By Tammy Binford, Contributing Editor

A new appeals court ruling is just the latest sign of the risks associated with basing salary offers on applicants’ pay history.

An 11-judge panel of the U.S. 9th Circuit Court of Appeals—which covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington—ruled on April 9 that basing a salary offer on an applicant’s compensation at a previous job can be discriminatory under the federal Equal Pay Act.

The decision overruled a ruling from a three-judge panel of the 9th Circuit a year ago. The new ruling also is in line with a number of state and city laws prohibiting employers from using an applicant’s previous compensation to determine a salary offer.

The case, Rizo v. Yovino, involves a lawsuit filed by a Fresno County, California, school employee who learned that she was paid less than men in comparable jobs because her salary was based on what she earned at a previous job in Arizona.

The county schools had a policy of adding 5% to an applicant’s previous pay when making a job offer. The county argued that its practice was nondiscriminatory because the Equal Pay Act allows pay that is based on seniority, merit, quantity or quality of work, or “any other factor other than sex.” The county claimed its practice was not based on sex and was therefore legal, and the three-judge panel agreed.

But the larger panel’s opinion stated that “the financial exploitation of working women embodied by the gender pay gap continues to be an embarrassing reality of our economy,” and therefore it overturned the previous ruling.

What Employers Need to Know

Erica E. Flores, an attorney with Skoler, Abbott & Presser, P.C., in Springfield, Massachusetts, and a contributor to Massachusetts Employment Law Letter, says she thinks it is becoming “increasingly risky for employers to rely on pay history as a factor for setting employee compensation, even in places where the issue remains undecided by the courts and there is no local legislation prohibiting the practice.”

Flores says employers may tell themselves that pay history is relevant for nondiscriminatory reasons because it tells them how much the work involved is worth to their competitors and how much they may have to offer to secure a desired candidate. But such thinking carries legal risks when the information about past compensation “is the product of past discriminatory pay practices—like the widespread and well-documented pay gap between men and women.” Continuing to use salary history “only perpetuates the problem,” she says.

Tony G. Puckett, an attorney with McAfee & Taft in Oklahoma City, Oklahoma, and a contributor to Oklahoma Employment Law Letter, agrees that basing compensation on past pay is risky. “It appears that prior salary history will no longer be a valid defense to an equal pay claim, based on this decision from the 9th Circuit, decisions from other circuit courts, and various state laws prohibiting asking applicants about their salary history,” he says. “If employers cannot use prior salary history as a defense in an equal pay case, then past salary is not a safe method for determining salaries.”

Advice for Employers

Flores urges employers to base salary on qualifications, experience, and other requirements for the job. “For example, employers should consider the importance/profitability of the job to the overall business, the particular demands and responsibilities of the position, the value of any benefits package, local market rates if available, what the business can actually afford to pay, and, perhaps most importantly, what the employer is currently paying employees who are in comparable positions,” she says.

Flores also urges employers to consider auditing their pay practices to try to identify existing pay disparities among comparable jobs that can’t be justified by nondiscriminatory factors. Then they should consider implementing a plan to voluntarily eliminate those disparities.

Her state, Massachusetts, is one of the states that has passed a law prohibiting employers from inquiring about salary history before making an offer of employment that includes compensation. The law is to take effect in July.

Puckett also urges employers to carefully look at how they determine salary offers. “The key for employers is utilizing legitimate job-related factors that are not based on sex—either currently or historically—to set salaries, and keeping a record of the job-related factors that resulted in the pay levels set by the employer.”