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Hawai‘i Life, Hawai‘i Law Matters

Employers Can No Longer Rely on Prior Salaries When Setting Pay

May 9, 2018

Employers, it is time to evaluate your compensation setting policy.

Last month, the Ninth Circuit Court of Appeals ruled that, in Hawaii and other western states, an employer cannot use a “prior salary alone or in combination with other factors” to “justify a wage differential.” 

In that case, a female math consultant brought a lawsuit against her employer under the Equal Pay Act, alleging that she received less pay than her male counterparts.  At the time of hiring, the consultant’s employer took her prior salary, added five percent, and placed her on the corresponding step of a salary schedule.  The court found this practice to be unlawful.

Equal pay advocates celebrated the court’s decision and recognition that an employer’s reliance on a new hire’s prior salary may “perpetuate” wage discrimination.  The court’s ruling, however, may come as an unwelcome surprise to employers that may have relied upon prior salary in setting pay – a practice that, in 1982, the Ninth Circuit unequivocally held to be lawful.

Now, an employee can pursue a claim under the Equal Pay Act if she can show, today, that she earns less than a male co-worker in a similar position (or vice versa) and the employer relied upon her prior salary in determining her initial salary.  An employer may be liable even if it made the initial salary determination some twenty or thirty years ago, in reliance on the 1982 decision. 

If the employee is successful in proving her pay discrimination claim, she could collect two years of back pay, liquidated damages, and attorneys’ fees and costs.  All of that may add up, especially if more than one employee makes a claim.

The court’s ruling does not apply to individualized salary negotiations.  The Ninth Circuit declined to discuss whether an employer could consider an employee’s prior salary during negotiations, partly due to the concern expressed by some judges that female employees may leverage past salaries to persuade their new employees to pay more.  This potentially signals the court’s belief that voluntary salary negotiations may be different. 

Employers, however, should exercise caution when considering prior salaries in negotiations.  Recent news articles suggest that women are disproportionately reluctant to advocate for themselves during negotiations.  If that is true and an employer expects that all new hires will negotiate their salaries, this type of compensation policy may further perpetuate wage discrimination. 

An employer should document how it calculates the employee’s initial salary, as well as subsequent pay increases.  The employer should not ask for prior salaries in job applications, and, as a practice, should wait until the employee voluntarily provides his or her prior salary in negotiations.  An employer who has knowledge of a new hire’s prior salary may later be accused of relying on the prior salary in making its salary determination, even if it did not.

The Ninth Circuit’s decision should serve as an opportunity for employers to review their compensation policies and analyze whether there is a pay disparity among male and female employees.  Employers that spot a wage disparity should consult with a qualified attorney about creating a plan to address the disparity because sometimes a flawed plan can do more harm than good.

This article was prepared by Jordan Odo.