Changing laws and new court decisions have made it difficult for employers to understand when it is lawful to rely on salary history to set compensation. California passed a law in 2017, only to amend it a year later. A federal appellate court issued a ruling broadly prohibiting the use of salary history information. But the Supreme Court unanimously vacated that ruling just last Term. Below we will explain the current state of the law.
Background. Some employers base a new employee’s wage rate, at least in part, on the employee’s compensation at their previous employer. There obviously are legitimate reasons for doing so. The hiring employer naturally wishes to offer enough to entice the employee to accept a new job offer, but without offering too much. The hiring employer also may wish to understand the “market rate” for a job or the particular employee; that is, how much the competition is paying for a similar position.
Civil rights advocates and lawmakers have decided that reliance on previous salary perpetuates discriminatory or at least artificially depressed wage rates, caused by a history of discriminatory pay practices against women and minorities.
California Labor Code section 432.3 expressly limits the use of salary history information, but allows for certain exceptions contained in the statute.
The federal Equal Pay Act of 1963 does not expressly prohibit employer consideration of salary history. Rather, that law prohibits pay disparities between employees performing similar work, which cannot be justified by the employer under one of the allowable defenses. However, federal courts recently have decided that employers that base new employees’ wages on their previous salary may violate the Equal Pay Act. That is because the employer cannot claim as a defense that the prior salary history falls under one of the allowable defenses to an unequal pay claim.
Determining an applicant current or prior salary. Given California’s statute, an employer is not allowed to ask an applicant what he or she earns at a current or prior employer. California law also prohibits an employer from doing an “end run,” by asking a job recruiter or past employer about the applicant’s salary history.
California law does not prohibit applicants from voluntarily disclosing their own salary history to a prospective employer. For instance, an applicant might volunteer current compensation to negotiate a starting salary that is higher than the hiring employer’s job offer. If the disclosure is voluntary, California law permits the employer to consider the applicant’s salary history in making a compensation proposal to the applicant.
That said, creating a salary disparity based on prior compensation may create legal risk even if “considering” voluntarily disclosed wage history is not strictly prohibited. First, the Ninth Circuit Court of Appeals is re-considering a case in which it previously prohibited employers from considering salary history under any circumstance. If the Court re-affirms that ruling, consideration of even voluntarily disclosed salary history will be unlawful under federal law, which applies in California.
Second, if two employees are hired for the same job on the same day, the employer must justify a pay disparity if an employee brings an equal pay or discrimination claim. The defense “one employee voluntarily disclosed his or her salary, resulting in higher pay” may not be successful under California law, even though considering the prior salary was not per se illegal.
Verifying an applicant’s salary history, post-offer. California law does not expressly prohibit employers from confirming an employee’s previous salary (assuming it was lawfully disclosed in the first place). If the employer did not obtain the employee’s prior salary history in the first place, it makes little sense to verify it. Additionally, certain jurisdictions, such as San Francisco, prohibit employers from disclosing current or former employees’ salary histories without their written consent.
Asking an applicant about “salary expectations,” Employers may ask applicants for their salary expectations under federal or state law. The employer is free to evaluate the stated salary expectation when deciding if the applicant is a good fit for the position or organization. Of course, the employer should not inquire if the expectation is based on a prior salary.
“Salary History” at the Current Employer. California’s salary history restrictions apply only to employers’ efforts to base compensation decisions on employees’ wage rates at previous employers. Employers may continue to base a wage increase or bonus on what employees earned during the previous year, for example. That said, employers must continuously scrutinize pay scales for equal pay issues to ensure that disparities are justified by one of the applicable defenses.
Written Pay Scales, California law requires employers to provide applicants with the pay scale for the position being applied for upon request. However, employers need not provide pay scales to applicants who are not interviewed. Also, a pay scale may be as simple as a range for a given position.
Other Compliance Issues. Most fundamentally, employers must ensure those involved in the hiring process understand that seeking salary history information is prohibited. Employer application materials must not include requests for salary history. Those responsible for checking references should not ask prior employers about salary history, either.
More broadly, employers must continue to audit their wage rates within similar job positions for unfair pay differentials. Over time, of course, wage differentials will occur. The key will be to know how to justify then, such as by pointing to length of service, performance criteria, or other factors tied to differential pay increases. With respect to starting wage rates, it is more important than ever to document the legitimate reasons for differences among employees performing substantially similar work. The equal pay laws do not require intent to discriminate, merely a differential that cannot be explained by one of the statutorily authorized reasons.