So you’ve lost the unfair dismissal or discrimination claim against you and are now staring down the barrel of the Employment Tribunal’s jurisdiction to award compensation for the employee’s losses.

Never mind, you think – he could easily and immediately have got another job at a pay rate sufficient to extinguish his losses, so the Tribunal will undoubtedly give him a comprehensive monetary kicking on the grounds of his failure to do so. You will be out of the remedies hearing by lunchtime and still with change enough for a cab home.

Nice try. Following the EAT’s decision in Cooper Contracting Limited -v- Lindsey issued late last month, it is indeed possible that you will be out by lunchtime, but not necessarily in a good way.

Lindsey was dismissed and won his claim that it was unfair. That brought him under Section 123 Employment Rights Act 1996 which says that the compensatory award should be what the Tribunal considers just and equitable in all the circumstances, having regard to the loss sustained by the employee, insofar as that loss is attributable to action taken by the employer.  Section 123 also notes that in assessing that loss, the Tribunal should use common law damages principles, which impose a duty on the victim to take reasonable steps to mitigate his losses.

The Colchester Tribunal found that Lindsey could have taken up a relatively handsome and stable income from a new employment pretty soon after his dismissal but chose instead to go self-employed at a lower average rate of pay. It then appeared to get itself in a tangle about the impact of this on his compensation.  On the one hand, it awarded him his unreduced actual losses for the 14 months from dismissal to hearing, so paying no heed to the ready availability of better paid employment positions over that time.  On the other, it expressly noted that same availability when limiting Lindsey’s compensation for future losses to the next 3 months only.  So had he failed to take the necessary steps to mitigate his losses arising from the dismissal or not?  What are those steps?

The EAT rehearsed the decided cases on the point and arrived at a series of principles, none of which are terribly good news for employers:

• The burden of proof of failure is on the employer. Therefore if no evidence of any failure to take reasonable steps to find another source of income is brought by the employer, the Tribunal is under no obligation to (and generally will not) take lost opportunities to mitigate into account against the employee.
• The often-quoted formula that the employee must take “all reasonable steps” to mitigate is wrong – delete the “all”, since otherwise a single inadvertent failure among many other efforts would still count as a breach of that duty.
• The employee must be shown to have acted unreasonably. That is a different test from his showing that what he did was reasonable. Since there may be a number of reasonable responses to a particular set of circumstances, runs the argument, the employee will not be at fault if he pursues one rather than others, even if it turns out to be a duff choice and is to his own cost.
• Ultimately it is the Tribunal’s view of what is unreasonable which matters, though that will take into account the views and wishes of the employee (as here – Lindsey had lengthy prior experience of being self-employed and had had a sufficiently rough time as employee at Coopers that he had no wish to repeat it with another employer elsewhere).
• “The Tribunal is not to apply too demanding a standard to the victim; after all, he is the victim of a wrong. He is not to be put on trial as if other losses were his fault“. Similarly, said the EAT, “where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment, the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticise the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency”.  In other words, employers, you come to the mitigation debate from no moral high ground in most cases.  The barrel you are staring down is therefore now not a rifle but a sawn-off shotgun, sorry.

Here the EAT took the view that even though there were decent reasons why Lindsey should have reduced his claimed losses by taking up an employed position immediately after his dismissal, that did not mean in all the circumstances that he had acted unreasonably by not doing so. This was not a case where he had set his heart on some unrealistic or theoretical next career move – he had his reasons for preferring self-employment and they were not unarguable.  Therefore, there was no failure to mitigate.  The capping of the future losses to 3 months did not suggest to the contrary.  Instead, that was the Judge’s way of telling Lindsey that the self-employed model he had chosen was indeed his to choose but that it nonetheless had a cost to it, and that it would not be just and equitable for Section 123 purposes to make the Respondent pay for that indefinitely.

A little-known (or perhaps forgotten) fact is that the very first bill President Obama signed into law was an employment law:  the Lilly Ledbetter Fair Pay Act of 2009.  This law unwound the Supreme Court’s 2007 decision in Ledbetter v. Goodyear Tire & Rubber Co., and was intended to make it easier for employees to bring gender pay discrimination claims by clarifying that each allegedly discriminatory paycheck starts a new statute of limitations.  To commemorate the seventh anniversary of his signing of the Ledbetter Equal Pay Act, on January 29, 2016, President Obama held a press conference, attended by Lily Ledbetter, the Secretary of Labor, the Chair of the Equal Employment Opportunity Commission, and tennis legend Billie Jean King – to announce the Administration’s latest initiative to address gender pay inequality, proposing a rule to expand the information required from employers regarding their pay practices.

President Obama’s announcement explained that the Equal Employment Opportunity Commission (EEOC) will be proposing (in the form of a proposed new federal regulation) a revision to its longstanding Form EEO-1.  The EEO-1 currently requires employers with 100 or more employees to provide the federal government with workforce profiles containing data sorted by race, ethnicity, and gender.  The proposed new rule would expand of the scope of required disclosures by employers, and would specifically require disclosure of aggregated  pay and hours worked data to the federal government.  The proposed rule also would seek to require employers to submit this information via an updated and improved data collection mechanism, ostensibly easing the compliance burden on most employers.

According to the EEOC’s statement, the new data “would provide [the] EEOC and… Department of Labor with insight into pay disparities across industries and occupations and strengthen federal efforts to combat discrimination.”  The EEOC believes the data will allow the agencies to use information “to assess complaints of discrimination, focus agency investigations, and identify exiting pay disparities that may warrant further examination.”  However, aside from providing greater transparency and insight into the pay practices of America’s larger employers, a significant aim of the proposed rule appears to be to turn the conversation inward.  According to EEOC Chair Jenny R. Yang, “this information will assist employers in evaluating their pay practices.”  The EEOC statement similarly expresses the hope that the published aggregated data “will help employers in conducting their own analysis on their pay practices to facilitate voluntary compliance.”

If approved, the revised rule would go into effect for covered employers’ September 2017 report.  The proposed changes are scheduled to be published on the Federal Register  website on February 1, 2016.  Employers and members of the public will then have sixty days to submit comments, with the comment period ending on April 1, 2016.  According to the White House, the proposed change would cover over 63 million employees.

Employers also should be cognizant of changes and proposed efforts to amend state equal pay laws, as several states led by California and New York, have strengthened their respective state equal pay acts within the last year.

