Brian E. Koegle, Partner
As part of its efforts to eliminate pay disparity among employees performing “substantially similar” duties within a particular role, the California legislature significantly expanded employer obligations as part of the California Fair Pay Act, following a busy legislative session in September 2022. The new bill, which becomes effective January 1, 2023, creates a new obligation for smaller employers to update their pay and hiring practices, and expands reporting requirements for larger employers, to ensure more “transparency.”
The reasoning behind the new requirements facially appears just and fair – elimination of unequal pay for those particular groups who have traditionally been paid less for the same work, including racial and ethnic minorities and women. However, the practical effects of the legislation will have a significant and painful impact on many businesses throughout California in the new year.
The California Fair Pay Act
Prior to the passage of SB1162, for over four years California had one of the most stringent requirements for both tracking and reporting equal pay among those employees performing “substantially similar work” – a stricter test than the federal standard of “equal pay for equal work.” Employers with 100+ employees in California are required to submit an annual report to the California Civil Rights Department (formerly, the Department of Fair Employment and Housing (DFEH)), which are the administrative offices charged with monitoring and tracking pay practices.
As part of that reporting, larger employers were required to classify their clearly defined job descriptions within specific categories of employment (beyond simply a job title). Within those job descriptions, employers are required to identify specific job duties that would identify those employees performing substantially similar work. Annually, those businesses report to the Department their pay statistics, tracked by sex, race and ethnicity. The employer was then required to separate each data point into twelve specific “pay bands” set by the state, with individual reports submitted for each establishment location, as well as a “combined” report including all establishment location data. The Department then used that information to ensure there was not a disparate impact (e.g., lower wages) on those protected individuals.
As part of this process, larger employers were strongly encouraged to revisit their written job descriptions to ensure that their roles and titles reflected all critical components which may differentiate the positions of their employees – including experience, education, merit, and a more specific list of duties and responsibilities that each position entailed. For many employers, this process was a tremendous burden because it required them to differentiate and articulate a legitimate, non-discriminatory reason for the differences in pay.
Flash forward to the heart of the pandemic when many employers were forced to “overpay” candidates for “hard-to-fill” positions, because they could not attract and/or retain talent at a time when jobs were plentiful, but labor was scarce. The legislature saw this unfold and endeavored to stem the “imbalance” between what was offered to those hired in the COVID-market and existing employees, who – in some cases – were earning substantially less than their newly hired colleagues.
The result was SB1162, a broad and overreaching bill that fails to take into consideration current market conditions, inflationary pressures, or any other “non-discriminatory” factors that come into play for employers, when hiring.
Effective January 1, 2023, employers with
in California are required to: (1) identify and include a pay scale for any vacant, posted position – including advertising, internal “bulletin boards,” and online recruiting; (2) provide all current employees with the pay scale for their current positions, upon demand; and (3) maintain records of job title and wage range history for every employee, for the period throughout their employment, and for three years beyond their last day worked. 15 or more employees
In addition to the pay transparency obligations,
have expanded reporting requirements as part of their annual pay data report, including: (1) submission of a separate pay date report for employees who are hired or retained through “labor contractors (e.g., temporary staffing agencies, labor “leasing” agreements), including “ownership names of all labor contractors used to supply employees”; (2) reporting both the larger employers (100+) and mean pay rates (including hourly rate) based upon every combination of race, ethnicity and sex, within each job category. This obligation includes both “direct-hire” employees as well as those provided by “labor contractors” during the prior 12-month period; and (3) dividing the pay data report into ten different categories ( median e.g., executive, mid-level managers, professionals, etc.).
Within each of these ten (10) categories, the employer must identify the total number of individuals within each category, divided by sex, race and ethnicity, into one of twelve (12) pay bands, announced by the United States Bureau of Labor Statistics, as reported in the annual Occupational Employment Statistics survey. Then, for each employee within a category, divided by race, ethnicity and sex, the employer must also report the
by each employee within each pay band. total number of hours worked
The reporting obligation to provide a “consolidated” report for all locations has been removed, but the employer is still obligated to report all data by “establishment.” Additionally, the legislature removed the “loophole” that allowed employers who filed a federal EEO-1 to avoid filing a separate report with the state. This means that California employers will be required to file both the EEO-1
a state-compliant pay data report, annually. The California reporting deadline was moved to the second Wednesday in May, which will be May 10, 2023, for the first “updated” pay data report. The federal filing deadline for the EEO-1 report will remain March 31 of each calendar year. AND
Civil Liability Expanded
In addition to the transparency and expanded reporting requirements, the Department will now have the authority to bring a civil claim against any employer found to be in violation of the California Fair Pay Act (as amended by SB1162), with civil penalties of up to $200 per employee, per year, for failing to file accurate and timely pay data reports.
Importantly, the requirements of this bill are fully enforceable through the Private Attorneys’ General Act of 2009 (PAGA) – meaning that an “aggrieved” employee may bring a claim on his/her own behalf, as well as all other “similarly situated” employees working for the business, as a “representative” of the State of California.
The new law also creates a “rebuttable presumption,”
in favor of the employee, (and against the employer) if the employer fails to maintain compliant and completely accurate pay data records.
As such, employers must be on high alert, and take steps now, to ensure that they are fully compliant before SB1162 becomes effective law on
. January 1, 2023
These new obligations once again highlight the need for all employers (with 15+ employees) to have clearly defined, written job descriptions, with clear explanation of the job responsibilities, qualifications, experience, and duties. It also reinforces the urgency to work alongside competent legal counsel to ensure all policies, practices and procedures, are clear and enforced among your management or leadership teams. Finally, annual audits of all wage and hour practices within your business, prior to filing annual reports, to ensure compliance – before you blow the whistle on your own problematic pay practices.
California continues to be “the tip of the spear” when it comes to worker protections, and employers who fail to stay vigilant, regarding changes of the law, put their businesses at risk of significant liability at a time when many businesses are struggling to keep their doors open. A proactive approach to legal compliance – especially in the realm of California employment law – reinforces the old adage “an ounce of prevention is worth more than a pound of cure.”