 427 F.3d 466, 469 (7th Cir.2005); Adams v. Florida Power Corp., 255 F.3d 1322, 1325 (11th Cir. 2001); E.E.O.C. v. Governor Mifflin Sch. Dist., 623 F. Supp. 734, 740 (E.D. Pa. 1985); Mullin v. Raytheon Co., 164 F.3d 696 (1st Cir. 1999).
 Smith v. City of Jackson, 544 U.S. 228, 239 n.11 (2008)
 487 U.S. 977 (1988).
 183 F.3d 38, 61 (1st Cir. ___); 433 U.S. 299, 302 (___); 457 U.S. 147, 159 n.15 (___); 327 F.3d 938, 955; 487 U.S. 977, 1007 n.5; 732 F.2d 1010, 1015.
 Cal. Lab. Code § 1197.5(a)(1)(C).
 Amy Wax, Disparate Impact Realism, (complete citation).
 Watson, 487 U.S. at 992