10 Questions: Complying with California’s Fair Pay Act

FW speaks to Rebecca Torrey, a partner at Manatt, Phelps & Phillips, about compliance with California’s Fair Pay Act.

FW: Could you provide the backdrop to the introduction of the Fair Pay Act in California? How has it been received by companies since it came into force in 2016?

Torrey: The Fair Pay Act was introduced in February 2015, and passed unanimously in both the Senate and Assembly. Governor Jerry Brown approved and it became law, effective 1 January 2016. There was no opposition within the legislature – unlike most employment legislation introduced in California. What elected official would publicly advocate that men be paid more than women? The only notable opponent was the National Organisation for Women, critiquing the bill as too narrow for protecting only against gender disparities and not others. Misunderstandings about pay equity and the lack of a practical solution have put compliance on the backburner. Most businesses have no concept of how to assess internal pay inequality and assume the pay gap is not a problem because they would not intentionally set compensation based on gender. The main concerns we hear from management focus on the anticipated expense of analysing compensation on an annual basis and the legitimate fear about a proliferation of lawsuits.

FW: In terms of pay disparity in California, how would you characterise the extent of the issue? Is the state any guiltier than other jurisdictions of paying women less than men for performing the same tasks, in either the public or private sector?

Torrey: Our experience in pay analysis involves federal affirmative action compliance, which applies nationally to businesses contracting and subcontracting with the US government. Until now, organisations rarely asked for legal advice on gender pay concerns, apart from affirmative action employers. Pay disparity along gender lines haunts virtually every federal contractor at one level or another, despite the rigorous statistical and cohort analyses they conduct annually. The largest disparities appear in executive and middle management ranks and among professional services personnel – law, accountancy, finance, private equity, stock brokerage, hedge funds. Because federal contractors were the only private sector businesses with a mandate to eliminate pay disparities, companies that have not addressed it may have greater disparities. We consistently hear anecdotes from women relating their experiences with pay inequality, and the inconsistent reasons they are given for why they receive less than their cohorts. The problem is extensive and persistent, based on cultural values, gender assumptions about work/life and implicit bias. And, no, the problem is not worse in California compared to the rest of the US. Public sector employers and union shops may have seniority structures – union contracts and civil service – that reduce the odds of certain pay disparities.

FW: How does the Act address the inherent difficulties companies often face when assessing the pay of their employees? Does the Act’s replacement of “equal” with “substantially similar” open up a Pandora’s Box as far as employers are concerned?

Torrey: The ‘Pandora’s Box’ fright was the most common feedback we heard from executives during the flood of press following enactment. The legislature chose a “substantially similar” rather than “equal” measure of work because of the crippling shortcomings of the federal Equal Pay Act and California’s predecessor EPA. Almost no one brought an EPA claim because it was simple to explain differences with after-the-fact, irrelevant and typically inconsistent non-gender based factors. The intelligence of the Act lies in what it does more than a word choice. The Act places the burden on an employer to fine-tune a rational compensation structure based on legitimate business criteria and to apply it consistently, including to both men and women alike. By doing that in a thoughtful way, an organisation is prepared to explain to any employee, state auditor or jury why individuals are paid differently. This is the opposite of the free-market approach of many businesses, where compensation is individually offered, perhaps negotiated, based on a variety of circumstances at hire and continuing during employment. It is no surprise that employers have concerns about legal challenges where a rational structure, consistently followed, is absent.

FW: What provisions and remedies does the California Fair Pay Act provide for employees who have been discharged, discriminated or retaliated against for exercising their rights? Furthermore, what penalties await employers who are found to have violated the law?

Torrey: An employee who believes she or he has experienced gender pay inequity can file an administrative claim with the California Labour Commissioner or file an action in court. Depending on the nature of the claim, the employee may also file a claim with the California Department of Fair Employment and Housing, the state agency enforcing state anti-discrimination laws. An employee does not have to file an administrative claim before filing a court action. A prevailing employee is entitled to the difference in compensation, interest at 10 percent, and an equal amount as liquidated damages –basically twice what the employee was not paid plus more to account for delayed payment. If an employee wins a lawsuit, she or he can also recover attorney’s fees and costs. In addition, employees who are retaliated against for making a claim or inquiring about or discussing information about compensation with others are entitled to reinstatement and lost compensation with interest at 10 percent. To provide context on how radical this is, until now many private sector employers had written policies prohibiting discussion among employees about their compensation and could discharge employees who stirred up trouble by doing so.

FW: Although the Act has been hailed by proponents as the toughest law of its kind in the US, do you agree with concerns that it may be logistically complicated to roll out and leaves companies, individual managers and executives susceptible to potential lawsuits?

Torrey: I disagree that the Act is logistically complicated. It obviously takes thought and preparation, and a willingness to make changes – nothing out of the ordinary for a well-run business. It also may involve certain compensation adjustments and some training. Businesses that have never considered pay equity or are reluctant to comply will be more susceptible to lawsuits. We would not expect executives to be held personally liable except under unusual circumstances involving individuals with un-evolved personal biases or companies where corporate formalities are not followed. No doubt questions and claims will come and that is why businesses should be prepared. Pay equity is a major national discussion now and central to our political debates. There is no turning the clock back on this basic issue of fairness, so best to move ahead.

FW: With the Act only applying to organisations that have an office in the state of California, how does this apply to multinational companies with multiple offices across the US? Is the impact of California’s Fair Pay Act likely to cause a ripple effect, leading to similar legislation being introduced in other states?