Back in 2014 we posted a piece on Moorthy –v- HMRC http://www.employmentlawworldview.com/taxing-times-for-uk-discrimination-claimant/, a case looking at the taxable status of payments to employees for injury to feelings caused by unlawful discrimination. Historically there had been an unspoken understanding that such compensation could be paid tax free, on top of the usual £30,000 allowance for termination payments.  However, the First Tier Tax Tribunal concluded that compensation for injury to feelings would only be tax-free if it did not arise “directly or indirectly in consideration of or in consequence of the termination of a person’s employment“.  If it was related in some way to that termination (most obviously through a dismissal being found to be discriminatory) then it would only be tax free to the extent that it and all the other compensation payments made added up to less than £30,000.

That decision has just been upheld by the Upper Tax Tribunal. It seems unlikely to be further appealed, so we had better get used to what that means for the structuring of severance payments and the drafting of settlement agreements:

Lessons for employers

Let us assume for these purposes that as employer you can get past the irritation implicit in paying tax-free cash to an ex-employee for injury to his feelings caused by an act of discrimination which you probably deny ever took place. Instead, let us proceed on the premise that you want to pay injury to feelings compensation tax-free if possible so as to minimise the cost to you of providing an acceptable level of return to the employee.  On that basis, consider:

(i)         within the settlement agreement, identifying expressly the (alleged) acts of non-termination discrimination and attributing a separate injury to feelings figure to them;

(ii)        if the termination is also alleged to be discriminatory, attach a separate injury to feelings figure to this also;

(iii)       there is no reason in logic why there should not be payments for both pre-termination and termination-related injured feelings in the same settlement, but remember the relativity of the two sums.  HMRC may view with some suspicion a larger payment for injury to feelings caused by pre-termination discrimination than for an outright dismissal which will on any view usually cause the greater distress.  Such an imbalance may suggest that the employer is shifting compensation which is actually for the dismissal, and so potentially taxable, into the tax-free pre-termination piece, an assessment HMRC would not be shy to challenge;

(iv)       and also keep an eye on the size of the pre-termination injury to feelings amount relative to the act of discrimination it is paid for.  A failure to follow the Vento guidelines (e.g. paying more than about £6,000 for minor one-off acts or over £18,000 for anything less than the most serious and extended harassment) would also allow HMRC to challenge the status of the payment.  The employee will also have to tread a thin line here – the more serious the pre-termination discrimination alleged, the less easily HMRC will accept that it did not play some role in the subsequent parting.  However, the point is still entirely arguable in the right circumstances – an employee subjected to very serious harassment whose whole workplace is closed while his claim is still unresolved, for example.

(v)        make sure that any tax indemnity in the settlement agreement covers not just the ordinary severance payment but also the injury to feelings amount(s);

(vi)       and finally as employer, note that HMRC will look askance at tax-free injury to feelings payments on termination which purport to be for acts of discrimination taking place any material time before the dismissal.  Ideally there would be evidence of an ongoing grievance or Employment Tribunal claim still extant at the time of the dismissal.  The obvious point is that if the pre-termination discrimination was long ago or had clearly not become an issue of contention, a sudden payment of compensation for it will inevitably look contrived.  Equally, of course, the closer the alleged discrimination is in time to the termination, the less keen HMRC will be to accept that it is actually unrelated to it.

A week ago, President Barack Obama announced further efforts by the White House and EEOC to combat gender pay equality issues. The momentum from last week’s announcement carried its way up the coast from the District of Columbia to the state legislature of New Jersey. Yesterday, New Jersey’s Senate Labor Committee approved Senate Bill 992 sponsored by Senate Majority Leader Loretta Weinberg and Senate President Steve Sweeney aimed at providing additional equal pay protections. The proposed legislation would build on New Jersey’s current equal pay law already in place.

The federal government’s announcement a week ago commemorated the seven year anniversary of the Lilly Ledbetter Fair Pay Act, the first bill President Obama signed into law after taking office in 2009. New Jersey Senate Bill 992 – as proposed – would mimic the language of the Ledbetter Act, restarting the statute of limitations for pay discrimination claims each time a paycheck is issued in furtherance of discrimination. The proposed bill contains other features, including (1) prohibiting employer retaliation against employees for disclosing compensation; (2) requiring employers to articulate a bona fide job-related reason for difference in pay for employees of a different gender performing substantially similar work; and (3) reporting requirements for contractors relating to certain changes during the course of the contract.

The proposed New Jersey legislation comes after similar legislation was passed in the last year by New York and California. Employers should keep an eye out as the New Jersey’s SB 992 makes its way through the state legislature this year, as well as for similar legislation likely coming in other states. The Federal proposal was published in the Federal Register on February 1, 2016 and written comments may be submitted on or before April 1, 2016. For further information on submitting comments, check the Federal Register here.

We don’t yet know what lessons, if any, the Government took from the serial savaging by all sides of its disastrous consultation document on reforming the tax treatment of severance payments http://www.employmentlawworldview.com/uk-government-consults-on-tax-treatment-of-severance-payments-do-you-want-the-bad-news-or-the-bad-news/.

It has not published any response to that feedback, but we can probably take some short-term clarity in this area from yesterday’s Budget. From April 2018:-

• the £30,000 exemption will be left entirely alone, but Employer (not Employee) NICs will be due on any excess over that number;
• all payments in lieu of notice and “certain damages” will be taxable as earnings. It is presumed that “certain damages” means wrongful dismissal compensation, as this would allow the Government to hide its embarrassment at its failure to recognise in the original consultation paper that payments in lieu of notice and wrongful dismissal damages are legally the same thing; and
• foreign service relief will be abolished.

These measures confirm the widespread suspicion that the original consultation document was less about simplification of the severance tax regime and more about increasing the tax-take for the Government. Making payments in lieu of notice taxable as a matter of course will increase the costs for employers of reaching settlement agreements, sometimes materially, even where the overall payment is still less than £30,000.  Nobody much will miss foreign service relief, but the Employer NIC surcharge on payments over £30,000 may also cause complications in squaring what the employer is willing to pay out in total with what the employee requires to receive net.

Today (April 4, 2016) California Governor Jerry Brown signed SB 3, raising California’s minimum wage to $15 by 2023.  Under that law, minimum wage in the state of California (currently $10.00 per hour) will increase as follows:

Beginning on January 1, 2023 for large employers, and January 1, 2024 for small employers, the law provides for additional yearly increases to be determined by August 1 of each year.  Of note, the scheduled minimum wage increases can be temporarily suspended by the Governor, based on certain determinations outlined in the law.   In addition to raising the minimum wage, SB 3 extends California’s Healthy Workplaces, Healthy Families Act to providers of in-home supportive services.

Not to be outdone, New York Governor Mario Cuomo (also today) signed an historic budget bill (S06406), raising the state’s minimum wage to $15.00 ($12.50 outside of New York City, Nassau, Suffolk and Westchester counties) for all workers and providing for the nation’s only 12-week paid family leave program.

