In an effort to combat pay equity issues, California has established rules about pay disclosures in the last few years, including prohibiting employers from asking applicants their salary history, requiring employers to disclose a position’s pay scale upon request from applicants who interviewed for a position, and requiring certain employers to report pay data to the state. Beginning on January 1, 2023, California takes these efforts even further with a new pay transparency law, SB 1162, which amends Section 12999 of the California Government Code and Section 432.3 of the California Labor Code[i]. This article outlines key aspects of SB 1162 and provides practical steps that employers should take now to ensure compliance.
EXPANDED ANNUAL PAY DATA REPORTING
Before SB 1162, employers with 100 or more direct employees were required to file an annual report with the State of California setting forth, for the prior calendar year (“Reporting Year”), their employees by race, ethnicity and gender in 10 job categories by pay band. SB 1162 has revised employer reporting obligations in a number or respects, including: (i) expanding the scope of employers covered by the law; (ii) eliminating the ability for covered employers to comply by submitting their EEO-1 report; (iii) adding a new category of information that must be disclosed each Reporting Year; (iv) eliminating the requirement for covered employers with separate “establishments” to file a consolidated report of their establishments; and (v) authorizing penalties for non-compliance with the law.
Expanded Definition Of A Covered Employer
In addition to employers with 100 or more direct employees, SB 1162 now also requires employers who obtain 100 or more workers through labor contractors (“an individual or entity that supplies…a client employer with workers to perform labor within the client employer’s usual course of business”) (“Labor Contractor Employers”) to file a separate report about those contract workers, separately reporting the categories of information discussed below.
SB 1162 also additionally requires Labor Contractor Employers to report the names of all labor contractors used to supply workers and specifies that labor contractors must supply all necessary worker and pay data to the employer for reporting.
Expanded Categories Of Information That Must Be Reported
Significantly, in a change from prior law, SB 1162 states that employers cannot satisfy the state’s reporting requirements by simply submitting a copy of the employer’s EEO-1 Report. Instead, for each Reporting Year, annual pay data reports for covered employers will now need to include the following:
- Job Categories: The number of employees by race, ethnicity, and sex in each of the following 10 job categories: (i) executive or senior level officials and managers; (ii) first or mid-level officials and managers; (iii) professionals; (iv) technicians; (v) sales workers; (vi) administrative support workers; (vii) craft workers; (viii) operatives; (ix) laborers and helpers; and (x) service workers. To capture this data, the employer creates a “snapshot” that counts all individuals in each job category by race, ethnicity, and sex employed during a single pay period between October 1 and December 31 in the Reporting Year (“Snapshot”).
- Pay Bands: The number of employees by race, ethnicity, and sex whose annual earnings fall within each of the pay bands used by the US Bureau of Labor Statistics in the Occupational Employment Statistics survey. To capture this data, the employer creates a Snapshot which reports the number of employees whose W-2 earnings during the Reporting Year fell within each pay band. In prior reporting years, the California Civil Rights Department (“CRD”), with whom these reports are filed, provided applicable pay bands on its website, a practice that is expected to continue going forward.
- Hourly Rates: Median and mean hourly rate within each job category above, for each combination of race, ethnicity, and sex. To obtain median and mean hourly rates by job category, employers must use the total W-2 earnings for each employee in the Snapshot for the entire Reporting Year, regardless of whether the included employee worked for the full calendar year. SB 1162 is unclear about what combinations must be included – e.g., each racial group plus each combination of race and sex (e.g., the mean and median hourly rate for Black men as well as for Black women, etc.).
- Hours Worked: Total number of hours worked by each employee counted in each pay band during the Reporting Year.
Separate Reports Must Be Filed For Each “Establishment”
Employers with multiple establishments must submit a report covering each establishment; “establishment” means an economic unit producing goods or services. This would apply, for example, to a company that owns and operates several retail locations doing business under the same name. SB 1162 eliminates the language requiring employers with more than one establishment to also file a consolidated report that includes all employees. However, it is not clear whether the new provisions will allow for filing one report that lists all of the employer’s establishments separately.
Additional Details Regarding Compliance And Penalties
Pay data reports are to be filed with the CRD and are due on or before the second Wednesday of May each year; in 2023, the deadline is May 10. Employers must provide their pay data report in a format that allows CRD to search and sort the information using readily available software. The data in these reports will be used by the CRD to identify employers who may have race, ethnicity, or gender pay disparities and to investigate and take enforcement action where needed.
In terms of enforcement, SB 1162 authorizes the CRD to seek civil penalties in court from employers who fail to timely submit the required pay data, of up to $100 per employee for an initial failure, and up to $200 per employee for any subsequent failure.
Preparing For Pay Data Reporting
For the required annual pay data reports to the CRD, employers should:
- Ensure their payroll and/or HR team is aware of the reporting requirements and designate who is responsible for compiling and submitting the required report(s).
- Confirm that the required data can be timely gathered from the appropriate system(s).
- Become familiar with the CRD’s website and reporting portal, which includes a user guide, templates, and list of FAQs.[ii] The CRD website and portal are not yet updated for the 2023 Reporting Year, so employers should be on the lookout for updates and additional guidance.
