California’s Groundbreaking Pay Transparency Law Passed — Here’s What You Need to Know

| September 27, 2022 | 5 min read
California's pay transparency law

This article was originally published on September 2, 2022. It was last updated on September 27, 2022.

Pay gap reporting and pay scale transparency are coming to California — soon and in a big way. California’s SB 1162 was signed by Governor Newsom on September 27. This is a groundbreaking law with first-in-the-nation requirements. The fifth largest economy in the world will require that companies include pay scales on job postings beginning in January 2023 and report median and mean pay gaps and on contractor pay starting in May 2023. 

This news is important for companies with a presence in California, including those based elsewhere but looking to hire employees in California, as they will need to prepare to disclose information around employee and contractor pay. But the implications of the bill extend beyond California. As the pay transparency wave charges across the country, California’s pay transparency law is an important signal of what’s to come. As the Wall Street Journal reported, the legislation “could compel employers to make nationwide changes to pay and hiring practices.”

Here’s a primer on what you need to know about the new law: what’s required, what it means for employers, and how to start preparing to ensure you’re in compliance.

 

What’s included in the bill — and what it means for employers

California’s SB 1162 adds to the pay scale disclosure requirements in California by requiring employers to add pay ranges to job postings and provide them to current employees, upon request. It also adds median and mean pay gap and contractor pay reporting to the existing SB 973, which requires employers of 100 or more employees to submit pay data reports to the California Department of Fair Employment and Housing and break down aggregate pay data by sex, race, and ethnicity in specified job categories. 

With the addition of new pay scale transparency and pay gap and contractor reporting, the new law represents a sea change from previous legislation. Here’s a detailed look at what’s included:

 

Pay scale transparency

The current law requires that employers must provide the pay scale for a position to any job applicant who requests it, after the applicant has completed an initial interview with the employer. SB 1162 adds more stringent requirements:

  • Employers with 15+ employees will need to post the pay range on every job posting;
  • Smaller employers will still have to provide pay scale information to applicants “upon request”; and
  • Employers must provide employees the pay scale for their current position upon request.

SB 1162 also adds record-keeping requirements. Employers will be required to maintain job title and wage rate history for each employee for the duration of the employment plus three years after the end of the employment, and these records are open to inspection by the California Labor Commissioner.

Penalties are steep, with penalties ranging from $100-$10,000, per job posting, though there is no penalty for the first violation if the employer can show that all job postings for open positions have been updated to include the pay scale.

These changes will go into effect on January 1, 2023.

 

Median and mean pay gap reporting

The annual pay reporting in California will become more complicated.

Employers of 100 or more employees — if even one is a California employee — will have to add the mean and mean pay gaps to the annual pay data reports provided to the California Civil Rights Department (CRD), which is the newly renamed agency formerly known as the Department of Fair Employment and Housing (DFEH). Employers must calculate and report on the median and mean pay gap in each EEO-1 job category in each location, for each combination of race, ethnicity, and sex.

Unlike similar disclosures in the UK, which are available at the company-level to the general public, this pay data will not be available to the public. There are still risks, however. According to the CRDs FAQs, “Employers’ pay data reports allow CRD to more efficiently identify wage patterns and allow for effective enforcement of equal pay or anti-discrimination laws, when appropriate.” Also, the CRD analyses and releases aggregate data, across companies, as we previously discussed. This matters because a company’s data could be compared by the CRD — potentially unfavorably — against this aggregated dataset.

This represents a fundamental shift in the way employers think about pay equity, because the median and mean pay gap is not about equal pay for equal work but rather, it’s about equal access to opportunities.

Pay equity is straightforward — if an employee is not being paid the same for substantially similar work and there is not a bona fide explanation for the difference, you simply can increase their pay. The pay gap is more complex. Even if you pay every employee the same for the same job, female employees may make less than their male counterparts across the organization — which would be the case if you have fewer women and BIPOC leaders in higher-paying leadership roles, for example. 

Employers may welcome the news that the final amendments to the bill extended the deadline for including this information in the pay reports. Employers will need to begin including the mean and median pay gaps in the report based on 2022 wages, which will be filed on the second Wednesday in May 2023 (i.e., May 10, 2023).

 

Contractor pay report 

Contractor pay is going to become a bigger issue.

Beginning in May 2023, employers that have 100 or more employees hired through labor contractors will also have to submit a separate pay data report to CRD covering the workers hired through labor contractors for the prior calendar year. 

The employer shall also report the ownership names of all the labor contractors used to supply employees.

While many staffing companies do not currently track the demographic information needed for the California Pay Report — much less provide this information to employers — SB 1162 will require labor contractors to supply all necessary pay data to the private employer so the employer can file the report.  

Like the median and mean pay gap, employers will be required to file this report in May 2023, based on 2022 data.

Key Milestones
January 1, 2023 Pay scale disclosure Proactive disclosure (15+ employees in CA); Reactive disclosure upon request to applicants/employees (1+ employees in CA)
May 10, 2023 Median / mean pay gap disclosure 100+ employees (1+ in CA), based on 2022 hours and wages data
May 10, 2023 Contractor pay disclosure 100+ employees hired through labor contractors, based on 2022 hours and wages data

 

How to prepare 

Under the new law, employers can be fined for non-compliance; but monetary fines are only part of the risk equation. Shareholders understand the impact of workplace equity and are calling for some of the biggest corporations to report on the median pay gap. The pressure’s on from employees, too. 

As legislation like CA SB 1162 increases urgency around pay transparency and pay gap reporting, here are some steps you can take to prepare. 

1. Build better pay ranges by analyzing salaries of current employees relative to proposed pay ranges. Flag outliers and discrepancies, then refresh salary ranges to ensure what you’re posting is in line with what you’re paying employees. 

2. Identify employees above and below their job’s stated pay, which can inform compensation decisions in time for merit increases. 

3. Audit your compensation program to ensure your pay policies are working as you intend them to, in a consistent and equitable way across teams and departments.

4. More pay transparency means more proactive communication. Explain to managers and employees how your compensation program works and actions you will take to remediate inconsistencies and inequities.

5. Start assessing whether you’re providing equal opportunity to all employees across the organization. This requires that you ask and analyze tough questions about potential opportunity gaps, including:

  • Do you have diverse representation at all levels of the company, including higher-paying leadership roles? 
  • Are you building diverse pipelines to management positions?
  • Are you giving all employees equal access to jobs, promotions, and opportunities to collaborate on high-profile projects?
  • Are roles traditionally held by men (such as IT) paid more on average than roles traditionally held by women (such as HR)? 

 

Join our experts to learn more about California’s pay transparency law

Our team is tracking this legislation closely and we want to help you prepare. To learn more about what the California pay transparency law will require, lessons learned from other jurisdictions with pay transparency laws, and steps on how to start complying now, watch our Q&A-style webinar Ask the Experts: California’s Pay Reporting + Pay Scale Disclosure Law as well as our overview webinar California’s Groundbreaking Pay Reporting & Pay Scale Disclosure Law Passed: What Now? on-demand below. 

 

 

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