Under the new law, New York’s state minimum wage (currently $9.00 per hour) will increase as follows:

In addition, the law requires food service workers receiving tips to be paid a cash wage of at least two-thirds of the applicable minimum wage rate or $7.50, whichever is higher.  Of note, the scheduled minimum wage increases can be temporarily suspended, based on certain determinations outlined in the law.  

Finally, the law amends the state’s workers’ compensation law to include 12 weeks of paid family leave benefits for all employees, in addition to the disability benefits already provided for under New York law.  Family leave is defined as any leave taken by an employee from work “(a) to participate in  providing  care,  including  physical  or psychological  care,  for a family member of the employee made necessary by a serious health condition of the family member; or (b) to bond  with the  employee’s  child  during the first twelve months after the child’s birth, or the first twelve months after the placement of the  child  for adoption  or foster care with the employee; or (c) because of any qualifying exigency as interpreted under the family and medical leave act, 29 U.S.C.S § 2612(a)(1)(e) and 29 C.F.R. S.825.126(a)(1)-(8), arising  out of  the fact that the spouse, domestic partner, child, or parent of the employee is on active duty (or has been notified of an impending call or order to active duty) in the armed forces of the United States.” 

Beginning on January 1, 2018, the paid family leave benefit will be 8 weeks at 50% of the employee’s average weekly rate, increasing to 10 weeks at 55% of the average weekly rate on January 1, 2019, 10 weeks at 60% of the average weekly rate on January 1, 2020, and finally 12 weeks at 67% of the average weekly rate starting on January 1, 2021.   Notably, employers are not required to fund the family leave benefit; rather, the benefit is funded through payroll deductions.

Employees become eligible for benefits on the 175^th day of employment.  Upon return from family leave, an employee is entitled to be restored to the position held by the employee when the leave commenced, or a comparable position with comparable benefits, pay and other terms and conditions of employment. Employers are required to maintain any existing health benefits during the duration of paid family leave as if the employee continued to work.  An employer may choose to allow an employee to use available vacation or other paid time off during the period of paid family leave, in which case the employer may request reimbursement in accordance with the law.  Paid family leave must be used concurrently with any available FMLA leave.

Gibbs -v- Leeds United Football Club concerned the former Assistant Manager of the Club who took his £330,000 constructive dismissal claim to the High Court so as to sidestep the compensation ceiling in the Employment Tribunal.

Having fairly easily established the fundamental breach of contract necessary to win his claim against Leeds, Mr Gibbs then faced two more difficult questions about his compensation. First, how do you provide for mitigation where you know the dismissed employee is going to get a bonus from his new employer, and when, but don’t know how much it will be?  Second, is it a failure to mitigate that the employee declines to accept an offer of improved employment terms from the old employer?

On the first point, the Judge reviewed the options of (i) estimating the bonus figure (but thereby certainly being wrong in one party’s favour of the other) or (ii) delaying the compensation award until the bonus amount were known, but thereby racking up interest charges for Leeds and denying Mr Gibbs receipt of his money. Note that part of the relevant bonus was due to be paid by Mr Gibbs’ new employer, Tottenham Hotspur FC, little more than four months after the High Court’s decision, at a time of low prevailing interest rates and when Mr Gibbs was safely in receipt of a salary from Spurs and so had no immediate need for the money.   Nonetheless, this was still felt to be hardship enough all round to leave that option on the bench.

The Judge chose instead to order that:

• the full amount of the £330,000 award should be paid to Mr Gibbs’ solicitors to be held in an interest-bearing account;
• the parties should then agree how much of that could be released to Mr Gibbs (i.e. leaving at least enough in the account to cover any likely bonus award from Spurs); and
• the rest would be offset against that bonus, with the bonus amount going back to Leeds and the balance to Mr Gibbs, plus interest in each case.

All very sensible and the fact that this was a High Court case in no way prevents a similar Order (or agreement between the parties) being made by the Employment Tribunal where there is a need to reflect an uncertain future receipt in the amount of a settlement or compensation award.

On the second point, was it a failure by Mr Gibbs to take reasonable steps to mitigate his losses when he rejected Leeds’ post-resignation offer to stay at Elland Road as Head Coach/Manager? The Judge gave this allegation a fairly short shrift – having found the Club guilty of a repudiatory breach of Mr Gibbs’ contract, it could not fix things so easily.  Though the new role would have been more senior and presumably better paid, the damage caused to Mr Gibbs’ credibility among players and staff by the Club’s earlier treatment of him made it reasonable for him to refuse.  He could have taken the chance that Leeds would change its behaviour towards him, but he was not obliged to do so.  Bear in mind also the recent Employment Appeal Tribunal decision in Cooper Contracting -v- Lindsey http://www.employmentlawworldview.com/mitigation-of-loss-in-employment-tribunals-not-a-happy-new-year-for-uk-employers/ which stressed just how high is the hurdle of showing a failure to mitigate, and also Buckland –v- Bournemouth University http://www.employmentlawworldview.com/upholding-grievances-kill-or-cure/ in 2010. There the Court of Appeal decided much against its own better judgment that once the employer was guilty of a repudiatory breach of contract, it could not “mend” that breach by profuse apologies and other appropriate steps afterwards, even if those measures would have undone all or most of the harm caused in the first place.

Minneapolis is the first city in the Midwest to jump on the sick leave bandwagon. On May 27, the Minneapolis City Council passed a sick and safe time ordinance that requires employers of employees working in Minneapolis to provide sick leave to those employees. Beginning July 1, 2017, employers of 1-5 employees must provide unpaid sick leave, while employers of 6 or more employees must provide paid sick leave. The law specifies that all employees working for an employer (not just those working in Minneapolis) should be counted in determining employer size (although this provision seems to conflict with the how the law defines “employee”). However, only employees who perform work within the city for at least 80 hours a year for an employer are entitled to accrue sick leave.

Beginning on July 1, 2017 or upon commencement of employment, employees will accrue one hour of sick leave for every 30 hours worked, up to 48 hours (2 days) of sick leave each year. Employees may carryover all accrued, unused sick leave hours to the next year, but there is an 80 hour cap on the amount of sick leave an employee may have at one time. The law does not specify what happens if an employee hits that cap before accruing 48 hours of leave; ostensibly the employee would begin accruing again after using some of the accrued sick leave.

Employees can use sick leave for the usual sick and safe leave reasons; sick leave may be used in four hour increments. As with other sick leave laws, the law also specifies under what circumstances employers can require notice and documentation of sick leave use, and also specifies the recordkeeping requirements. The law requires employers to post a required notice (not yet published) and, if they have an employee handbook, to include in the handbook the notice of rights and remedies provided for under the law.

