California DLSE Posts FAQs on New Fair Pay Law but Leaves Tough Questions Unanswered

Three months after the California Fair Pay Act took effect on January 1, 2016, the California Division of Labor Standards Enforcement (“DLSE”) has issued answers to FAQs about the new law, which by all counts is the most employee-friendly equal pay law in the nation.  But for California employers who anxiously have been awaiting official guidance on the Act’s many new terms and standards, the FAQs provide little satisfaction.  Rather, they focus more on informing employees on how to bring a claim.  Nor has the DLSE otherwise spoken publicly about how it plans to enforce the new law; instead, the agency appears to be taking its time and exercising caution as it potentially sets the stage for the rest of the nation.

As most California employers now know, the California Fair Pay Act (SB 358) made significant changes to the state’s equal pay law.  Although California law previously mirrored federal law and required employers to pay employees working at the same establishment equal pay for equal work, the California Fair Pay Act expanded that standard to eliminate the same establishment requirement, and now requires employers to pay employees of the opposite sex equal pay for “substantially similar” work when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions—a standard that is unprecedented in the nation.  Additionally, although employers may still justify wage differences using the same four factors as under the prior California law (including a “bona fide factor other than sex”), the new law increases employers’ burden of proving those factors.  For example, employers must now demonstrate that any factor relied upon was applied “reasonably,” and accounts for the entire wage differential.  And, if the employer intends to rely on a “bona fide factor other than sex,” the employer also must show the factor is not based on or derived from a “sex-based differential in compensation,” is job-related, and is consistent with business necessity.  The new California law also includes expanded requirements and prohibitions related to pay transparency, and prohibits retaliation against employees for exercising their rights under the new law.

Despite the new law’s splash when signed by Governor Jerry Brown last October, the DLSE—the agency charged with administering and enforcing the new law—is in a passive enforcement role because it does not have authority to bring claims on its own.  Rather, it may only prosecute a claim once an employee has initiated an administrative proceeding with the agency.  And, unlike typical gender discrimination claims, employees are not required to exhaust their administrative remedies with the Agency before filing suit in court.  For these reasons, it is no surprise that the Agency has prioritized informing employees about how to bring a claim, rather than offering guidance to employers.

Nevertheless, many questions about the new law remain unanswered, including:

  • What does “substantially similar work” mean?  Although the FAQs pose this question, the explanation offered simply says that “substantially similar” means “mostly similar.”  The answer to the FAQ goes on to define other common terms, such as “skill,” “effort,” “responsibility,” and “working conditions,” but it does not offer guidance, for example, on whether the phrase “substantially similar” will be interpreted more or less broadly than “similarly situated,” which is the commonly used comparator standard under both federal and state discrimination statutes such as Title VII and California’s Fair Employment and Housing Act (“FEHA”).  Moreover, courts throughout the country do not agree on the appropriate standard for determining “similarly situated,” so it remains to be seen where on the spectrum “substantially similar” will fall.
  • What is a “sex based differential in compensation”?  Not surprisingly, the “bona fide factor other than sex” defense is the most commonly used employer defense when explaining wage differentials.  But what does it mean for a factor to be based on or derived from a sex based differential?  Employee advocates argue that this exception to the exception targets “tainted” factors, which purportedly includes things such as basing starting salary on prior salary or using “market factors” to set pay.  But how are employers to compete for talent if they cannot consider the salary demands of sought-after candidates, whether based on prior salary, a competing offer, or some other competitive factor?  It also bears mentioning that in 2015, Governor Brown vetoed A.B. 1017, a bill that would have prohibited asking job applicants about their salary histories, based on the rationale that there was little evidence that it would assure more equitable wages.
  • What does it mean to explain the entire wage difference?  Any good labor economist knows that when dealing with large numbers, differences of less than 2 standard deviations are the statistical equivalent of zero.  So, can an employer meet the Act’s new requirement by showing it has no statistically significant differences, or are statistics no longer the basis for an employer defense?  If the latter, how exactly is an employer to show that non-discriminatory factors explain for the entire wage differential?

Employers should not expect to see guidance overnight.  Before the Act was passed, the DLSE did not see much activity under the previous equal pay law.  Thus, the agency presumably is still ramping up its resources in anticipation of new claims.  Moreover, because the new California law is prospective only, it may be a while before courts have the opportunity to weigh in on questions such as those posed above (though keep an eye on Coates v. Farmers Group (CV-15-1913-LHK), currently venued in the Northern District of California before Judge Lucy Koh, as it is the first case we’ve seen where the complaint was amended to bring a California Fair Pay Act claim).  In the meantime, employers can best minimize risk by conducting privileged compensation audits to ensure pay equity; reviewing compensation policies and practices; and documenting pay decisions, including factors that explain pay differences.  Stay tuned for more updates from us on equal pay as this new law unfolds.