California Adds to the Trend of States Requiring Greater Pay Transparency

On September 27, 2022, California’s Governor signed S.B. 1162, making significant changes to California’s existing pay transparency and reporting laws and joining the growing trend of jurisdictions requiring companies to disclose their pay ranges in job postings. Starting in 2023, S.B. 1162 adds several substantial and notable changes to California’s current pay transparency and reporting laws, including:

• Requiring employers with 15 plus employees to disclose pay scales in each job posting for positions in California and disclose pay scale information to current California employees upon their request;
• Adding to California’s existing pay data reporting obligations to require employers with 100 plus employees to include the median and mean hourly rates for their employees by job category and race, ethnicity, and gender in their annual reports to the California Civil Rights Department (CRD) (formerly known as the California Department of Fair Employment and Housing);
• Requiring employers with 100 plus workers provided by “labor contractors,” such as staffing agencies, to submit a separate annual pay data report to the CRD relating to those contractors;
• Changing the deadline for submitting the annual pay data report from March each year to the second Wednesday in May each year;
• Implementing new obligations to retain records of job titles and wage rate history for each employee during employment and three years after employment ends; and
• Enhancing penalties and remedies companies can face for non-compliance, including civil penalties ranging from $100 to $10,000 per violation for failing to comply with the pay scale disclosure requirements, and adding a new private right of action for violations of the pay disclosure and retention requirements.

California employers will need to develop policies and practices for ensuring compliance with these new requirements and consider other practical and legal risks arising from S.B. 1162. With the passage of S.B. 1162, California joins the growing trend of jurisdictions, including Colorado, Washington, and New York City, requiring employers to disclose pay ranges in their job postings. Employers operating in multiple jurisdictions should consider how to comply with the growing patchwork of pay transparency laws.

New Pay Scale Disclosure Obligations

California currently requires employers to provide applicants with the pay scales for the positions for which they are applying, but only when requested. Starting on January 1, 2023, S.B. 1162 will significantly expand these obligations in two primary ways.

•  Current Employees: All employers, regardless of size, will have to provide current employees’ pay scale information only for their position upon their request. S.B. 1162 defines pay scale as the “salary or hourly wage range that the employer reasonably expects to pay for the position.”
• Job Postings: Employers with 15 plus employees will be required to provide pay scales for the position in job postings. Employers using third parties to post their job openings, such as third-party recruiters, must ensure those third parties include pay scale information for any job postings posted on their behalf.

Changes to Annual Pay Data Reports

California currently requires employers with 100 plus employees that are required to file an annual EEO-1 report to submit pay data reports to the CRD by the end of March each year. Covered employers must currently report data for employees for the prior calendar year, broken down by race, ethnicity, and gender within each job category (e.g., professionals and technicians) and, within each category, the aggregate number of employees that were within each of the 12 specific pay bands and total number of hours worked by each employee counted in each pay band. 

S.B. 1162 adds several new requirements starting in 2023.

• All California employers with 100 plus employees will be subject to the pay data reporting requirements, regardless of whether they were required to file an EEO-1 report.
• The pay data reports must now include the “median and mean hourly rate” within each job category for each combination of race, ethnicity, and sex.
• Employers with 100 plus employees hired through “labor contractors” in the prior calendar year will be required to submit a separate pay data report to the CRD covering the employees hired through that labor contractor in the prior year. A “labor contractor” means “an individual or entity that supplies, either with or without a contract, a client employer with workers to perform labor within the client employer’s usual course of business,” such as a staffing firm. The separate report must include the “ownership names of all labor contractors used to supply employees.”
• The due date for the annual report has been changed from March 31 to the second Wednesday in May each year. 

New Recordkeeping Obligations

S.B. 1162 will require all employers to maintain records of the job title and wage rate history for each employee during employment and three years after employment ends. The California Labor Commissioner will be authorized to inspect those records, including to determine if there is a “pattern of wage discrepancy.” If an employer fails to maintain these records, S.B. 1162 adds a rebuttable presumption in favor of the employee’s claim against the employer.

Enhanced Penalties and Enforcement Actions

S.B. 1162 adds new enforcement mechanisms and civil penalties for violations. 

• Pay Data Reporting: Currently, the CRD can seek a court order requiring compliance with the pay data reporting requirements and recover costs associated with seeking compliance. S.B. 1162 will now allow a court to impose civil penalties of up to $100 per employee for the first violation and up to $200 per employee for each subsequent violation. Notably, S.B. 1162 allows courts to apportion some of the penalties to any labor contractor that has failed to provide the employer with the required pay data that led, at least in part, to the employer not being able to submit a complete and accurate pay data report.
• Pay Scale Disclosure and Record Retention: S.B. 1162 allows the California Labor Commission to order civil penalties ranging from $100 to $10,000 per violation for companies failing to comply with the pay scale disclosure and record retention requirements. Employers who violate the job posting requirements for the first time will not be subject to penalties if they can show that all of their job postings for open positions have been updated to include the required pay scale information.
• Private Right of Action: S.B. 1162 also allows any person “aggrieved” by a violation of the pay disclosure and record retention requirements the option to either: (1) file a civil action for injunctive relief and any other relief that the court deems appropriate; or (2) file a written complaint with the California Labor Commissioner within one year after the date the person learned of the violation.

Next Steps

Given these new pay transparency and reporting obligations and potentially hefty penalties for non-compliance, covered employers will need to consider how to update their policies and practices for compliance. With many of these new requirements becoming effective on January 1, 2023, covered employers should consider starting their compliance initiatives as early as possible as they will likely involve various practical and legal considerations and might require input from a number of company stakeholders, including HR, recruiting, compliance, legal, and leadership. 

These changes also heighten the increasing focus on pay equity and transparency. The disclosure of pay scale information to current employees might uncover certain pay equity or transparency concerns. For example, because many companies have increased starting pay over the last several years due to market conditions and inflation, these new pay disclosure requirements could reveal pay compression issues, where long-term employees are paid the same (or in some cases less) than newer employees given that merit increases have not kept up with the market.  Employers should consider how to address these and other issues that could lead to low employee morale, turnover, or other potential issues.

Employers who have not already established pay ranges or are not conducting annual pay equity studies and audits of their pay ranges should consider doing so now. Creating pay scales for positions will not only be required by the new law but establishing proper pay ranges can mitigate the risk of potential disparities and assist in the companies’ diversity and equity initiatives. Pay equity studies are also key to helping employers uncover and potentially remedy pay disparities among similarly situated employees and confirming whether any current employees might fall below the established pay ranges.  Companies should ensure that any such proactive pay equity studies are conducted with experienced counsel to ensure the studies are properly performed and are protected by the attorney-client privilege.

Employers with employees in multiple jurisdictions should also consider how they plan to comply with S.B. 1162 in light of the growing patchwork of pay transparency and reporting laws.  California joins the growing trend of states and localities, like Colorado, Washington, and New York City, requiring employers to disclose pay ranges in job postings.  Many other jurisdictions require employers to provide pay information to applicants and employees at various stages in the hiring process, such as Connecticut, Maryland, Nevada, and Rhode Island.  Many of these laws have different requirements for disclosing pay range information on job postings or to employees and applicants. Companies with employees in these jurisdictions will need to consider how to navigate these laws and create strategies for compliance.

We will continue to monitor developments related to S.B. 1162 and its impact on California employers.