Importantly for employers with existing PTO policies, the City Council has recognized that many employers have existing PTO policies that do not require accrual and do not allow for carryover and has directed various city offices to analyze how such policies can be accounted for in the law by August 17, 2016.

The city will likely publish some guidance clarifying some of the ambiguities in the law sometime before next July.  In the meantime, if you have employees in Minneapolis, get those employee handbooks and sick leave accrual and use tracking mechanisms ready!

Voters in San Francisco voted yesterday (June 7, 2016) to amend that city’s paid sick leave law, the oldest in the nation. The amendments, which go into effect on January 1, 2017, expand San Francisco’s paid sick leave law to parallel the broader provisions of California’s Healthy Workplaces, Healthy Families Act. Specifically, Proposition E amends San Francisco’s paid sick leave law as follows:

• Provides that employees would begin to accrue paid sick leave on the first day of employment (rather than the 90^th day of employment) but may not use sick leave until the 90^th day of employment.
• Provides that employees who leave their job and are rehired by the same employer within a year would have their unused sick leave reinstated.
• Provides that employees can use paid sick leave for leave or other purposes when the employee is a victim or domestic violence, sexual assault or stalking.
• Provides that employees can use paid sick leave for purposes related to organ or bone marrow donation.
• Broadens the definition of family member.
• Provides that an employer may provide a lump sum of paid sick leave at the beginning of the year, which would be treated as an advance. An employee would not accrue paid sick leave until after the employee has worked the number of hours necessary to have accrued the upfront allocation amount.
• Provides that employers who have to provide notice of available sick leave under California state law must also include on that notice the amount of paid sick leave available under San Francisco’s law.

Proposition E also grants the Board of Supervisors the power to amend the paid sick leave law to adopt provisions to parallel state or federal law in order to provide broader protections or coverage for employees (thus avoiding the need to put any such changes before voters again).

Also in yesterday’s elections in California, San Diego voters passed Proposition I, approving Ordinance O-20390, which provides for paid sick and safe leave and a minimum wage hike. Of note, the law is effective as soon as the election results are certified. The sick leave portion of the law was originally set to go into effect (and provides for sick leave to begin accruing) in 2015. However, interest groups forced the referendum. One would hope the city would provide employers with a grace period, but barring that employers should start tracking and allowing use of sick leave almost immediately.

Under the sick leave portion of the law, employees who perform at least two hours of work in San Diego in a year will be entitled to one hour of paid sick leave for every 30 hours worked. Unlike most other jurisdictions, there is no cap on accrual of paid sick leave, however employees are limited to using only 40 hours of paid sick leave per year.  Accrued, unused sick leave must carry over from year to year. Sick leave may be used in two hour increments. Unused sick leave does not have to be paid out upon termination of employment.

Also under this law, San Diego’s new minimum wage is $10.50, increasing to $11.50 per hour on January 1, 2017. Beginning in 2019, it will be tied to inflation. Given California’s recent minimum wage hike, the San Diego rate will match the state rate beginning in 2019.

Meanwhile, in Oregon, nine counties have sued the state over its sick leave law, which went into effect in January. Employers shouldn’t get excited, however—the counties are only challenging the legality of the law as it applies to them. Specifically, the counties claim that the sick leave law is an unfunded government mandate, and are asking the court for an interpretation of a 1996 amendment to the state’s constitution, which requires the legislature to pay local governments for costs of new state-mandated programs and provides that if funds are not provided, the local government does not have to comply with the program. While the lawsuit will not impact private employers, it is a good reminder for employers with employees working in Oregon to ensure that they are in compliance with Oregon’s sick leave law, which has a few unusual provisions, such as allowing the use of sick leave for bereavement purposes.

Finally, employers should ensure they are ready for the next round of minimum wage hikes, which go into effect July 1. You can find the current minimum wage rates in this chart, which is current as of May 26, 2016.

Here is a recent case which contains lessons harder than A-Level Maths for employers with discretionary bonus schemes.

Mr Hills was regional sales manager in the UK for Niksun Inc, a US-owned business whose website says that it is “the primary provider of full packet capture for DISA“.  No, nor me.  Niksun runs a bonus scheme based on attributable sales revenues.  While it stresses repeatedly that revenue allocations are discretionary, it also states that they will be “fair and reasonable” and that for any given sale, the allocation will take into account point of influence (where the major account control resides), point of sale (where purchase orders are received) and point of installation (where the delivered product is physically sited).  Each is allocated up to a third of the available revenue, but all still subject to repeated references to an overriding discretion residing with senior management in the US.

Mr Hills closed a sale in the UK for an installation in Asia Pacific. He had been told by his boss, who had in turn been told by someone senior in the US, that if the deal were done, he would be “looked after” in relation to the revenues coming off it.  He was correspondingly more than slightly disgruntled when credited with less than half (48%) of those fees.

But the scheme was discretionary, it said repeatedly, and everyone knows that so long as a discretionary bonus award is not perverse or irrational, it cannot be challenged. The UK was clearly not the point of installation, so that was a third of the revenues gone elsewhere straight off.  In addition, employees in the US had undoubtedly contributed to some extent to the account management, so that suggested that Mr Hills should not get all the remainder.  In the circumstances it would surely be impossible for him to show that a 48% allocation was irrational or perverse?

Perhaps so in normal circumstances, but the Winchester County Court Judge (now backed in full by the Court of Appeal) took the view that these were not normal circumstances. And therein lie the lessons for employers, since the points which the Judge relied on in awarding Mr Hills a sum equivalent to an allocation of two thirds of the contract revenues (an extra £6,700) are in fact present in many bonus schemes and bonus discussions:

Lessons for employers:

• The very high “perverse or irrational” hurdle for a successful challenge to a discretionary bonus award only applies where the discretion is completely unfettered.
• So as soon as you start qualifying it in any way, you are bound also by those qualifications. Here there were three main caveats to the broad discretion which Niksun thought it had:
• The statement that the bonus would be “fair and reasonable“. This sounds like a modest enough aspiration, but is still a much narrower band than that which is merely not irrational or perverse, a phrase which can easily allow for decisions which are unfair, harsh, ignorant or unreasonable.
• The assessment of revenue allocation by the three points (influence, sale, installation). The Judge found as a fact that the UK, not the US, was the main point of influence.  This necessarily suggested a higher figure for Mr Hills than a calculation based on its being the US.
• Most dangerously for employers, the assurance to Mr Hills’ boss that the UK would be “looked after” in the revenue allocation. Which employer has never said anything of this sort to an employee with itchy feet?  However, even a phrase as vague and non-committal as that was still found to have a weighting effect in the proper exercise of Niksun’s discretion.
• It would be easy to conclude that the Judge reached his conclusions because Niksun did not call as witness the US boss responsible for the bonus allocation. His evidence as to the thinking behind the bonus decision would have gone a long way on Niksun’s behalf.  However, the Judge was no fan of Mr Hill either – “Mr Hills was so strongly motivated to maximise his claim that he had been willing to behave in a dishonourable way and was a witness whose evidence should be treated with caution”.  Mr Hills was therefore in the faintly depressing position of not being fully believed even though the other side effectively did not turn up, but he succeeded all the same.
• So think carefully where you want to put the line between law and good practice for your bonus scheme. Give your employees no insight into how it will be assessed, no assurance that it will be fair and no promise that good work will be rewarded, and you will have very substantial freedom of manoeuvre.  However, if you want your staff to be committed, incentivised and perhaps less likely to make the sort of comments about you which appear on Niksun’s Glassdoor review, there may be a price attached.

