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Under the California Equal Pay Act, Incentive Programs Create Disparities

The California Equal Pay Act (CEPA) recognizes a few exceptions to the general bar on pay differentials between genders: a seniority system, a merit system, a system that measures earnings by quantity or quality of production, or “a bona fide factor other than sex.” Cal. Lab. Code § 1197.5(a)(1)(D). The last exception is a vital catch-all that allows employers the flexibility necessary to create reasonable, non-discriminatory compensation systems. For instance, the catch-all exception allows employers to consider education, training, or experience when setting pay.

However, as important as this exception is, there is little caselaw from which to draw. Though it is clear that the catch-all applies only to factors that are “job related with respect to the position in question” and “consistent with business necessity,” those limitations are largely undefined and unexplored. For this reason, employers continue to operate under a shroud of uncertainty that creates the risk of litigation.

The risk is particularly high for employers that use pay to incentivize behaviors. For example, an employer that rewards COVID vaccination with extra pay (or charges a fee if employees refuse vaccination). By way of another example, some employers operate in jurisdictions where continued employment cannot serve as consideration for arbitration agreements. To ensure uniform compliance, those employers sometimes choose to rely on extra pay (or the opportunity for extra pay) instead. Other examples abound. In such cases, it is quite possible that a woman chooses not to engage in whatever behavior the employer wants to reward—e.g., she chooses not get vaccinated or sign an arbitration agreement. Her choice naturally leads to a pay disparity, where her male comparators earn more.

Common sense dictates the employer should not be liable, but the law may well say otherwise.

  • The CEPA does not consider the employers’ motivations. The fact that the employers did not consider gender in their decisions to articulate and implement the policies is legally irrelevant.
  • It is unclear if vaccination or arbitration programs are consistent with “business necessity.” Employers have strong arguments that those programs generally lower the costs of doing business. But so far, there is no guidance indicating that this rationale alone is sufficient to count as a “business necessity.”
  • It appears that vaccination and arbitration programs are not typically job-related “with respect to the position in question.” Certain jobs in healthcare, for example, may meet this standard, but most positions will not.

As these examples demonstrate, it is important for courts and administrative agencies to further define the “bona fide factor other than sex” exception. Absent additional guidance, employers cannot deploy pay as a tool to incentivize important goals—like vaccination—without taking on additional, unnecessary risk.

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