Anything Goes, “Except for Sex”! Says the Second Circuit on Factors that Can Explain Pay Differences by Sex
On October 17, 2023, the 2nd Circuit of the Federal Court of Appeals made one of the most important decisions about pay discrimination since the Equal Pay Act was signed in 1963, the Eisenhauer V. Culinary Institute Of America decision (Decision), because it re-defined the factors that can explain pay differences among groups. The three justices were unanimous in the Decision, but divided 2 to 1 on the reason. The reasoning by the majority held that employers may use “any factor except for sex”[21] to explain compensation differences between men and women under the Federal Equal Pay Act (EPA). The Chief Justice’s separate opinion disagreed with the majority on this point. If not negated later by the Supreme Court, the majority argument is an important change that has far-reaching implications for anyone setting or analyzing compensation for regulatory or litigation purposes. It also highlights the important role of compensation in aligning employee incentives with employer/corporate goals.
First, the Decision expands the types of factors employers[22] can use to set and justify compensation, in the 2nd Circuit, to include those with no business justification, as long as those factors are not a “pretext for gender.”[23] To the extent that a “pretext for gender” is not well defined, this decision also adds some ambiguity to the factors that are allowable, even as it expands them.
Second, the Decision puts the Federal EPA law, as read by the 2nd Circuit, at odds with both the same law as interpreted by the Federal Circuits covering other states and the state laws of the 2nd Circuit’s largest state, New York. This divergence in interpretation and laws creates a significant complexity that HR managers and attorneys (Compensation Professionals) must navigate when dealing with employee populations that span both 2nd Circuit states (Connecticut, New York, Vermont) and the rest of the USA, and potentially across the divergent requirements of state and Federal law within 2nd Circuit states.
In addition, further thought about this ruling raises the important fact that paying employees based on factors that are unrelated to their job and productivity for the employer is economically inefficient, whether legal or not. This holds whether the pay differs across protected versus “advantaged” groups or within demographic groups, due to non-job related factors.
Given these new complexities, what is a Compensation Professional to do? How do Compensation Professionals create an overall strategy to set compensation that avoids the conflicting interpretations of the EPA across Circuits and within states when the interpretation of the states’ laws and federal laws are now conflicting, according to the 2nd Circuit?
In the end, to avoid the additional risks created by 2nd Circuit ruling, Compensation Professionals can go “Old School” and set compensation based on job-related factors, as allowed across the Federal Circuits. We discuss the issues raised by the Decision and their implications in further depth below.
Additional Explanatory Factors Allowed in the 2nd Circuit
The 2nd Circuit ruling provides employers with a wide range of additional factors that can be used in setting pay and in pay discrimination claims brought under the EPA. While Eisenhauer involved a collective bargaining agreement (CBA) that the Court viewed as the “non-business-related factor,” the 2nd Circuit expanded the definition of allowable factors to “any factor except for sex.”[24] The 2nd Circuit did rule out factors that are simply “pretext for sex-based pay discrimination….”[25] Depending on the definition of a “pretext for sex,” this leaves a broad range of factors that employers can use to explain sex-based pay differentials in EPA claims. There is no statement in the Decision that these factors must be documented prior to a dispute. Therefore these explanatory factors could be developed as justification for gender compensation differences after a dispute has arisen.
The 2nd Circuit emphasized the importance of reading the EPA based on its “plain meaning.”[26] Following this admonition in reading the 2nd Circuit’s Decision, “any other factor” except for sex might include a diversity of other factors, such as whether an employee participates in sports of any sort,[27] or perhaps scores high on some cognitive test of general intelligence, like the math portion of the SAT, even for non-math related jobs. Based on the “plain meaning” of the words in the Decision, an employer could base pay on, and defend against an EPA pay discrimination claim, based on the color of the cars that employees drive. The 2nd Circuit ruling clearly expands the range of allowable factors short of those that are a “pretext for sex.”[28],[29] The Court did not provide a detailed definition of a “pretext for sex,” but the examples provided[30] appear to relate to factors that the employee cannot change, as opposed to factors that may be associated/correlated with a demographic group, but which the employee could alter. However, the Court has left this important definition ambiguous. For example, could factors that tend to be associated with gender, but which are individual choices, be used as an explanatory factor – consider knitting. As an alternative, could factors that are not uniquely related to gender, but which are not changeable by the employee, be valid 2nd Circuit explanatory factors – consider height of employee accountants, which is loosely associated with gender (while men tend to be taller than women, some women are taller than some men). Would this be a valid 2nd Circuit factor for explaining pay differences by gender? At present, only the two justices on the 2nd Circuit know the answer.
Conflicting Definition of Allowable Explanatory Factors Across Circuits and State Laws
Conflicting Rulings
As the 2nd Circuit decision states, the Eisenhauer definition of allowable factors is in conflict with “many of our sister circuits.”[31] This inconsistency across the Federal Circuits means that employers face different requirements for the factors that may be used to determine an employee’s pay, depending on the state in which the employee works, even under Federal EPA law. Furthermore, the pay practices of a multistate company facing a national EPA claim could be found legally justified if heard in the 2nd Circuit, but illegal if heard in the 6th, 7th, 10th or 11th Circuits.