Today (June 22, 2016), Chicago’s City Council passed an ordinance requiring employers to provide paid sick leave to employees beginning on July 1, 2017.  Mayor Emanuel spoke in favor of the ordinance following the Council’s vote, noting his “fervent wish” that the state of Illinois would follow suit and pass a statewide paid sick leave law. Chicago joins Minneapolis, Los Angeles and San Diego as the most recent cities to pass paid sick leave laws.

Chicago’s ordinance is, in many respects, similar to paid sick leave laws in other jurisdictions, but it has a few key differences and a few ambiguities, detailed below. In order to be eligible for paid sick leave under Chicago’s law, an employee must work for an employer for at least 80 hours in any 120-day period.  Employees will accrue one hour of paid sick leave for every 40 hours worked, up to a maximum of 40 hours per 12‑month period (calculated from when the employee first became eligible to accrue paid sick leave (e.g., January 1, 2017 or upon hire)).  All employees may carry over half of any unused, accrued paid sick leave hours to the next year, up to a maximum of 20 hours.

Chicago’s ordinance is unique in that it allows employees to carry over additional sick leave from one year to the next, to be used for absences that are eligible under the federal Family and Medical Leave Act (FMLA).  The law provides that if the employee is FMLA-eligible, the employee may carry over an additional 40 hours of accrued, unused paid sick leave to the next year.  This is where things get murky.  The law states that employees may only use 40 hours of paid sick leave per year.  However, if an employee “carries over 40 hours of Family and Medical Leave Act leave … and uses that leave, he or she is entitled to use no more than an additional 20 hours of accrued Paid Sick Leave in the same 12‑month period….”  As written, the ordinance technically could be read to require an employee to carry over a full 40 hours of FMLA sick leave and use all of that leave before the employee could use sick leave for any other purpose during that 12‑month period.  Surely, that is not the intent, but the way the ordinance is currently drafted certainly creates confusion as to whether an employee who has carried over FMLA sick leave is required to use up all of that leave before taking sick leave for any other (non-FMLA eligible) purpose.  Hopefully, the City will realize this, make revisions or provide guidance clarifying the matter for employers before the ordinance goes into effect.

As in most other jurisdictions, employees may use paid sick leave for: the employee’s or the employee’s family member’s illness or injury, or to receive medical care, treatment, diagnosis or preventive medical care; for absences resulting from the employee or the employee’s family member’s status as a victim of domestic violence or a sex offense; or if the employee’s place of business or child’s school is closed due to a public health emergency.  Notably, Chicago’s law has an expansive definition for family member, extending it to include any individual related to the employee by blood, or whose close association with the employee is the equivalent of a family relationship.

Employers should also be aware that the Chicago law requires that they provide notice of covered employee’s rights to paid sick leave with the first paycheck issued after the law goes into effect on January 1, 2017 (or the first paycheck after hire, for employees hired after that date).  The City will be providing a form notice that employers can use for this purpose.

Some legal blogs stretch their analogies too far. This one doesn’t.  Whether or not you actually care about who won the synchronised swimming, what happens to unsuccessful North Koreans or why you would invent a mugging while trashing a toilet, do take a look at this clever piece on executive remuneration as an Olympic sport.  Sarah Nicholson from our Corporate team in Birmingham gives you the lowdown on what you can do with your directors’ pay to get you gold, leave you disqualified or fail the dope test.

You can find the piece on our Comp and Bens blog here http://www.globalcompensationinsights.com/

The election results are in, and President-elect Donald Trump’s victory over Secretary Hillary Clinton has the nation abuzz and undoubtedly will for the foreseeable future.  However, the Presidential race was not the only notable race or measure on the ballot.  Although the dust hasn’t quite settled from last night’s historic vote, there a number of approved ballot measures that employers will need to understand and prepare for immediately.

Specifically, in Arizona, the Minimum Wage and Paid Sick Time Off Initiative, also known as Proposition 206, passed by a 59% to 41% margin.  The paid sick time component of the law will go into effect July 1, 2017, while the minimum wage increase begins in just a few months by raising the Arizona minimum wage to $10.00 per hour effective January 1, 2017.

The first component of the new Arizona law inserts Article 8.1 entitled “Earned Paid Sick Time” into Section 5, Title 23, Chapter 2 of the Arizona Revised Statutes.  The new paid sick time law applies to covered employers regardless of the number of employees; a covered employer with at least one Arizona employee is obligated to comply with the law.  Accrued paid sick time may be used for the employee for his or her own mental or physical illness, injury or health condition; or to care for a family member’s – as the term family member is defined under the statute – mental or physical illness, injury or health condition.  Here are the major points of emphasis:

• All employees will accrue paid sick time at a minimum rate of one hour for every 30 hours worked for the employer.
• Employees of an employer with 15 more employees may cap maximum annual accrual of paid sick time at 40 hours, while smaller employers may cap the maximum annual accrual at 24 hours.
• Employees who are exempt under the Fair Labor Standards Act of 1938 (“FLSA”) will be assumed to work 40 hours in each work week for purposes of calculating paid sick time accrual, unless their normal work week is less than 40 hours, in which case earned paid sick time accrues based on actual hours worked.
• Unused earned paid sick time must be carried forward to the following year consistent with the accrual limits of the statute. Employers may forego this requirement by following a procedure specified in the statute.
• A 90-day probationary period for new employees may apply to the use, but not accrual, of paid sick time.
• The new law includes specific employee protections making it unlawful for an employer to retaliate or discriminate against an employee for exercise of his or her use of paid sick time.

