On December 3, 2021, the U.S. Court of Appeals for the Fourth Circuit rejected the notion that under the federal Equal Pay Act (EPA), equality should be assessed based on total compensation, holding instead that equality must be satisfied regarding each component of compensation.  Sempowich v. Tactile Sys. Tech., Inc., No. 20-2245, 2021 WL 5750450 (4th Cir. Dec. 3, 2021). The Fourth Circuit hears appeals from the nine federal district courts in Maryland, Virginia, West Virginia, North Carolina, and South Carolina. This case has significant implications for how employers in the Fourth Circuit structure compensation.

The Federal Equal Pay Act

The EPA prohibits employers from discriminating “between employees on the basis of sex by paying wages to employees … at a rate less than the rate at which [it] pays wages to employees of the opposite sex” for jobs requiring equal skill, effort, and responsibility, performed under similar working conditions.  In other words, to prove a prima facie case under the EPA, an individual must show:  (1) the employer paid higher wages to an employee of the opposite sex of plaintiff; (2) plaintiff and the comparator employee performed work that required equal skill, effort, and responsibilities; and (3) plaintiff and comparator employee performed that work under similar working conditions in the same establishment.  The initial showing permits an inference that a pay disparity exists on the basis of sex. 

The EPA provides the following exceptions to the general prohibition, which are affirmative defenses to liability: the pay differential is based on (i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production; or (iv) any other factor other than sex. 

Factual and Procedural Background Regarding Sempowich’s Equal Pay Claim

In Sempowich, the issue on appeal regarding the EPA claim turned on the appropriate metric for assessing wage discrimination under the EPA.  The plaintiff argued the proper metric is the rate at which an employer pays an individual, while the employer argued that the proper metric is the employee’s total wages. 

The employer, a medical device company, hired the plaintiff to work as a product specialist.  Several years later, it promoted her to be the regional sales manager for the mid-Atlantic region.  That same year, the employer hired a male regional sales manager for the southern region.  In granting summary judgment, the lower court assumed without deciding that the male sales manager was an appropriate comparator for purposes of the EPA claim and, accordingly, that the plaintiff satisfied the second and third prongs of her prima facie case.¹ 

There were few, if any, material facts in dispute.  The plaintiff earned more than her male comparator in total compensation, measured as base salary plus incentive compensation.  However, she contended that incentive compensation should be ignored when comparing her wages to those of her comparator.  The lower court applied the Equal Employment Opportunity Commission’s (EEOC) comprehensive definition of “wages”² to the EPA claim and granted summary judgment in favor of the employer. The plaintiff appealed.

The Fourth Circuit’s Ruling & Analysis

The Fourth Circuit vacated and remanded the ruling on the plaintiff’s EPA claim, holding that the lower court applied an incorrect legal standard for determining “wages” under the first prong of a prima facia case.  First, the Fourth Circuit reasoned that the EEOC’s interpretation of “wages” under the statute is unnecessary because the plain language of the EPA makes no reference to “total wages,” but does refer to wage “rates”:  “The text of the Equal Pay Act unambiguously states that an employer may not ‘discriminate … between employees on the basis of sex by paying wages to employees ... at a rate less than the rate at which he pays wages to employees of the opposite sex.’”³

Second, the Fourth Circuit held that the district court misinterpreted the EEOC’s definition of “wages” under 29 C.F.R. §1620.10 to include commissions.  The Fourth Circuit held that although “wages” includes commissions, “just as with salary, an employer could not pay commissions to a female employee at a lower rate than a similarly situated male employee [but] [t]his does not mean that all types of remuneration should be combined into one lump sum when comparing earnings of a male and female employee.” 

Third, the Fourth Circuit noted that the EEOC’s regulations imply the same conclusion because, under 29 C.F.R. §1620.19, “an employer would be prohibited from paying higher hourly rates to all employees of one sex and then attempting to equalize the differential by periodically paying employees of the opposite sex a bonus.”  The Fourth Circuit extrapolated that, under this logic, an employer would be prohibited from paying a female employee a lower salary than a similarly situated male employee and then avoid liability if the female employee works hard enough to equalize the difference through commissions or bonuses. 

Implications of Fourth Circuit Ruling

Employers in the Fourth Circuit should ensure parity in each component of pay between similarly situated male and female employees performing similar work, unless the discrepancy (if any) can be explained by one of the EPA’s four affirmative defenses. Merely equalizing total compensation between genders may no longer be sufficient to prevent an EPA claim if inequities exist regarding particular components of pay.  Employers that distribute bonuses or equity as a means of closing or “remediating” inequities in base pay may be vulnerable to lawsuits for both the initial inequity in base pay, as well as the subsequent inequity in the compensatory component.

It remains to be seen whether Sempowich will be followed outside the Fourth Circuit.  Indeed, the majority of lower courts in other jurisdictions that have weighed in on the issue have applied the total compensation metric when comparing compensation under the EPA.⁴  However, Sempowich now is the law of the Fourth Circuit, and until there is definitive guidance from other circuits, employers elsewhere are advised to consider Sempowich’s ruling in assessing their own compensation-setting practices.  An employer may wish to consider whether it pays men and women equally both in terms of each component of compensation and with respect to total compensation.