Pay Equity Legislation and Regulatory Activity
There has been both federal and state level legislation and regulatory activity aimed at addressing existing pay equity concerns. Two examples — one federal and one state — exemplify this trend.
In August 2015, the Securities and Exchange Commission adopted a final rule that requires public companies to disclose the ratio of the compensation of their CEOs to the median compensation of their employees. The rule, which amends the existing executive compensation disclosure rules to provide for increased transparency in corporate pay practices, is mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Companies will be required to report their pay ratios for their first fiscal year beginning on or after January 1, 2017.
In January 2016, the amended California Fair Pay Act will take effect. Before being amended the Act demanded equal pay based on gender for jobs that required “equal skill, effort and responsibility, and which are performed under similar working conditions.” This was interpreted relatively narrowly to mean comparing employees in the same job titles in the same locations who perform identical or nearly identical job duties. Now, the Act has been broadened such that employers are prohibited from paying employees of the opposite sex lower wage rates for “substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions.” Employees thus can now bring unequal pay claims based on wage rates in any of their employer’s facilities and in other job categories as long as the work is substantially similar.
The Act as amended also requires the employer to show that the entire wage differential is based on the reasonable application of one or more of the following: “(1) a seniority system; (2) a merit system; (3) a system which measures earnings by quantity or quality of production; or (4) a bona fide factor other than sex, such as education, training, or experience.” To prevail on the bona fide factor defense, the employer must demonstrate that the factor is not the result of a sex-based differential in compensation, is related to the position, and is consistent with business necessity. An employee can defeat this bona fide factor defense by proving that an alternative business practice exists “that would serve the same business purpose without producing the wage differential.” The amended language appears to present ambiguities. For example, what does the term “substantially similar” mean, what qualifies as a “business necessity,” and what is a seniority or merit “system”? It may take litigation and court interpretations to shed light on the intended meaning of these key terms.