Equal pay ruling could be a game changer for Finance

CFOs beware: One of the most common salary-setting techniques could now put your company in legal danger.

The 9th U.S. Circuit Court of Appeals just unanimously ruled that pay differences based on prior salaries are inherently discriminatory under the Equal Pay Act because those past salaries stemmed from gender bias.

The ruling was handed down in Rizo v. Fresno County Office of Education, a lawsuit in which a teacher claimed she was paid thousands of dollars less than her male colleagues.

$13K less than a less-qualified co-worker

According to the lawsuit, Rizo, a math consultant for Fresno County, found out over lunch that she made nearly $13,000 per year less than a male colleague with less experience, education and seniority. Plus, she generally made less than her male counterparts.

Fresno County claimed its process for determining salary, which did take into account prior salary, didn’t violate the Equal Pay Act and had nothing to do with gender.

The County had a formal procedure that determined a new hire’s starting salary by taking the new hire’s prior salary, adding 5%, and placing the new employee on the corresponding step of Fresno County’s stepped salary levels.

But the court disagreed with this argument. As Judge Stephen Reinhardt wrote in the opinion:

“The Equal Pay Act stands for a principle as simple as it is just: Men and women should receive equal pay for equal work regardless of sex. The question before us is also simple: Can an employer justify a wage differential between male and female employees by relying on prior salary? Based on the text, history and purpose of the Equal Pay Act, the answer is clear: No.”

Salary history becoming obsolete?

Increasingly, cities and states (as well as giant corporations like Amazon) are passing laws that prohibit employers from asking prospective candidates about their previous salary during interviews. Combine that with ruling like this, and employers may want to avoid using past salary history altogether even if they aren’t subject to laws banning salary history inquiries.

The trend of salary history bans is only going to increase. So forward-thinking companies can make changes to their own internal policies now and avoid rushing to do so when their state and/or city requires them to do so.

This story was originally published on our sister website, HR Morning.