The new California Pay Transparency Law is creating a number of new requirements for employers with companies located in “The Golden State“. These obligations, which come into effect on January 1, 2023, relate to pay scale disclosure and pay data reporting.
If you run a business in California, then you need to prepare for all the changes that are going to come into effect in a couple of weeks. This will help you avoid any hefty non-compliance penalties that may damage your business.
But what is pay transparency, exactly? What are the specific requirements of California’s new pay transparency and pay scale disclosure law? Which states have pay transparency laws? Is it just California? Or do employers from other states need to understand pay scale disclosure and transparency?
Read on for answers to these questions, and more.
Table of Contents
Table of Contents
California pay transparency law overview
California is joining a number of other states, cities, and local governments by legislating new requirements that promote transparency in the workplace. The California Pay Transparency Law (Senate Bill 1162), which comes into effect on January 1, 2023, requires all companies with employees based in California to share pay scale data with current employees and prospective candidates. The new employment law also establishes employer obligations relating to pay data reporting. Failure to comply with this law can result in civil liabilities and hefty non-compliance penalties.
California’s new pay transparency and pay scale disclosure law has one primary objective: to promote equal and transparent pay for all. With this law, the state hopes to build on the existing work it has done to identify and eliminate wage disparities. This includes The Equal Pay Act, which is one of the strongest equal pay laws in the nation. It also includes The California Fair Employment and Housing Act (FEHA), which protects employees from discrimination, retaliation, and harassment in employment.
California’s new pay transparency law will apply to all companies with at least one employee based in California, regardless of where the company’s headquarters is located. Furthermore, companies with at least 100 employees must comply with the new data reporting obligations which serve as an extension of the Equal Employment Opportunity Commission’s EEO-1 form and existing California law. Failure to do so can result in civil penalties and legal action.
Pay scale disclosure
Pay scale transparency isn’t an entirely new concept in California. Existing employment laws already require employers in the state to share pay scale data with job applicants upon reasonable request. However, as of January 1, 2023, this requirement will be expanded to include all applicants and all existing employees.
Specifically, the California Pay Transparency Law will require employers to:
- Include pay scale data in all published job advertisements (for companies with 15 or more employees). If the employer uses a third party to advertise a job, they must provide them with a pay scale to include in their posting.
- Disclose the pay scale for a position that an employee currently holds, upon request.
According to the new pay scale disclosure, the term “pay scale” is defined as “the salary or hourly wage range that the employer reasonably expects to pay for the position”. The law, however, does not specify if this includes benefits or bonuses.
Pay data reporting
The new California Pay Transparency Law also defines a number of pay data reporting obligations that you need to be aware of.
Firstly, according to the pay transparency law, you must maintain accurate records of all job descriptions and wage histories for all your employees. You must maintain these records for the duration of their employment plus an additional three years. This protects you in the event that the California Labor Commissioner chooses to inspect your records to determine if there is a pattern of wage discrepancy.
The second obligation relates to the filing of employee records. As the law currently stands, all private employers in California with 100 or more employees are required under federal law to file annual Employer Information Reports (EEO-1) with the Equal Employment Opportunity Commission (EEOC). Depending on employment status, some companies are also required to submit annual pay data reports to the state’s Civil Rights Department (CRD). This includes data relating to pay, hours worked, job category, and demographic data including sex, race, and ethnicity.
The California Pay Transparency Law of 2023 has extended these obligations. All private employers with 100 or more employees must now submit pay data reports to the CRD. You need to do this by the second Wednesday of May each year. This rule applies even if you were not previously required to submit EEO-1 reports (if you hire labor contractors, for example). The range of data that you must report, together with listed job categories, has also been expanded.
Data reporting categories
As of January 1, 2023, the range of data that must be submitted to the CRD by all employers will be expanded. This will apply to all employees and all contractors.
Specifically, employers in California will need to file annual reports on:
- Number of employees by race, ethnicity, and sex in each of the following job categories:
- Executive or senior-level officials and managers
- First or mid-level officials and managers
- Sales workers
- Administrative support workers
- Craft workers
- Laborers and helpers
- Service workers
- The number of employees by race, ethnicity, and sex, whose annual earnings fall within each of the pay bands used by the United States Bureau of Labor Statistics, as established in the Occupational Employment Statistics Survey.
- Median and mean hourly rate for each job category, according to race, ethnicity, and sex.
- Total number of hours worked by each employee in each pay band during the reporting year.
- The employer’s North American Industry Classification System (NAICS) code.
Essentially, this means that you will have to count how many employees you have in each job category in a reporting year and classify them by race, ethnicity, and sex. You will also need to keep a record of how many hours they are working, and how much you are paying them.
California pay transparency law: non-compliance penalties
It’s important to be aware of these changes to pay transparency. If you fail to comply with new obligations relating to pay scale disclosure and pay data reporting, then it can lead to significant non-compliance penalties for your business.
If any of your current or past employees feel that you have not been transparent about your pay scales, then they will be within their rights to file a complaint about you with the California Division of Labor Standards Enforcement (DLSE). Candidates who have applied for a position at your company can also file a lawsuit claiming violation if they feel you have failed to disclose pay scale data during the application and hiring process. If the DLSE finds that you are in violation of the California pay transparency law, then you could incur a penalty of between $100 and $10,000 per violation.
