Court rules gender pay gap legal based on prior salaries

A federal appeals court late last week ruled that employers can legally pay women less than men for the same work based on differences in the workers’ previous salaries.

The decision by the 9th U.S. Circuit Court of Appeals overturned a lower-court ruling Thursday that said pay differences based exclusively on prior salaries were discriminatory under the federal Equal Pay Act.

A three-judge panel of the 9th Circuit cited a 1982 ruling by the court that said employers could use previous salary information as long as they applied it reasonably and had a business policy that justified it.

“The current employer sets salary by considering the employee’s education, years of experience, and prior salary,” the court noted in its opinion. “Using these factors, the employer gives both employees the same salary credit for their identical education and experience, but the employer pays the male employee a higher salary than the female employee because of his higher prior salary.”

The court adds that in this example, it is prior salary alone that accounts for the pay differential, even though the employer also considered other factors when setting pay.

The court ruling indicates that companies should take a look at their pay strategies, experts say.

“Employers must focus on describing positions well and aligning pay to the work performed,” says Michael Rogers, CEO of iFocus: Human Capital Solutions, a consulting firm. “[The] status quo on pay setting is over. Each organization has a responsibility to create an employment market that is compliant with the law.”

Meanwhile, the Society for Human Resource Management notes that the “decision has resulted in a split in the circuits,” indicating it may make its way to the Supreme Court.

“SHRM believes pay should be set by relying on legitimate and legal factors such as experience and education,” the organization says. “Prior salary is sometimes considered but should not be the sole factor used to set pay, as it apparently was in this case.”

“It will be challenged for good reasons,” Rogers adds. “Employers should reconsider the level of merit in their pay setting methods. Just because it is institutional, does not make it legal.”

A number of local and state governments have made recent strides in banning employers from asking for an employee’s salary history in efforts to curb the gender pay gap.

New York City took the most recent steps, following Philadelphia, to make the move. Other measures are also in the works, as seen in New Jersey, Pittsburg and Washington, D.C.

“We anticipate that the trend of state and local legislation preventing employers from asking about prior salary history is likely to continue,” SHRM adds.