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

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. On September 27,Governor Newsom signed California SB 1162, a groundbreaking pay transparency law with first-in-the-nation requirements. The fifth largest economy in the world will require that companies include pay scales and hourly rates on job postings beginning in January 2023 and report median and mean pay gaps and on contractor pay starting in May 2023. Employers may welcome the news that the final amendments to the bill extended the deadline for including this information in the pay reports.

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. However, the implications of the bill extend far 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
• How to start preparing to ensure you’re in compliance

 

What the bill includes— and what it means for employers

California’s SB 1162 adds to the pay scale disclosure requirements in California by requiring employers to add salary and hourly wage 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. We provide a detailed look at the law’s requirements below.

 

Pay scale transparency

The current law requires that employers must provide the pay scale for a position to any job applicant who requests it, only after the applicant has completed an initial interview with the employer. However, 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” 
• Employers must provide employees the pay scale for their current position upon request

The new law 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.

Furthermore, the penalties are steep, 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 pay scale transparency.

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 with at least one California employee will have to add their mean and mean pay gaps to the annual pay data reports provided to the California Civil Rights Department (CRD), 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 public information. There are still risks, however. According to the CRD’s 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 analyzes 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 just about equal pay for equal work, but also equal access to opportunities.

Pay equity is relatively 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 can simply increase their pay. The pay gap, however, is more complex. For example, even if you pay every employee the same for the same job, female employees as a group may make less than their male counterparts across the organization — which could be the case if you have fewer women leaders in higher-paying leadership roles.

 

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 for 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 an accurate report.  

Like the median and mean pay gap reports, employers will be required to file this report for contractors in May 2023, based on 2022 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 the California pay transparency law 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 requires more proactive communication throughout the organization. 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, such as:

• 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 the California 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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