Different Wording of Similar Laws
New York law, even according to the 2nd Circuit Eisenhauer decision, remains more restrictive, allowing only job-related factors, because the New York State statute uses the explicit words “job-related.”[32] This of course adds further complexity for Compensation Professionals because the determination of which explanatory factors are allowable in a pay equity analysis will depend on which court is hearing the case – the 2nd Circuit versus other Federal circuits, and which laws the case is likely to be brought under, e.g., EPA versus state law such as New York.. What is a Compensation Professional to do? We turn to the answer next.
Compensating Workers for Non-Job-Related Factors – It’s Just Bad Business
While the 2nd Circuit says “any factor other than sex” can be used to explain differences in compensation across gender[33] that does not mean it is good business to do so. These non-job-related factors of an employee, by definition, do not contribute to the productivity or output of the employer/company. If an explanatory variable provides a company benefit then it is “job-related” and could be included in a compensation analysis under state (NY) or Federal EPA law, and before courts in the 2nd or others Circuits. Some of these factors may be somewhat less tangible, such as “working well with colleagues,” but to the extent that they provide a benefit to the company they would be considered economically job-related.
However, allowing “any factor other than sex”[34] as an explanation also covers factors that provide no benefit to the company – such as an employee’s favorite color, interest in knitting, ability to lift heavy weight (even in an office job), height above average (even if gender-specific), ability to read (even if job requires no reading).[35] If the employer uses any non-job-related factors in setting pay, the employer is paying too much to some employees and too little to others for the same contribution to the company. This is simply economically inefficient and bad HR management. Rewarding or penalizing any provider of an input for a characteristic unrelated to productivity, whether an employee or a vendor, is obviously not efficient, and Compensation Professionals with the goal of enhancing the economic performance of the company should avoid it.[36]
To the extent that any of these non-job-related factors tend to be associated with gender, the practice of compensating employees for these non-job-related factors will also create a gender pay disparity that, while explainable in the 2nd Circuit Federal, would not be explainable in other Federal Circuits or under New York State law, which prohibit the use of non-job-related explanatory factors.
In addition to these non-job related factors being economically inefficient, they can be confusing and demoralizing to the workforce, and lead to wasteful behavior among employees as they attempt to acquire or shed non-job-related characteristics used in setting pay to increase their compensation. All of this leads to the fact that just because the 2nd Circuit says you can use non-business-related factors, it doesn’t mean you should.
However, if during your compensation research prompted by an EPA claim, you discover that a propensity toward some non-business-related factor, say skillful knitting,[37] has crept into your compensation structure, the plain words of the 2nd Circuit say they will credit you with the power it provides in explaining the difference in compensation by sex at your company.
What Is A Compensation Professional To Do? It Is Less Confusing Than It First Appears.
With all these differing laws, jurisdictions and reasons for using different types of explanatory factors in establishing compensation structures, what can a Compensation Professional do to create a legal, systematic and efficient compensation structure for a company, particularly if it has employees in multiple states? The answer is simpler than you might think; Build your compensation structures exclusively on explanatory factors that are job-related. Across all these laws and the court jurisdictions in the United States, using explanatory factors that are job-related is allowable. In addition, using job-related factors creates an incentive structure that is consistent with the interest of the company, incentivizing employees to work and act in ways consistent with the company’s broadly defined economic interests.
Creating a compensation structure based on job-related factors can take time. The factors may include current productivity, employee characteristics, such as skills, certifications, education, tenure, department metrics, such as group revenue or productivity achievements, public service that enhances the reputation of the employer, and general economic factors, among many others. These structures may not reflect every dimension of each employee’s contribution to the company, but as long as they reflect important factors to the company’s productivity goals broadly defined, they can contribute to the legal justification across laws and court jurisdictions for employee compensation, and will reduce the potential for gender pay inequity to appear in statistical analysis of compensation where discrimination does not exist. Gender pay disparity observed in statistical tests of compensation based on your compensation structure could still arise if gender pay inequity is already embedded in the company’s pay structure, but statistical tests using job-based factors will help you focus on potential areas for remedial action.
The use of non-business-related factors, in contrast, poses a thicket of potential problems in setting a compensation structure. First, as discussed above, non-business-related factors are not allowed in certain jurisdictions and under some laws. Second, even within the 2nd Circuit, a factor that is “pretext for sex” is not allowed as a non-business-related factor.
To add another log to this fire, explanatory factors, whether business-related or not, may have the potential to “reveal” pay inequity where there is no raw gender pay inequity. Will plaintiffs be allowed to introduce non-business-related factors to demonstrate a gender pay inequity, after the fact, whether intended by the employer or not?[38] For example, perhaps when controlling for each employee’s favorite sports team, it is revealed that women are paid less than men. The “plain meaning” of the 2nd Circuit’s words would allow such a factor as an explanation in a sex pay discrimination case. Will plaintiffs be allowed to use them as well? An explanation of the employer’s logic for compensating employees on such a factor was not called for in the Decision.