Further complicating the new law will be the statutory provision allowing employers to do away with the accrual method in favor of simply providing an employee at the beginning of the year all earned paid sick time that an employee is expected to accrue during the year.  (This provision brings Arizona’s law relatively on par with neighboring California’s paid sick time law.)  The new Arizona law contains other provisions explaining issues such as an employer’s ability to pay its employees for earned, unused paid sick time rather than carrying it forward to the next year; notice required by the employee for use of paid sick time; and the employer’s ability to request documentation to verify proper use of paid sick time.   Notably, the law does not require the payment of accrued but unused paid sick time upon termination of employment.

Employers should note that the provisions of the new paid sick time law are minimum requirements, and nothing in the new law prevents an employer from establishing a more generous policy or continuing one already in place.

The second component of the new Arizona law adjusts Arizona Revised Statute § 23-363 to require a gradual increase of Arizona’s minimum wage beginning this coming January.  Arizona’s new minimum wage will be $10.00 per hour effective January 1, 2017.  Thereafter, the minimum wage will be raised to $10.50 effective January 1, 2018, $11.00 effective January 1, 2019, and $12.00 per hour effective January 1, 2021.  Beginning in 2021, the minimum wage will continue to be adjusted annually based on Arizona’s cost of living.  Employers with employees who customarily and regularly receive tips as part of their income may continue to pay employees $3.00 less than the minimum wage in accordance with Arizona’s minimum wage act if the employer can prove the employee is earning at or beyond the minimum wage after tips are counted.

Arizona’s passing of Proposition 206 continued a national trend of answering demands for paid sick time and increasing the minimum wage.  Maine and Colorado also agreed to raise the minimum wage, while Washington voters approved of both a minimum wage increase and to provide paid sick leave for employees in similar fashion to Arizona’s measure.

Arizona employers are encouraged to reach out to local employment attorneys for additional guidance or as questions may arise.

For some time, the majority of married women working part-time in Japan have brought home annual pay of less than 1 million yen (around USD 9,150 at today’s exchange rates). This is largely the result of tax and compensation policies:

• At an annual income of 1.03 million yen, a part-time employee becomes subject to income tax, and their spouse loses the benefit of a 380,000 yen “spouse deduction” from their own taxable income. (Spouses are always taxed separately in Japan.)
• A majority of private sector employers pay “spouse allowances” to their full-time employees, and a majority of these employers tie eligibility to the tax deduction criteria. So if a part-timer crosses the 1.03 million yen income barrier, their full-time spouse may face a pay cut in addition to a tax hike.
• At an annual income of 1.06 million yen, many part-time employees are required to enroll in employer-provided health and pension insurance. Employer-provided health insurance is often significantly more expensive than the alternatives of either relying upon national health insurance, or being a dependent under a spouse’s employer-provided health insurance. While participating in pension insurance entitles the employee to collect a pension at a later date, it results in immediate deductions from take-home pay.

Due to these factors, a person making more than 1 million yen, particularly if they have a higher-earning spouse, may take home significantly less than a person at or below the 1 million yen barrier. As a result, some in this group (mostly composed of women) actively avoid making more than 1 million yen per year, such as by reducing their working hours.

The current government has been vocally promoting increased participation by women in the workforce, and has been making gradual efforts to ease these constraints. Earlier this year, there was discussion of abolishing the spouse deduction and replacing it with a joint deduction for married couples (subject to a household income limit). However, it was reported in October that this change is unlikely to become effective in 2017, and that instead the eligibility cut-off for the spouse deduction is likely to be raised to 1.5 million yen.

Meanwhile, the government and some major domestic employers have revamped their spouse and family allowance systems to remove allowances tied to having low-income spouses. It was reported this week that Nippon Keidanren, the influential federation of major Japanese companies, will formally request that its members consider reducing or eliminating spouse allowances in order to encourage more active workforce participation by married women.

Companies with a workforce in Japan may wish to keep an eye on these developments, as they are likely to have significant effects on recruiting and compensation practices.

As we come to the end of 2016, all employers should be planning ahead for any changes that will need to be implemented in 2017.  For California employers, those changes may be extensive, as the California Legislature has been busy this year, passing several new laws that will impact California employees and their employers.  Although there are a number of industry-specific employment laws that will impact some employers(e.g. agriculture, domestic workers, janitorial service workers, etc.), the following laws will apply to mostCalifornia employers.  Below is a brief review of some key legislation that will go into effect in 2017.  Make a resolution to be prepared now!

Minimum Wage Increase

As the battle over the minimum wage continues, California is not waiting.  SB 3 increases California’s minimum wage each January 1 from 2017 through 2022 (or 2023 for employers with less than 26 employees).  Come January 1, 2017, the new minimum wage will be $10.50.  Remember, this means more than just raising the minimum wage – exempt employees in California must also earn no less than 2 times the state minimum wage for full-time employment (defined as 40 hours per week) to maintain their status as exempt.  Therefore, employers must analyze exempt employees at or near the minimum salary cutoff.  At $10.50, the new cutoff will be $43,680 (assuming the federal overtime rule does not pass scrutiny).

Equal Pay Act Expansion

California has long been a frontrunner when it comes to income equality.  On January 1, 2017, two new laws (AB 1676 and SB 1063) will combine to expand the California Equal Pay Act to:  eliminate prior salary as a bona fide exception to equal pay based on gender, and to preclude employers from paying employees of a different race or ethnicity different rates for substantially similar work.

Juvenile Court Information Prohibited in Interviews

AB 1843 prohibits employers from asking about or considering, for purposes of hiring or any condition of employment, any information about the employee/applicant’s arrests, convictions, or other proceedings involving juvenile court.

Notice of Sexual Assault/Domestic Violence Leave Rights

Employees must be notified at time of hire of their rights to take protected leave when victimized by domestic violence, sexual assault, or stalking.  By July 1, 2017, AB 2337 will further require the California Labor Commissioner to develop a form employers may elect to use to comply with this notice requirement.

Arbitration Contracts

SB 1241 is a brainteaser, but the message is simple:  employees that work and reside primarily in California cannot be required to adjudicate claims outside of California, or adjudicate claims using the law of another state even in California, as a condition of employment.  This applies specifically to arbitration agreements, and any agreement entered into on or after January 1, 2017 must not contain any such provisions.

Tracking Hours Worked for Certain Exempt Employees

Under AB 2535, employers no longer will have to track hours worked by certain employees that are exempt from minimum wage and overtime regulations.  Specifically, the bill adds a subjection (j), which identifies seven circumstances where exempt employee hours do not need to be tracked.

State Sponsored Retirement Savings Program

SB 1234, passed in 2012, goes into effect on January 1, 2017.  Practically speaking, the imposition on employers should be minimal.  The bill requires employers to either maintain a private, qualified retirement savings plan, or enable employees to make automatic contributions from their paycheck to a California Secure Choice Retirement Savings Program savings account.  Employers may also be required to provide information about the program to employees.

