California Expands Pay Data Reporting and Mandates Pay Scale Disclosures

California Gov. Gavin Newsom signed Senate Bill (SB) 1162 on Sept. 27, 2022, to expand the requirements for annual pay data reports and requires covered employers to publish pay scales with job postings as well as to retain certain pay records. The law, which takes effect Jan. 1, 2023, is an effort to bolster pay transparency and counter workplace discrimination and aligns California law with several other states, including New York, Nevada and Washington.

Requirements Under the Law

There are two distinct disclosure requirements under the new law: mandatory pay scale information for job postings and expanded pay data reporting requirements.

Expanded Annual Pay Data Reporting to California Civil Rights Department

SB 1162 represents an expansion of a previous pay data reporting bill, SB 973, that went into effect in 2021. SB 973 required employers with 100 or more employees, and who were required under federal law to file an annual federal Employer Information Report (EEO-1), to submit an annual pay data report to the California Civil Rights Department (CRD, formerly known as the Department of Fair Employment and Housing (DFEH)). However, SB 973 did not address workers supplied to employers by labor contractors (e.g., staffing agencies).

Under SB 1162, covered employers who are supplied workers by labor contractors will not escape this pay data reporting obligation in 2023. The law defines labor contractors as "an individual or entity that supplies, either with or without a contract, a client employer with workers to perform labor within the employer's usual course of business." Employers who have 100 or more employees hired through labor contractors within the prior calendar year will now be required to file a separate report for those employees who have been supplied by labor contractors, and the report will need to identify the labor contractors. In turn, labor contractors will be obligated to provide pay data to the reporting employers.

SB 1162 also broadens SB 973 by requiring the median and mean hourly rate for each combination of race, ethnicity and sex in the designated job categories. Employers with multiple establishments are required to submit separate reports for each establishment instead of a consolidated report and are no longer permitted to submit an EEO-1 in lieu of the required pay data report.

Accordingly, in 2023, pay data reports must include the following:

1. The number of employees by race, ethnicity, and sex in each of the following job categories:

   a. executive or senior level officials and managers

   b. first or mid-level officials and managers

   c. professionals

   d. technicians

   e. sales workers

   f. administrative support workers

   g. craft workers

   h. operatives

   i. laborers and helpers

   j. service workers

2. Within each job category listed above, the number of employees by race, ethnicity and sex whose annual earnings fall within each of the pay bands defined by the U.S. Bureau of Labor Statistics Occupational Employment and Wage Statistics Survey based upon employees' W-2 earnings
3. Within each job category listed above, for each combination of race, ethnicity and sex, the median and mean hourly rate, based upon employees' W-2 earnings
4. The total number of hours worked by each employee counted in each pay band during the reporting year
5. For employers with multiple establishments, a report must be submitted for each establishment

An employer who fails to submit the required report to the CRD may be subject to costs associated with compelling compliance. A court may also impose civil penalties up to $100 per employee and up to $200 per employee for subsequent failures to file the pay data report.

Pay Scale Disclosure to Employees and Applicants

Beginning Jan. 1, 2023, employers with 15 or more employees must include the pay scale in all job postings under California Labor Code 432.3. "Pay scale" is defined by statute as the salary or hourly wage range that the employer reasonably expects to pay for the position. Additionally, if a covered employer posts, announces or publishes job postings using a third party, the employer must provide pay scale information to the third party for it to include in the job posting. Further, upon request, covered employers must provide the pay scale information to current employees and to applicants upon a reasonable request.

Failure to comply with the required disclosures allows "aggrieved individuals" to file a written complaint against employers with the Labor Commissioner within one year after learning that employers did not make the required disclosures. Upon a finding that the employer violated the law, the Labor Commissioner may order the employer to pay civil penalties ranging from $100 to $10,000 per violation based on the totality of the circumstances. Notably, the Labor Commissioner will not assess a penalty upon first violation of the pay scale disclosure law upon showing that the employer updated job postings for open positions to include the required pay scale in compliance with the law. An aggrieved individual may also bring a civil action for injunctive relief and other relief as deemed appropriate by a court.

Employee Record Retention

Employers also must maintain employee records, including job titles and wage rate histories, through the term of each employee's employment and for three years after the employment has ended. As under current law, these records are subject to inspection by the Labor Commissioner.

Next Steps for California Employers

In order to prepare for the new 2023 pay data reporting and disclosure requirements, covered employers should ensure their policies and procedures comply with the requirement to maintain pay history documentation for current employees for the required period of time and should update existing and new job postings to meet the requirements to disclose pay scale information. Employers who do not comply with the requirements to submit pay data and post pay scales within their job posting may be subject to civil penalties and costly lawsuits.

In addition, as SB 1162 extends pay data collection obligations to employees furnished by labor contractors, covered employers should also ensure they comply with the new reporting requirements for these workers. This represents a significant expansion of existing pay data requirements, and employers utilizing staffing agencies, independent contractors and/or temporary employees must consider such third-party-sourced employees in its reports. A court may apportion an appropriate amount of penalties to a labor contractor who did not provide the requisite pay data for an employer to submit a complete and accurate report.

Employers should also review agreements with staffing agencies and other third parties to ensure that employers have a contractual right to receive pay data information from their contractors for purposes of pay data reporting. Agreements with professional employer organizations (PEOs) and payroll companies should also be reviewed to ensure access to this data for the period of time required by the statute (especially after a contract with such a service provider may be terminated).

SB 1162 creates an additional layer of complex requirements and easy pitfalls for employers. All entities doing business in California should consult with counsel on current records and pay information to review and rectify potential discrepancies. For more information about how SB 1162 applies to your business, contact the authors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.