Alert February 12, 2009

New Federal Law Expands Employees’ Entitlement to Sue Over Compensation-Discrimination Issues

On January 29, 2009, President Obama signed the Lilly Ledbetter Fair Pay Act (the “Fair Pay Act” or the “Act”), overturning a 2007 U.S. Supreme Court decision that limited the time frame for bringing federal pay discrimination claims. The Act provides that new charge-filing periods under a variety of federal anti-discrimination laws are triggered whenever an employee is affected by application of a discriminatory compensation decision or practice. Simply stated, the statute of limitations for claims of discrimination in compensation is restarted each time wages, benefits or other compensation resulting from such a decision or practice are paid to an employee.

Background

In Ledbetter v. Goodyear, 550 U.S. 618 (2007), the U.S. Supreme Court strictly construed the statute of limitations for filing EEOC charges under Title VII of the Civil Rights Act of 1964, holding that new violations do not occur each time an employer issues a paycheck to a female employee that is less than what similarly situated male employees receive. Ledbetter worked as an area manager for Goodyear Tire and Rubber Company in Gadsen, Alabama from 1979 to 1998. Although Ledbetter’s salary initially was comparable to those of male colleagues performing similar work, she alleged that the disparities between her salary and theirs grew over the years. Beginning in the early 1980s, the salary for managerial employees, including Ledbetter, was based primarily on a merit system, with each salaried employee having his or her salary reviewed annually. At the end of 1997, as the only female area manager working in Gadsen, she was earning $500 less per month than the lowest-paid male area manager and more than $1,500 per month less than the highest-paid male manager. Ledbetter alleged that multiple supervisors had given her poor evaluations on account of her sex which, because of the merit review system, led to lower compensation than her male colleagues throughout the term of her employment. A jury awarded Ledbetter back pay and damages. The U.S. Court of Appeals for the Eleventh Circuit reversed, holding that she filed her claim with the EEOC too late, because it had not been filed within 180 days of any discriminatory decision.1

On appeal to the Supreme Court, Ledbetter argued that she should be entitled to recover under a “continuing violation” theory. Ledbetter claimed that the discriminatory intent behind the initial decision setting her pay was given present effect each time Goodyear issued her a paycheck. The Court disagreed, finding that Ledbetter’s claims were time-barred because she did not allege any discriminatory intent motivating any pay decision made within the limitations period. The Court held that the statute of limitations for filing a discrimination claim with the EEOC would begin to run when the employer first makes a discriminatory decision about the employee’s compensation and that each separate paycheck is not in and of itself a discriminatory act.2

Shortly after the Supreme Court issued its decision in Ledbetter, Senate and House Democrats voiced their disapproval. Congress found that “[t]he Ledbetter decision undermines [statutory protections against discrimination in compensation] by unduly restricting the time period in which victims of discrimination can challenge and recover for discriminatory compensation decisions or other practices.”  (H.R. 11, S. 181). Accordingly, on January 9, 2009, the U.S. House of Representatives approved the Fair Pay Act and the Paycheck Fairness Act. The two pieces of legislation were combined and sent to the Senate for approval. On January 22, 2009, the Senate approved the Fair Pay Act but did not take action on the Paycheck Fairness portion of the bill.3

The Fair Pay Act

The Fair Pay Act applies not only to compensation discrimination claims based on race, color, religion, sex and national origin under Title VII, but also to such claims based on age, under the Age Discrimination in Employment Act, and disability, under the Americans with Disabilities Act and the Rehabilitation Act. These anti-discrimination laws require that aggrieved employees file charges containing their allegations with the EEOC generally within 300 days of an “unlawful employment practice.” 

The Fair Pay Act redefines when an “unlawful employment practice” is deemed to have occurred with respect to discrimination in compensation. Under the new law, an unlawful employment practice occurs not only “when a discriminatory compensation decision or other practice is adopted” – as was the holding in Ledbetter – but also “when an individual becomes subject to a discriminatory compensation decision or other practice, or when an individual is affected by application of a discriminatory compensation decision or other practice.”  Each time wages, benefits or other compensation are paid in accordance with a discriminatory decision or practice, an unlawful employment practice occurs, triggering anew the statute of limitations period.

The Fair Pay Act specifically retains the rule that back pay liability under Title VII, the ADA and the Rehabilitation Act does not extend beyond the two-year period preceding the filing of the charge.4  The Act does not address temporal limitations on back pay damages for claims under the ADEA, or for compensatory and punitive damages under any of the statutes.

The Fair Pay Act is effective retroactively to May 28, 2007 (the date of the Ledbetter decision). This means that the new law will apply to all claims of discrimination in compensation brought under Title VII, the Age Discrimination in Employment Act, the Americans with Disabilities Act or the Rehabilitation Act that were pending on or after that date.

Practical Impact

The Fair Pay Act makes it easier for employees to file claims of pay discrimination and, in doing so, exposes employers to liability on the basis of compensation decisions made many years ago. Because the timeline for filing a charge of discrimination begins with each new paycheck, it is conceivable that an employee could challenge a compensation determination made when she was first hired or a merit-based salary adjustment from many years ago. This is exactly what happened in Ledbetter, where purportedly discriminatory compensation determinations that were made beginning in the 1980s were not challenged until 1998. The challenge of defending against such claims in many cases will be compounded by faded memories or the departure of managers responsible for the decision in question. Should employees “sit on their rights,” however, and wait several years after an alleged discriminatory compensation determination to file a claim of pay discrimination, nothing in the Act precludes an employer from asserting equitable defenses of waiver, estoppel or the doctrine of laches.

Given the expanded potential liability for pay discrimination claims, employers should take steps to ensure that the reasons for pay decisions are well documented in order to be in a position to explain why certain employees may receive higher or lower salary or benefits from similarly situated co-workers. Employers also should assess their performance evaluation procedures and ensure that supervisors and managers are appropriately conducting and documenting performance reviews that form the basis for compensation determinations.