Fair Employment and Housing Act Expansion

AB 488 expands FEHA’s reach to include employees hired under a special license, specifically those with physical or mental handicaps.  The expansion provides corresponding affirmative defenses, and provides that it is not disability discrimination to pay less than the state minimum wage to disabled employees employed pursuant to California Labor Code sections 1191 or 1191.5.

Workplace Smoking Prohibitions

Although it took effect on June 9, 2016, it is important to remember that ABx2 6 has expanded smoking prohibitions in workplaces to expand the definition of “smoking” to include “the use of an electronic smoking device that creates an aerosol or vapor, in any manner or in any form, or the use of any oral smoking device for the purpose of circumventing the prohibition of smoking.”  Employers should be certain that employees are aware of these changes.  Owner-operated businesses are now covered by SBx2 6.

All-Gender Toilet Facilities

Effective March 1, 2017, AB 1732 will require that all single-user toilet facilities in any business establishment, place of public accommodation, or government agency, be identified as all-gender toilet facilities.

On February 16, 2017, the New York State Industrial Board of Appeals (IBA) issued a Resolution of Decision invalidating and revoking regulations that would have required employers to satisfy certain notice requirements and obtain employees’ informed consent in connection with payment by direct deposit or debit card as well as regulated fees charged by vendors. The IBA concluded that the prohibitions on fees contained in the regulation exceeded the scope of the NYSDOL’s authority because it regulated financial services products under Labor Law Article 6. The NYSDOL now has sixty days to appeal the IBA’s decision to the New York State Supreme Court. Until any further decision is issued, the regulation is deemed revoked and employers are not required to comply. The NYSDOL may choose to appeal the decision, or seek to implement revised regulations to comply with the IBA’s decision. In the meantime, employers should monitor the status of legal developments on this issue for employees working in the state of New York, but also remember to be mindful that other states and cities may have their own laws governing this topic.

On November 8, 2016, voters in the City of San Jose approved the “San Jose Opportunity to Work Ordinance.”  The Ordinance is well-intentioned, but open to significant interpretation.  This is important, given the potential exposure to steep penalties and legal liability for failure to comply.  Here, we break down what you need to know, and identify some of the highlights of the new measure:

What is the Ordinance?

The Ordinance, previously Measure E on the ballot, will take effect on March 13, 2017.  Section 4.101.040 of the Ordinance provides:

Before hiring additional Employees or subcontractors, including hiring through the use of temporary services or staffing agencies, an Employer must offer additional hours of work to existing Employees who, in the Employer’s good faith and reasonable judgment, have the skills and experience to perform the work, and shall use a transparent and nondiscriminatory process to distribute the hours or work among those existing Employees.

Which employees are “qualified” to perform the work and therefore eligible for the additional hours is a decision left to the employer, so long as any decision is exercised in good faith and in a reasonable manner.

Further, the Ordinance requires employers to maintain the following records for four years:

1. Work schedules and employment and payroll records pertaining to current and former Employees;
2. Copies of written offers to current and former part-time employees for additional work hours (the Ordinance does not appear to require the offer be written, but this provision suggests employers ought to ensure all offers are, in fact, made in writing); and
3. Any other records the Office of Equality Assurance may require that Employers maintain to demonstrate compliance.

Finally, employers must post a notice informing employees of their rights under the Ordinance.

Who does the Ordinance affect?

The Ordinance applies to part-time employees, defined as any person who (1) performs at least two hours of work for an employer, and (2) is entitled to payment of the minimum wage under California law.  Executive, administrative, and professional employees are not covered by the ordinance.

Employers affected by the Ordinance include any person (or business) who (1) directly or indirectly, including through a staffing agency, employs or controls the wages, hours, or working conditions of any employee, (2) is either subject to the Business License Tax Chapter 4.76 of the San Jose Municipal Code or has a place of business in the City of San Jose that is exempt under state law from the tax imposed by Chapter 4.76, and (3) employs 36 or more employees.  The 36 employee-threshold is assessed by counting all part-time and full-time employees at all of the employer’s locations (except for executive, administrative, and professional employees, as defined by the California Department of Industrial Relations).

What is an Employer’s Liability?

A first violation of the Ordinance is subject only to a warning by the San Jose Office of Equality Assurance.  However, any subsequent violation may expose an employer to substantial civil penalties, and even civil litigation.  Remedies available to individuals harmed by a violation include:  (1) the right to sue in court to enforce their rights; (2) award of back wages; (3) civil penalties of $50 per day to each harmed employee; and (4) recovery of reasonable attorneys’ fees and costs.  These fines can add up quickly, and the availability of statutory attorneys’ fees creates a strong incentive for employees (and the plaintiff’s bar) to test the scope of the ordinance.  On the other hand, the extremely subjective nature of deciding which employees are “qualified” to perform the additional hours of work, may create a high bar for proving any violation.

Can a Business Be Exempt from the Ordinance?

The short answer is yes, but in very limited circumstances.  The Ordinance creates a narrow, twelve-month hardship exception for employers who demonstrate that they have undertaken all reasonable steps to comply with the Ordinance, and full and immediate compliance would be impracticable, impossible, or futile.  Exemptions are made on a case-by-case basis, and may be extended.  Generally, a hardship exemption will be granted where the work or need is unpredictable, or the work requires a specialized skill and there is a need to have employees on call.

Additional information about the Ordinance has been provided by the City of San Jose via a list of Frequently Asked Questions.  Employers should take precautionary measures and develop a protocol to address the Ordinance and its obligations before it becomes effective on March 13.

In another roll-back of Obama-era regulations, the Senate voted last night, 49 to 48, to repeal the contractor disclosure rule.  This rule required companies bidding on federal contracts valued at more than $500,000 to disclose violations of 14 federal labor laws, including those pertaining to workplace safety, wages and discrimination. Finalized in August and blocked by court order in October 2016, the rule would have limited the ability of companies with recent employment law compliance problems to compete for government contracts unless they agreed to remedies. The US Chamber of Commerce, the Business Roundtable and other leading business groups had urged Congress and the Trump administration to eliminate the regulations, arguing they discourage businesses from competing for government contracts, and increased their compliance costs. The government estimated the cost of the reporting requirements at $458 million in the first year. The measure to abolish this rule has already cleared the house, and next it goes to the President, who is expected to sign  it.

Can employers ask a prospective employee what they have earned at prior jobs? For most employers, the answer is currently – yes.

