California Slated to Usher in New Era of Pay Transparency in 2023: What California Employers Need to Know

On September 27, 2022, Governor Newsom signed SB 1162 (the “Act”) into law, which aligns California with a growing national trend mandating pay transparency in the workplace. The Act will impose new requirements on many California employers around pay data reporting and salary disclosures effective January 1, 2023. In this post, we will discuss current California law on pay data reporting and disclosures, how the Act changes and adds to those requirements, and what steps California employers should take now to prepare for the Act’s implementation.

Current California Law: Pay Data Reporting, Pay Scale Disclosure, and Use of Salary Information

Reporting Requirements. California employers with 100 or more employees (except those who are specifically exempted, such as institutions of higher learning) are already required to file an annual Employer Information Report (EEO-1) under federal law and to submit pay data reports to the California Civil Rights Division (CRD) (formerly the Department of Fair Employment and Housing) covering the prior calendar year. Under the current law, those pay data reports, among other things, must include:

• The number of employees by race, ethnicity, and sex in each of the following job categories: executive or senior level officials and managers; first or mid-level officials and managers; professionals; technicians; sales workers; administrative support workers; craft workers; operatives; laborers and helpers; and service workers;
• The number of employees by race, ethnicity, and sex, whose annual earnings fall within each of the pay bands used by the United States Bureau of Labor Statistics in the Occupational Employment Statistics survey;
• The total number of hours worked by each employee counted in each pay band during the reporting year;
• The employer’s North American Industry Classification System (NAICS) code; and
• A section providing clarifying remarks on any of the information provided (though clarifying remarks are not mandatory).

If a covered employer fails to submit a compliant report, the CRD may seek an order requiring compliance with these requirements and recover costs for doing so.

Pay Scale Disclosure. After an initial interview of an applicant and upon a “reasonable request,” all California employers must provide the pay scale (a salary or hourly range) for the position for which the applicant interviewed.

Salary History Information. Current law also restricts all California employers from using a job applicant’s salary history for specific purposes. An employer cannot:

• decide whether to hire an applicant based on salary history information;
• decide what salary to offer an applicant based on salary history information; or
• seek salary history information (including compensation and benefits) about an applicant.

However, if an applicant voluntarily and without prompting discloses salary history information to the prospective employer, an employer may consider or rely on that information to determine the salary for that applicant.

How SB 1162 Impacts Current California Law

Pay Data Reporting under the Act. The Act expands pay data reporting to all California employers with 100 or more employees regardless of whether or not they are exempted from the EEO-1 filing requirement. The Act also significantly expands the types of pay information employers must report each year. The first deadline to report is the second Wednesday of May 2023 (May 10, 2023). Covered employers must now also provide the “median and mean hourly rate” within each job category (discussed above), for each combination of race, ethnicity, and sex.

Along with the expansion of coverage and scope of pay data reporting, the Act will require some employers who use “labor contractors” to submit a separate report. A “labor contractor” is not an independent contractor (an increasingly rare permissible classification under California law), but rather refers to an individual or entity that supplies an employer with workers to perform labor within the client employer’s usual course of business (such as a staffing company). A California employer with 100 or more employees hired through “labor contractors” within the prior calendar year must submit a separate pay data report to the CRD covering the employees hired through labor contractors in the prior calendar year. This separate report must include ownership names of all labor contractors used to supply employees. The statute also requires labor contractors to supply all necessary pay data to the client employers.

Under the Act, a failure to supply the necessary data may now trigger civil penalties. On request by the CRD, a court may impose a civil penalty of no more than $100 per employee on any employer who fails to file the required report and no more than $200 per employee on any employer for a subsequent failure.

Pay Scale Disclosure under the Act. In addition to the new pay data reporting requirements, the Act creates a host of new pay scale disclosure requirements. These new requirements include:

• Providing an employee (who makes a request) the pay scale for the employee’s current position. The statute defines “pay scale” as the salary or hourly wage range that the employer reasonably expects to pay for the position;
• For an employer with 15 or more employees, providing the pay scale for a position in any job posting. If the employer uses a third party to publish job postings, the employer must provide the pay scale to the third party who must include the pay scale in the job posting; and
• Maintaining records of a job title and wage rate history for each employee during the employment plus three years after the employment ends. The records maintained must be open to inspection by the Labor Commissioner.

In line with the Act’s additional penalties for noncompliance with pay data reporting, the Act provides additional remedies for noncompliance with the new pay scale disclosure requirements, including an “aggrieved” person’s ability to file a written complaint with the Labor Commissioner within one year after the date the person learned of the violation, and the option to also bring a civil action for injunctive relief and any other relief that the court deems appropriate. The Labor Commissioner may order the employer to pay a civil penalty of no less than $100 and no more than $10,000 per violation. An employer’s failure to maintain the required records creates a rebuttable presumption in favor of the employee’s claim.

Employer Takeaways

The passage of the Act will no doubt require significant time and attention from many California employers to ensure compliance with the new requirements. This effort will likely involve different employer departments working together, including Human Resources, Recruiting, Payroll, and Legal. To get started now, employers may consider:

• Setting pay scale ranges for each covered position and assessing current employee pay for outliers that may need correcting (the Mintz Employment group will be providing additional guidance regarding best practices for pay scale range reporting in a coming post);
• Performing early, preliminary payroll audits to analyze relevant metrics for any apparent pay data discrepancies;
• Ensuring that job postings display pre-approved pay scale ranges that are consistent with the covered positions and current employees in those positions; and
• Implementing or supplementing existing document maintenance policies to cover the Act’s new requirements, and ensuring relevant employees are trained to follow those policies.

The Mintz Employment, Labor & Benefits group can help if your business has questions about the Act or about pay transparency more generally.

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