California’s Fair Pay Act was initially enacted in 2016. Then updated this last year. It is one of those compliance regulations that may be easy to overlook but shouldn’t be. It’s especially difficult for small businesses because the analysis of a small pool of employees is more difficult.

Background of the law

I find with a number of the laws that are burdensome, it is helpful to go back and look at the intent of the legislators to see what they were thinking. Often a constituent comes to their elected official with a complaint about something that was unfair. The legislator then drafts a law the fix a specific issue even if MOST employer/employee relationships don’t require it.

The Fair Pay Act doesn’t fit neatly into that scenario. It is, rather, an attempt by the legislature to fix an ongoing, systemic bias in the workplace. In this case, the historical (and current) wage disparity between men and women. California had an Equal Pay Act; the Federal government had an Equal Pay Act. This wasn’t a brand new law. But, the Fair Pay Act is easily the most aggressive equal pay law in the nation.

So, without turning this into a political debate, I think it’s pretty safe to say that employers were immediately behind the 8-ball when the Fair Pay Act was enacted. It’s extension this past year to include racial and ethnicity expanded the act beyond gender.

Employment law attorneys from Seyfarth Shaw, point out that: these changes dramatically lower the bar for an equal pay suit, permitting plaintiffs to compare themselves with persons of the opposite sex working at any location for the same employer, and in any similar—and not the necessarily the same—job.

If pay isn’t the same, why not?

The permitted reasons for differences in pay are:

  • A seniority system,
  • A merit system,
  • A system that measures earnings by quantity or quality of production, or
  • A bona fide factor other than sex such as education, experience, or training. This exception will apply only if the employer demonstrates that the factor is not based on or derived from a sex-based differential in compensation, is job related with respect to the position in question, and is consistent with a “business necessity” (i.e., the factor relied upon effectively fulfills the business purpose it is supposed to serve). This defense does not apply if the plaintiff can demonstrate an alternative business practice that would serve the same business purpose without producing the pay differential.

Employment Applications and the Hiring Process

The Fair Pay Act is the reason behind the change in the application process that prohibits employers from asking about past salaries/wages. Often small businesses think that they don’t ask about prior salary but, upon closer review of their employment application, it does have boxes for an applicant to list starting and ending wages of prior employment.

It’s important that everyone involved in the hiring process understands the prohibition on asking about prior salary. Prior salary can’t be inquired about in the interview or when requesting references.

What are the Action Items for the Fair Pay Act?

  1. Review your application. Make sure it doesn’t have any spaces for prior wages/salary. If you have an online application, make sure it has been up-dated as well. I talked to one client who had just successfully gotten their application updated and less than a week later, someone called to alert him that his application was out of compliance.
  2. Review your hiring process. Talk to everyone who may be calling prior employers or taking part in the interview process. Alert them to avoid asking questions about prior salary.
  3. Consider doing a salary review. Talk to your attorney before doing this. Without attorney direction, any documents that you create, review, etc., may be discoverable in case of a claim.
  4. Create a salary structure. You probably have a good idea of what the pay range is for each position in your organization. But most small businesses haven’t taken the time to put a formal structure in place. If an applicant or employee asks, you need to be able to give them the pay range of the different positions in your organization. As you create the pay ranges, you should also consider how the different positions overlap in duties and in pay. Also, think about the effect of the rising minimum wages on the pay ranges.
  5. Resolve problems proactively. Again, this is one you want to discuss with your attorney before making any decisions, however, it is probably a good idea to fix any outliers in your pay ranges before they become a problem.