But, if you are among the large group of employers that do ask about past earnings, take heed. A growing number of states and municipalities and even the federal legislature are considering new laws that would ban employers from asking candidates about their salary history. Last summer, Massachusetts became the first state in the country to pass such a law. The Massachusetts salary history ban is part of a broader state law promoting gender pay equality. Proponents of these salary history bans postulate that employers who base starting salaries on their candidates’ past salary rates may perpetuate the underpayment of women, who studies show make less on average than men doing comparable work. Accordingly, these groups believe that prohibiting employers from asking about salary history will help reduce the pay gap between men and women in the workforce. These bills are also seen as a way to level out pay gaps created by other disparate circumstances unrelated to the job. For example, people who graduate from school and begin their first job during a recession may earn lower salaries and be held at a lower income level regardless of talent, ability, skills or other job-related factors.

Two US cities – New York City and Philadelphia – also recently passed salary history bans. However, the Philadelphia ordinance has been temporarily stayed by a federal court after the Philadelphia Chamber of Commerce challenged the law. Just this week, the Illinois House passed a salary history ban, and several other states, including Maine, Maryland, New Jersey, Pennsylvania and Rhode Island are considering such bills. On the other side of the issue, California’s Governor Jerry Brown vetoed his state’s version of this salary history ban last year, but this year signed into law a bill that prohibits employers from using this pay history to justify gender-based salary disparities. Governor Brown has indicated he believes this measure should be sufficient to help correct the gender pay disparity, without preventing employers from gathering market information through pay history inquiries. A federal law instituting a nationwide ban on employer pay history inquiries was introduced in the House last September.

So for now, only those employers with operations in New York City and the state of Massachusetts need to modify their applications and interview practices that seek salary history information. New York City’s salary history ban is expected to become effective later this year. Massachusetts’ state law is slated with a July 1, 2018 effective date. Note that salary history bans generally do not stop employees from voluntarily providing this information to prospective employers, nor do they penalize employers who obtain it through these means. We will keep you apprised of this new trend as it develops.

On May 2, 2017, the House passed H.R. 1180, The Working Families Flexibility Act of 2017, which would allow private employers to offer paid time off, also known as “comp time,” instead of time-and-a-half wages for overtime hours. Congress had previously amended the Fair Labor Standards Act in 1985 to allow public-sector employees to be given comp time instead of pay for overtime hours worked.

The bill would amend the Fair Labor Standards Act to allow private employers and eligible workers (those that have worked at least 1,000 in the preceding 12 months) to voluntarily agree to 1.5 hours of compensatory time for every hour of overtime worked, for up to 160 hours of compensatory time per year. The requested time would have to be approved by the employer.

The bill provides that no later than January 31st of each calendar year, the employer will provide monetary compensation for any unused compensatory time off accrued during the preceding calendar year that was not used prior to December 31. An employer may provide monetary compensation for an employee’s unused compensatory time in excess of 80 hours at any time after giving the employee at least 30 day notice. Compensation is provided at not less than the regular rate earned when the compensatory time was accrued, or the regular rate earned by such employee at the time such employee received payment of the compensation, whichever is higher. The proposed bill includes provisions that would allow workers to cash out their comp time if they leave the job.

The House passage of the bill for private industry also comes as the Obama administration rule to expand overtime eligibility is on hold nationwide, pending federal litigation in Texas. That rule would double the salary threshold—up to about $47,500—below which workers automatically qualify for time-and-a-half overtime pay.

The bill now heads to the Senate, where some Democratic support is needed to keep it from stalling as it has in past years.

As we previously reported to you, pay history has recently become a topic of much discussion among federal, state and municipal legislatures. Many jurisdictions around the country are considering laws that would quell employer inquiries into candidate pay history. The underlying purpose of these laws is to level out the historical pay gap between men and women, which pay history ban proponents argue is perpetuated when employers base starting salaries on candidates’ prior earnings. In fact, many of these pay history bans are part of a larger scheme of pay equality laws. Amidst this movement, the Ninth Circuit announced last week that salary history alone can be used to determine new employee starting salary without violating federal equal pay law.

In Rizo v. Fresno County, Plaintiff Aileen Rizo, an educational consultant, filed suit against her employer, Fresno County, under the federal Equal Pay Act (EPA) after learning she made less than her male counterparts for the same work. The EPA, which prohibits pay disparity between men and women who perform the same work, has a strict liability standard, such that a plaintiff must only prove a pay disparity between men and women who perform the same work exists, and not that the disparity is an intentional act of discrimination by the employer. Because all of Rizo’s counterparts were male and made a higher salary than she did, the County conceded the pay disparity and defended itself by arguing that it fell under an exception to the EPA because it used “any other factor other than sex” to set Rizo’s and her co-workers’ starting salaries. Specifically, the County said it determined incoming salary for new employees by offering them a 5% pay increase above their most immediate prior salary. The County argued this was an objective formula entirely independent of gender.

In considering the County’s motion for summary judgment, which asked the Court to dismiss Rizo’s EPA claim based on this defense, the United States District Court for the Eastern District of California found that using salary history to set current salary was not “any other factor other than sex.” The trial court reasoned that such a practice “is so inherently fraught with the risk … that it will perpetuate a discriminatory wage disparity between men and women that it cannot stand, even if motivated by a legitimate non-discriminatory business purpose.”  For this reason, the District Court concluded the practice could not be valid under the EPA.

On appeal, the Ninth Circuit declared the District Court’s outcome was in direct contradiction to Ninth Circuit precedent interpreting the EPA. The Ninth Circuit pointed to its prior decision in Kouba v. v. Allstate Insurance, Co., in which the plaintiff alleged Allstate violated the EPA. Allstate’s pay system at issue considered pay history, among other factors, in setting new employee salaries. The plaintiff in that case alleged that pay history was the sole cause of the alleged pay disparity. Allstate responded, stating that, to the extent its consideration of pay history did create a pay disparity between men and women, pay history was a “factor other than sex” and therefore the practice did not violate the EPA. The Ninth Circuit agreed. The Court of Appeals specifically found that employers can use pay history to set incoming salary as long as the practice was to effectuate a business policy, and was used reasonably in light of this policy and its other business practices. The Ninth Circuit determined that establishing these factors satisfies the affirmative defense that any resulting salary disparity was determined by a “factor other than sex.”

Based on Kouba, the Ninth Circuit reversed the District Court’s decision in Rizo and remanded the case so the trial court could analyze Fresno County’s business reasons offered to support the pay history practice and determine whether the County used prior salary “reasonably in light of these business reasons and other practices.”

Thus, while this outcome does not automatically green-light pay history-based salary systems, employers in the Ninth Circuit that can establish a business policy and reasonableness of the system may escape the EPA’s harsh penalties. But, as we previously cautioned, this outcome may be in conflict with other affirmative laws prohibiting pay history inquiries, which may end up providing more protection for pay equality than the federal scheme.