Overall, however, although the 2nd Circuit says almost “any factor other than sex” goes, greater restraint will probably serve best in the long-run. Business-related factors have the broad acceptance and economic benefits that non-business-related factors lack.
Alternatively, if you’re already in an EPA litigation before the 2nd Circuit you can consider the use of “any factor other than sex.” The 2nd Circuit says it will give it all due consideration and, in the opinions of some, even more.
[21] EISENHAUER V. CULINARY INSTITUTE OF AMERICA, (No. 21-2919-cv), United States Court of Appeals for The Second Circuit, P. 33.
[22] The Decision may also provide the possibility that employees may use this broader set of factors as plaintiffs in a case, since non-business-related factors included in pay analysis may, in some situations, reveal pay discrimination instead of eliminate it.
[23] EISENHAUER V. CULINARY INSTITUTE OF AMERICA, (No. 21-2919-cv), United States Court of Appeals for The Second Circuit, P.16, n.48.
[24] EISENHAUER V. CULINARY INSTITUTE OF AMERICA, (No. 21-2919-cv), United States Court of Appeals for The Second Circuit, P.33.
[25] EISENHAUER V. CULINARY INSTITUTE OF AMERICA, (No. 21-2919-cv), United States Court of Appeals for The Second Circuit, P.16, n. 48.
[26] EISENHAUER V. CULINARY INSTITUTE OF AMERICA, (No. 21-2919-cv), United States Court of Appeals for The Second Circuit, P.17.
[27] Men have about a 10 percent higher participation rate in sports than women: 21.2% for men versus 19.1% for women.
[28] The 2nd Circuits examples of pretexts for sex are explicitly connected to sex, such as a CBA that has explicit pay differential by gender and factors that the employee has stated are based on sex, such as different costs of employment for women versus men. See EISENHAUER V. CULINARY INSTITUTE OF AMERICA, (No. 21-2919-cv), United States Court of Appeals for The Second Circuit, P.16, n.48.
[29] As an empirical matter for a factor to provide a reason for gender pay discrimination that factor must have a mathematical correlation with gender and compensation. This does leave open what the 2nd Circuit defines as a “pretext for sex.” Perhaps it is another factor which is universally associated with sex, as opposed to one that happens to be associated with gender at some probability less than almost universal.
[30] EISENHAUER V. CULINARY INSTITUTE OF AMERICA, (No. 21-2919-cv), United States Court of Appeals for The Second Circuit, P.16, n.48.
[31] The majority opinion of the 2nd Circuit notes cases where the 6th, 7th, 10th and 11th Circuits have explicitly ruled only business- or job-related factors are allowable as explanatory factors in EPA pay discrimination cases. See EISENHAUER V. CULINARY INSTITUTE OF AMERICA, (No. 21-2919-cv), United States Court of Appeals for The Second Circuit, P.14, n. 32: See also the Separate Opinion of Chief Justice Livingston, EISENHAUER V. CULINARY INSTITUTE OF AMERICA, (No. 21-2919-cv), United States Court of Appeals for The Second Circuit.
[32] (N.Y. Lab. Law § 194(1)(b)(iv)(B)).
[33] EISENHAUER V. CULINARY INSTITUTE OF AMERICA, (No. 21-2919-cv), United States Court of Appeals for The Second Circuit, P.2.
[34] EISENHAUER V. CULINARY INSTITUTE OF AMERICA, (No. 21-2919-cv), United States Court of Appeals for The Second Circuit, P.2.
[35] See for example Griggs v. Duke Power Co.,401, US 424 (197), P. 1. . “Negro employees at respondent’s generating plant brought this action, pursuant to Title VII of the Civil Rights Act of 1964, challenging respondent’s requirement of a high school diploma or passing of intelligence tests as a condition of employment in or transfer to jobs at the plant. These requirements were not directed at or intended to measure ability to learn to perform a particular job or category of jobs.”
[36] The definition of factors influencing economic performance is a very broad one. Employing or associating with individuals that perform illegal or immoral acts outside the performance of the business transaction may well have a negative impact on economic performance of a company.
[37] Knitting sources indicate that 84% of knitters are women. Since less than 100% of knitters are women, this statistic can be used as evidence that may fend off claims that knitting is a “pretext for sex.” https://knitlikegranny.com/knitting-statistics/ . Ryan Gosling knits. See https://www.esquire.com/entertainment/a18076/ryan-gosling-knit-14981882/.
[38] “Aldrich’s underlying suggestion is that we should interpret “factor other than sex” so as to guard against pay disparities intentionally or unintentionally based on sex.” See EISENHAUER V. CULINARY INSTITUTE OF AMERICA, (No. 21-2919-cv), United States Court of Appeals for The Second Circuit, P. 13.