The federal appeals court ruling this week that said employers cannot consider prior salary in determining an employee's pay targets the growing tension surrounding gender pay disparity and forces companies to question long-held practices.

The U.S. Court of Appeals for the Ninth Circuit ruling fuels momentum to narrow the pay gap, led by state and local governments that are passing laws to ban employers from asking prospective employees about their prior salaries. Advocates say tactics such as considering salary history in determining pay and, later defending a disparity, perpetuate a cycle of inequity between women and men.

The Ninth Circuit en banc court's majority ruling was unequivocal in saying that a consideration of prior salary, whether alone or in a combination of factors, violated the Equal Pay Act. This could set up a Supreme Court battle, as the Seventh Circuit ruled the opposite way, and the Tenth and Eleventh circuits issued divergent but more nuanced opinions. The ruling came amid a call for greater transparency in light of the #MeToo movement and as companies from Silicon Valley to Wall Street square off in the courts over these issues.

“I see a direct link now to the #MeToo movement,” said Stephen Hirschfeld, founding partner and co-manager of San Francisco's Hirschfeld Kraemer. “Pay equity is just one of several issues that deal with workplace respect, harassment and promotional opportunities. They are all interrelated. Employers need to think about what this ruling says, what the state laws are indicating and how this perpetuation of income inequality can be stopped.”

Hirschfeld said he already advises clients to not ask about prior salary and to go a step further and conduct pay equity audits. “The more you can do to get ahead, not necessarily just avoid lawsuits, but also to create a fair playing field in the workplace,” he said.

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Companies facing these complex realities are reckoning with the new focus in different ways. Shareholders are calling for more transparency and better training. Some have taken the step to do voluntary pay audits or released pay data. Seyfarth Shaw attorneys, speaking on a webinar this week, said understanding pay discrepancies isn't always clear-cut.

Matthew Gagnon, a Chicago-based Seyfarth Shaw labor partner, said employers should be aware there is a growing sense that the use of prior salary history is not a defense by itself because it would perpetuate the wage discrepancy between men and women.

Class actions were recently cleared to move forward against Google Inc. and another against Goldman Sachs. In the Google case, the court specifically cited the companywide policy of considering previous salary history. The lawyers for the employees—represented by Altshuler Berzon and Lieff Cabraser Heimann & Bernstein—said the court's decision could provide a blueprint for other cases around the country.

“Plaintiffs lawyers are taking notice,” Gagnon said. “Given the prominence of the #MeToo movement, this will certainly continue and increase risk for employers.”

Differences in pay can be explained by factors other than sex, said Camille Olson, an employment partner in Seyfarth's Chicago office and co-chairwoman of the firm's national complex litigation team.

“You have to be able to show your compensation and the factors you are using for differential pay is necessary to hire and retain employees in the job,” Olson said. “That's the concept of business necessity.”

The full practical consequences of the Ninth Circuit's decision won't be known for some time.

Several judges on the Ninth Circuit panel warned, in concurrences, that the ruling could go too far. Judge M. Margaret McKeown charged that the majority's opinion “effectively bars any consideration of prior salary in setting a new salary.”

Companies are concerned about keeping records and adjusting what is a “comparable job” when determining scale, said Megan Winter, a Fisher & Phillips partner in San Diego.

“It has been a common business practice to use prior compensation as one factor. Under the ruling, even using it in conjunction with other factors won't be allowed,” she said. “For multistate employers, it creates a patchwork of obligations and whether they can use it as a factor in hiring.”

Annette Tyman, a Seyfarth Chicago-based employment attorney, said employers need to focus on job descriptions and the actual work being performed being outlined clearly. If a certain title has a wide scope and range of responsibilities, that should be addressed and explained clearly.

“Look at compensation but be proactive within the infrastructure of the company, including promotion policy and how do you set starting salary,” she said. “Those factors are changing and evolving. Always talk about the data gap.”

Measures to Enforce Pay Data Transparency Stall

A measure in California to require large companies to report pay data was vetoed by the governor. It mirrored a federal measure that was scuttled by the Trump administration's budget office before it could take effect. The U.S. Equal Employment Opportunity Commission, however, has said equal pay is a top issue.

This week, in recognizing Equal Pay Day on April 10, current EEOC chairwoman Victoria Lipnic said the agency continues to see pay practices that disregard the concept of equal pay for equal work. She touted that the agency has resolved more than 5,000 charges alleging pay discrimination and recovered $40 million through the administrative process and through litigation in the last two years.

The Ninth Circuit's decision was a major win for gender equality because company policies that ask about salary history essentially “bake in” the tendency to pay women less, said Debra Katz, the veteran civil rights lawyer at Washington's Katz Marshall & Banks.

“Employers don't want to overpay. They want to hire the talented people they want for the least amount of money they can. In asking about prior salary history, they are testing what this person would be willing to work for,” Katz said. “The fact is, if you are considering salary history, you are in effect considering a remnant of discrimination.”