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Jul 10, 2017

Equal pay and prior salary information

By: Allison Mann

It is a rather popular interview question: How much were you paid at your last job? This question allows employers to determine how much they may need to offer a promising new hire in order to incentivize them to take the position. However, setting salary on this basis may raise an issue of unequal pay for women and racial minorities, both of which groups are statistically paid less.

The Issue:

Take for example, XYZ Corp is hiring two new marketing professionals—Jane and John. Jane was previously paid $45,000 per year, while John made $50,000. XYZ Corp offers each of them $1,000 more than their previous salary, and they both accept the positions. Years later, Jane realizes that she is being paid significantly less than John, for performing substantially the same work. This situation often gives rise to a discrimination suit under the Equal Pay act. This raises the question: Does it violate the Equal Pay Act to base salary solely on what an individual’s salary history?

The Law:

This situation described above has been addressed time and again in court. Most recently, in the Ninth Circuit Court of Appeals case Rizo v. Yovino. The fact pattern is essentially identical. The plaintiff, a public school employee, discovered she was being paid significantly less than her male counterparts, and brought suit Under the Equal Pay Act against her employer.

Once this type of suit is brought, the employee must establish a prima facie case of discrimination, which is merely showing that there is a pay differential. It is then the employer’s burden to establish that one of four statutory exceptions applies: “(i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production; or (iv) a differential based on any other factor other than sex.” Rizo v. Yovino, 854 F.3d 1161, 1164 (9th Cir. 2017). In this case, the employer argued that the salary discrepancy was not discriminatory because it was based on a factor other than sex. Namely, its “Standard Operation Procedure” whereby it used prior salary information to determine starting salary—it would offer the prospective employee a 5% raise from

The appellate court ruled in favor of the employer. Factors in support of this ruling were that the policy was objective, prevented favoritism, and was consistently applied. In other words, the salary discrepancy was not motivated by discrimination, but was instead “motivated by legitimate, non-business reasons.” Id. at 1166.

The Eighth Circuit, of which North Dakota is a part, has adopted an approach similar to Rizo, Taylor v. White, 321 F.3d 710, 720 (8th Cir. 2003) (“[W]e believe a case-by-case analysis of reliance on prior salary or salary retention policies with careful attention to alleged gender-based practices preserves the business freedoms Congress intended to protect when it adopted the catch-all "factor other than sex" affirmative defense”). Please note, there is a split in authority. Other circuit courts have come to exactly the opposite conclusion, and have held that prior salary alone will not justify a pay disparity.

The Takeaway:

An employer should be cautious when relying on past salary to set a new employee’s base salary, especially where it may create a pay disparity between similarly situated employees. Though this defense is currently allowed in North Dakota, it is not something that an employer should rely upon. It is always best to avoid litigation, rather than prepare a defense before there is even a problem.

In addition, is under very recent scrutiny. This year, Massachusetts passed legislation banning employers from asking prospective hires about prior salary information during the job interview process. The motivation behind passing this bill is to promote equal pay. It looks like a few other states may follow suit in the near future.

It is advised that employers consult legal counsel in the event there is any specific question regarding this topic.

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Reprinted with permission from an article submitted for publication in the July, 2017 Southwest Area Human Resource Association newsletter.