Employers Must Use Caution When Basing Pay Decisions On Prior Salary History

Imagine a scenario where an employer hires two individuals – a male and female – to fill two identical jobs (i.e., same job qualifications and same job duties). Both individuals satisfy the educational, skill, and other technical requirements for the job and they have similar employment histories. However, at their prior places of employment, one individual earned $50,000 at his/her prior place employment, while other earned $60,000 per year. The employer agrees to hire both individuals at 10% more than their prior salaries. Thus, the starting pay for one hire is $55,000 while the starting pay for the other is $66,000, leading to a pay differential of $11,000 (20%) during the first year of employment. The two individuals eventually learn about the difference in pay and the lower-paid employee questions whether the starting pay differential is legally permissible.

This question is at the heart of a current Department of Labor – Office of Federal Contract Compliance Programs’ (OFCCP) current investigation into compensation practices. According to OFCCP investigator, during an onsite audit of the subject company’s  California headquarters, a company representative stated that the business asks prospective hires about their most recent salaries and then offers up to 20% more when setting starting pay. As a result of these alleged statements and the preliminary indicators of potential gender-based pay disparities, the OFCCP is seeking information regarding 2014 salaries, as well as several years of salary history information, for approximately 20,000 employees. The company denies that there are any gender-based pay disparities with respect to employees performing the same job and thus far has refused to turn over the requested information.

While litigation in this matter is ongoing, employers should be aware that both the OFCCP and the Equal Employment Opportunity Commission take the position that, in light of historical societal differences in pay based on gender and race, Executive Order 11246, Title VII, and the Equal Pay Act prohibit employers from justifying differences in pay based solely on salary history. Further, decisions from the federal courts on this issues are mixed, with courts in the Seventh, Ninth, and Eighth Circuits allowing employers to rely on prior pay as a defense in certain circumstances and courts in the Fifth, Tenth, and Eleventh Circuit rejecting the use of salary history as a defense to allegations of discrimination.

Finally, in an effort to reduce the reliance on salary history as a justification for differences in pay, multiple jurisdictions – namely California, Massachusetts, New Orleans, New York (limited to state agencies), New York City, Philadelphia, and Puerto Rico – have passed laws that prohibit employers from using prior pay as a defense to discrimination. And, in some cases, these laws even prohibit employers from asking about salary history altogether. In addition, Connecticut, Delaware, New Jersey, Pennsylvania, Rhode Island, and Washington D.C. are contemplating similar laws.

With this in mind, employers should be mindful of the risks of relying on prior salary history as a lone or significant factor in setting pay and should avoid consideration of prior salary history in those locations with prohibitions on questioning or using prior salary history in making pay decisions. Where prior salary history is used as a factor for pay decisions, employers should take the following steps to have the best defense to claims of discrimination:

• Ensure that compensation policies and practices comply with the law in all applicable jurisdictions;
• Avoid reliance on salary history alone when establishing starting pay;
• Document all factors that contribute to an initial pay determination including, but not limited to, educational history, degree, prior employment experience, special skills and expertise, individual candidate negotiations, market factors, and other position-specific factors;
• Document how each factor contributed to pay and the specific reasons for the rate of pay chosen;
• Periodically evaluate whether initial differences in pay should be reduced over time when employees have substantially similar job duties and responsibilities;
• Conduct regular, privileged compensation analyses to assess pay equity and ensure non-discriminatory treatment; and
• Consult with legal counsel regarding any questions or concerns.