- Review their labor contractor relationships. Employers who obtain 100 or more workers from labor contractors in 2022 should begin to work with their labor contractors to decide how and when the labor contractors will provide the data needed to prepare their separate pay data reports on such workers.
EXPANDED PAY SCALE DISCLOSURES AND WAGE HISTORY PROHIBITIONS
Current California Law Prohibits Wage History Inquiries
Under current California law, employers cannot rely on salary history as a factor in determining whether to make job offers or what pay to offer an applicant. Employers are also prohibited from seeking pay history information, including compensation and benefits, about an applicant for employment, but may inquire about salary/wage expectations. If an applicant voluntarily and without prompting discloses pay history information, employers are not prohibited from considering or relying on that information in determining pay for that applicant.
New Pay Scale Disclosure and Data Retention Obligations
SB 1162 requires all California employers to disclose pay scales to applicants and current employees, and maintain certain pay data. “Pay scale” under SB 1162 means the salary or hourly wage scale the employer reasonably expects to pay for the position. Under these new requirements all employers must:
- Upon reasonable request, provide the pay scale for a position to an applicant applying for employment. Based on prior regulations, “reasonable request” is defined to be a request made after an applicant has completed an initial interview with the employer.
- Upon request, provide a current employee the pay scale for the position in which the employee is employed.
- Maintain records of job title and wage rate history for each employee for the duration of employment plus three years after the end of employment. These records are open to inspection by the Labor Commissioner.
Finally, in addition to the above, employers with 15 or more employees must include the pay scale for a position in any job posting, including any job posting the employer engages a third party to post, publish or otherwise make known.
One potentially open issue is whether the pay scale disclosure provisions cover positions performed outside of California. Although it seems unlikely that SB 1162 will require pay scale disclosures for positions performed entirely outside of California, because remote work has increasingly blurred geographic boundary lines, employers should be prepared in case the pay scale disclosure requirement is found to apply to out-of-state positions that can, even just in theory, be performed in California. Another potential issue is whether the definition of “pay scale” includes other types of compensation, such as bonuses or equity grants. Although the answer appears to be no, these other forms of compensation can be considered for equal pay purposes and should be on an employer’s radar.
SB 1162 authorizes the Labor Commissioner to investigate alleged violations of the disclosure requirements and to impose civil penalties of between $100 and $10,000 per violation. It also authorizes any person aggrieved by a violation of the disclosure requirements to file a civil suit for injunctive relief.
Preparing For Pay Scale Disclosures
The first step in preparing for pay scale disclosures is establishing and maintaining pay scales. If an employer does not already have a documented pay scale for each position in the organization, now is the time to prepare them. This should be approached as a coordinated effort with the organization’s compensation and/or HR professionals who can assist with a proactive pay audit that organizes data and reviews current pay practices for potential discrepancies, especially those that could implicate race, ethnicity, and/or sex discrimination.
Employers should remember that not all job titles across departments or the company are equal. A pay audit should assess the content of each job (not the people in them) to show each position’s relative worth and level of responsibility. This could include assessing the education, skills and/or experience required for a particular position versus one with the same title but which requires less education, skill and/or experience and has less responsibility. This may require that more pay scales be established than expected.
To ensure the employer remains competitive, conduct market research to ensure that wages paid to employees are comparable to similar positions in the marketplace. Then, create pay scales based on the research and analysis. This typically involves establishing a minimum, midpoint and maximum per scale to accommodate wage growth in position.
To maintain accurate pay scale data, establish internal processes and procedures for pay changes. Determine who can approve raises or pay increases based on promotions or transfers, who is responsible for checking against the established pay scale, and who needs to be notified of any changes or outliers. Employers should check whether their payroll, Human Resource Information System (HRIS), or Human Capital Management System (HCM) providers may be able to assist with these procedures. Also, employers should determine the appropriate interval to review and adjust and/or update pay scales.
Once pay scales are in place, in order to ensure the accuracy of pay scale disclosures, employers are encouraged to take the following steps:
- Communicate with managers and supervisors about the new pay scale disclosure requirements for job applicants and current employees. Train them how to respond to requests for pay scales.
- Designate who will disclose pay scales and how the information will be communicated, ideally in writing, so data and practices remain accurate and consistent. Consider establishing a process in which all disclosures will come from one source within the company.
- Update recruiting procedures to ensure that current and accurate pay scales are included in job postings, including those posted by third-party recruiters.
- Confirm that systems are in place to maintain job title and wage rate history during employment and for three years thereafter. Most systems for payroll, HRIS, and/or HCM can maintain the required records regarding titles and pay history, but may not do so automatically. Employers should review their systems to ensure they meet data retention requirements and to determine how to report on the information should a Labor Commissioner inspection be required.
With the adoption of SB 1162, California’s efforts to combat pay equity issues mean that employers must now comply with an extensive pay reporting scheme that is among the most complex and detailed in the nation. Employers are advised to take action now to ensure that they are prepared to comply by the January 1, 2023 effective date.