Torrey: The Fair Pay Act will lead to similar legislation in more progressive states and on a federal level. Recent history shows the trend in employment legislation – minimum wage increases, paid parental leave, human rights protection based on sexual orientation, gender expression and gender identity, by way of example – began with initiatives on the state and municipal level in San Francisco and New York City, primarily because of obstacles caused by partisan politics on the federal level. The next presidential administration will impact compensation fairness in multiple ways, probably more like an epic wave than ripples. While the Fair Pay Act was intended to address California and create rights for California workers, it encompasses national and global organisations with employees in California. It requires comparison of substantially similar work across locations with no specified geographic boundaries. An organisation with a rational compensation system, applied consistently, would have to compare individuals working outside the state with California employees if they did substantially similar work. That might warrant compensation changes outside California.

FW: What steps should companies take to prepare for the increased scrutiny on pay equity that the Act requires? How important is it to develop a strategy that observes differentials based on legitimate and rational criteria, documenting and maintaining employee records while ensuring overall compliance with the Act?

Torrey: Companies with California employees should add pay equity to their strategic plan going forward and gather an appropriate team – human resources, payroll, upper management, possibly legal – to decide how to group employees doing substantially similar work for purposes of the analysis, in terms of skill, effort and responsibility. They must decide for those groups what combination of key factors – seniority, merit and productivity – determines, or should determine, compensation levels under the conditions of the job. They may take into consideration other bona fide factors impacting compensation, but only if they are reasonably and consistently applied to explain the entire compensation difference and compelled by business necessity. Any disparities along gender lines should be corrected promptly before claims arise. In this analysis, according to the agency enforcing the law, skill refers to the experience, ability, education or training required to perform the job. Effort means the amount of physical or mental exertion needed to perform the job. Responsibility addresses the degree of accountability or duties required in performing the job. Working conditions means the physical surroundings – temperature, fumes, ventilation – and hazards. The results of this exercise will vary among organisations and between groups within an organisation. If the size of a group or company is large, statistical comparisons such as regression analysis may be helpful, particularly if there are a number of measurable criteria. The result of this strategic analysis should be applied consistently going forward with adequate documentation of the reason for compensation decisions upon hire and annually when compensation is adjusted or bonuses awarded. Involving legal counsel will assist in keeping the communication and analyses confidential because the process may be discoverable in litigation. There is a three-year record keeping requirement in the statute, measured from the date of termination of the employment relationship. With digital data, the record-keeping requirement is not difficult as long as reasons for compensation decisions are recorded at the time they are made.

FW: In your opinion, how important is it for companies to introduce salary audits, employee surveys and a financial analysis of compensation packages to avoid the gender pay gap issue from developing into a major concern? Is it fair to say that C-suite executives are largely reluctant to spend time and money on audits that may uncover nothing at all?

Torrey: Some executives may regard compensation audits as an unwanted expense, however I doubt an appropriate audit for an organisation would uncover nothing. There are a range of options to analyse compensation equity, depending on the size of the organisation, the grouping and number of employees doing substantially similar work, and available budget. The investment of time and resources on the front end is modest relative to the potential legal exposure and ensuing reputational damage. No c-suite executive wants to be on the stand under oath before an employee-oriented California jury, explaining that he or she neglected to do what was needed to correct a pay equity issue because it was too much trouble or expense at the time, when it could easily have been corrected.

FW: What advice would you give to Californian companies in terms of understanding the intricacies of the Act and how to comply with it – particularly elements such as the ‘substantially similar work’ provision?

Torrey: Get started now with some help. It is difficult to understand what is required and how to comply without the guidance of California employment counsel, regardless of the sophistication and training of the internal human resources and legal team. Because it is a challenge for companies to identify their own issues without outside perspective, we encourage some external assistance. Compliance begins with an organisation’s explanation of what substantially similar work is based on its values and culture. That determination of substantially similar work must be intellectually honest and consistently applied to hold up to scrutiny.

FW: How do you envisage companies interpreting and implementing the Act over the coming years? Do you believe that California’s Fair Pay Act will go a significant way towards eliminating the gender wage gap in the state?

Torrey: The Fair Pay Act is a beginning to address pay disparity. By its own terms, it creates rights for men paid less than women for substantially similar work just as it does for women, even though the motivation for the legislation was the gender wage gap. And nothing changes overnight. 2016 may be the first year that many organisations with California employees consider adopting written policies that affirm a corporate commitment to non-discrimination in compensation along gender lines. The real change will occur over time when businesses begin to scrutinise their own practices, ask questions and make adjustments. The Act raises questions that will take some time to consider. For example, can a woman be hired at lower pay than a man in a substantially similar position because her prior employer paid her less, as did the one before that? And if so, how long does the current employer have to bring her up to par before repeating that pattern? Do gaps in tenure – for example, for childbirth, baby bonding or family duties, falling most heavily on women – justify pay differentials for substantially similar work, focusing on the level of skill, effort and responsibility involved in a particular job? Are companies entitled under the law to pay men more than women when men advocate for themselves or use a more aggressive negotiation style in pay and promotion demands? How does the perception of a person’s workplace contribution influence management’s evaluation of skill set when our perceptions are naturally impacted by implicit personal biases? There is no pat answer on how best to comply with the California Fair Pay Act, and these issues and others will continue to evolve as employers seek to understand what is legally required in the context of work.

Rebecca Torrey is a partner at Manatt, Phelps & Phillips. Ms Torrey is experienced in all aspects of employment law, with an emphasis on defending employers in single plaintiff and class action cases in state and federal court. Ms Torrey regularly advises employers in the full range of employment matters, including wage and hour issues; protecting trade secrets and the use of nondisclosure agreements; unlawful harassment prevention; EEO and affirmative action compliance (including regression and adverse impact analysis); leaves of absence; background and drug screening; employment agreements; the use of independent contractors; and hiring and termination decisions. She can be contacted on +1 (310) 312 4172 or by email: [email protected].