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Seventh Circuit Determines That Pay Differential Based Upon Wage History Is Permissible Under the Equal Pay Act

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The Employment and Labor Law Alert

December 20, 2005

The Seventh Circuit Court of Appeals has concluded that a pay differential between male and female employees based upon wage history does not violate the Equal Pay Act, 29 U.S.C. § 206(d) (“EPA”). In Wernsing v. Ill. Dept. of Human Services, 427 F.3d 466 (7th Cir. 2005), the court held that so long as sex is not a factor in determining salaries, there is no EPA violation in considering the employee’s wage history. The court refused to look at the legitimacy of the employer’s stated reason for the practice. According to the Court, like Title VII and other anti-discrimination laws, the EPA does not permit a court to assess the reasonableness of the employer’s stated business purpose. Rather, the burden rests with the employee to show that the stated reason is really a pretext for discrimination.

The employer in this case, the Illinois Department of Human Services, had a practice of giving lateral employees a salary that was at least equal to what they had been earning with their prior employer. Wernsing was hired as an Internal Security Investigator II in 1998. The job had a salary range that was based upon prior experience and years of service. Her starting salary was $2,478 monthly, 30% more than she was making in her prior position as a Special Agent with the Southern Illinois Enforcement Group. A male employee who was hired at the same time as Wernsing received a monthly salary of $3,739, 10% more than he was earning in his prior position. Although they did the same work, Wernsing and the male employee were paid substantially different salaries. Wernsing argued that the practice discriminates against women because it perpetuates the historic wage gap between men and women.

The EPA prohibits an employer from discriminating against employees on the basis of sex by paying wages to one employee that are substantially less than those paid to the employee of the opposite sex for “equal work on jobs the performance of which requires equal skill, effort and responsibility, and which are performed under similar working conditions.” However, section 206(d)(1)(vi) permits wage differentials ” based on any other factor other than sex.” While Wernsing argued that the practice used by the Department of Human Services to determine salaries was discriminatory, the District Court for the Central District of Illinois determined that wages at one’s prior employer are a “factor other than sex.”

The Seventh Circuit agreed, holding that the EPA does not authorize the federal courts to pass judgment on the acceptability of the business reason offered. So long as the employer does not base its decision or apply its practice based upon sex, the court would not consider whether the employer’s stated reason was a “good” reason. The court reasoned that under other statutes, such as Title VII and other anti-discrimination statutes, the employer need only demonstrate that it had a legitimate business reason for its actions that avoids the prohibited grounds, such as gender or race. The burden then shifts to the employee to demonstrate that the stated reason was pretextual. Relying on its decision in Pollard v. Rea Magnet Wire Co., 824 F.2d 557, 560-2 (7th Cir. 1987), the Wernsing court noted that “a district court does not sit in a court of industrial relations. No matter how medieval a firm’s practices, no matter how high-handed its decisional process, no matter how mistaken the firm’s managers, [the anti-discrimination statues] do not interfere.”

In this regard, the Seventh Circuit (joined by the Eighth Circuit) is in the minority of circuit courts on this issue. The Seventh Circuit acknowledged cases from four other circuit courts, the Second, Sixth, Ninth and Eleventh, holding that the “factor other than sex” defense is available only if the employer has an “acceptable business reason” supporting the criteria on which compensation is based. But the Seventh Circuit rejected the reasoning advanced by these courts as exemplified in the Ninth Circuit’s decision in Kouba v. Allstate Insurance Co., 691 F.2d 873 (9th Cir. 1982). The Kouba court applied a disparate impact analysis under the EPA and determined that if the plaintiff can show that an employment practice has a disparate impact on a protected group, then the employer must provide a strong reason for the practice. The Seventh Circuit determined that the EPA only encompasses disparate treatment, not disparate impact, claims. For this reason, EPA claims should be analyzed under the burden-shifting framework appropriate for disparate treatment claims. Thus the employer need only cite to a sex-neutral factor that was used to determine compensation, leaving the employee with the burden of proving that the use of that factor was merely a pretext to discriminate.

The Wernsing court also rejected the argument that “because women earn less than men from private employment, all market wages must be discriminatory and therefore must be ignored when setting salaries.” The court acknowledged historic differences in pay among men and women, but attributed those differences to factors like experience. According to the court, “[t]hat many women spend more years in child-rearing than do men thus implies that women’s market wages will be lower on average, but such a different does not show discrimination.” In this case, there was no evidence that the Department of Human Services was perpetuating discrimination in compensation based on sex by prior employers, although the court acknowledged that such evidence might establish a violation of the EPA.

Thus the Wernsing court affirmed summary judgment in favor of the Department of Human Services without making any inquiry into whether the Department had a good business reason for using salary at one’s former job as a factor in setting compensation. In this regard, it should be noted that the courts which have held that a good business reason is required to support a “factor other than sex” defense, would not necessarily reach a different result. Presumably, these courts would uphold pay differentials upon a showing that good business reasons supported paying employees differently based on their compensation at their prior employment.