November 3, 2015

California Fair Pay Act – Validating Factors Used in Compensation

The new California Fair Pay Act (CFPA) is summarized in depth in a previous blog in this series. The CFPA includes strict stipulations for employing “[a] bona fide factor other than sex, such as education, training, or experience” to explain wage differentials. If we look at the key components of the requirements, excerpted below, we see the CFPA is really just calling for a validation process for compensation factors.

“This factor shall 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… This defense shall not apply if the employee demonstrates that an alternative business practice exists that would serve the same business purpose without producing the wage differential.”

Demonstrating validity for a selection procedure is a core tenet of defensible employer selection decisions (see here and here for more on that). But how does the concept of selection procedure validation translate to the compensation arena, in light of the CFPA?

Let’s consider educational background, a commonly used pay factor. Education may be a clear “bona fide factor” for jobs where a degree is required to practice (e.g., MD for doctors), but what about for other jobs for which degrees are simply considered beneficial (e.g., MBAs for managers)? For the latter, the CFPA may require a rigorous analysis linking education to core job duties or outcomes to justify its use as a valid pay factor. Furthermore, it is unclear if establishing job-relatedness is enough to also satisfy the business necessity component, or if an employee could put forth a reasonable alternatives argument that certain experience or certifications would be comparable to the educational background, meeting the same business purpose.

Demonstrating the validity of pay factors has come up before in the EEO context. As an example, see Jock et. al. v Sterling Jewelers (Part 1 and Part 2), where  an arbitrator recently certified a class for a disparate impact claim alleging that job experience factors used to set starting salary were not job-related. The merits of the claim have yet to be decided. It appears that the CFPA will increase the challenges for California employers. We are all still working to understand how exactly the CFPA will be interpreted by the courts, so stay tuned.

By Samantha Holland, Consultant and Kristen Pryor, Consultant at DCI Consulting Group

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