In terms of recordkeeping, if you are investigated by the California Labor Commissioner and they find that you have not maintained accurate pay data records or provided the CDR with the necessary data, then you could also be liable for a non-compliance penalty. In this case, the CRD would be entitled to seek a court order requiring compliance. They can also recover all associated legal costs from you on top of the civil penalties that you could incur.
California pay transparency law: preparation for employers
If you have a business in California or hire employees who are based in the state, then you need to prepare for the changes that the California Pay Transparency Law will bring in next month. This includes the obligation to disclose pay scales in all your job postings and the requirement to maintain and file comprehensive pay scale records.
Here are a few best practices to help you prepare for pay transparency.
Create a pay transparency policy
The first step in ensuring internal and external pay transparency is designing a thorough pay transparency policy. This policy should define how salary data is collected and processed. It should also explain how job descriptions are defined and organized and how they fit into the framework of the company. The clearer you are with your job descriptions, the easier it will be to justify your salaries.
Design a pay strategy
It’s also a good idea to determine specific salary ranges for all the positions in your organization. Start by listing the specific roles and responsibilities of each position and the specific skills and experience that the people filling those roles need. Establish benchmarks for lower and higher salary ranges for each position.
What skills and levels of performance will you reward? How do you calculate bonuses? Are your salary ranges up to date and competitive compared to the external market?
Make sure you define a clear pay scale for each position in your company. This will make it easier to ensure salaries are negotiated fairly and consistently during the hiring process.
Promote pay equity
Pay equity is the driving force behind the California pay transparency law. So, it stands to reason that the fairer each salary is relative to other positions in your company, the easier it will be to promote an open and transparent culture.
The best way to assess whether you are an equal-pay employer is by conducting a pay equity audit, also known as a pay equity analysis. Essentially, this means analyzing all your salaries in order to identify and correct potential wage disparities.
Take a look at similar roles within your company to see if you are paying all employees the same. Can you directly attribute any differences in wages to gender, race, age, or any other unjustified criteria?
If you’ve identified pay gaps that you cannot reasonably justify, you need to correct them as soon as possible. The aim is to ensure equal pay for all employees performing the same duties, regardless of gender, race, or any other defining characteristics.
Review your data collection processes and use the right software
The final step in preparing for the California Pay Transparency Law of 2023 involves reviewing your internal data collection processes. This is important because you need to make sure you are collecting all the data you need to compile your pay data report.
The easiest way to ensure compliance in this regard is by using the right HRIS or HR software solution. This will help you streamline your processes for collecting, managing, and analyzing your employee data. It will also help you process your data in a safe and secure manner.
What solution are you using to manage payroll security right now? Does your payroll software include features for accurate recordkeeping? Do you have a clear record of all job descriptions and pay scales? If not, then now is the time to invest in a solution so that you are prepared for the changes in January.
California’s existing salary history law
We’ve discussed the new California pay transparency law, but let’s clarify what California’s existing salary history law is too. That way, you will be clear on what your obligations are now, as well as the additional pay transparency obligations that will come into effect in January.
- Right for employees to discuss pay. Employers must provide pay scales upon reasonable request by an applicant (employees will not have this right until January). They also cannot limit an employee’s right to discuss pay in a workplace environment.
- Employers cannot ask applicants about their previous salary. As with many other states, you cannot ask an applicant about their salary history during the hiring process. You can, however, ask them about their salary expectations.
- California’s Equal Pay Act (EPA). Section 1197.5 of this act aims to ensure there is equal pay across all genders and races. This applies to all workers who do “substantially similar” work. However, employers can justify disparities in certain conditions. For example, if a disparity is based on a seniority or merit system then it is considered justifiable. The same applies if it is a direct result of education, training, or experience.
- Fair Employment and Housing Act. The FEHA prohibits the discrimination of applicants and employees belonging to a protected category, such as race, religion, or gender.
- The National Labor Relations Act. Protects an employee’s right to discuss wages and working conditions.
Benefits of pay transparency
Let’s take a look at some of the specific benefits of promoting pay transparency in your organization.
- Helps to close the gender and racial pay gap.
- Increased diversity, equity, and inclusion in the workplace. This, in turn, improves the employee experience and helps you encourage a nurturing workplace culture. And this is a great way to create a more positive employer brand.
- Ensures HR compliance in terms of California’s new pay data reporting and pay scale disclosure obligations, especially if you include your obligations in an HR compliance checklist.
- Access a wider pool of quality talent. By creating more diverse and inclusive hiring practices you get access to a wider variety of talent and experience. For example, increased pay transparency often attracts more women and candidates from minority backgrounds.
- Increased productivity. When you are transparent about pay scales, your employees are more likely to feel that you are paying them fairly. They will also feel more valued. All this boosts performance and employee engagement.
- Attract and retain top talent. Transparency builds trust. Being open and honest about your pay scales shows your employees and candidates that they can trust you. This makes it much easier to build loyalty and to attract and retain top talent.
- Streamlines your hiring process. Pay transparency makes the hiring process run more smoothly. This is because you remove the uncertainty of salary negotiation. That way, candidates and interviewers can focus on other important matters during the hiring process. Being upfront about your salaries also stops you from wasting your time interviewing candidates whose salary expectations you cannot meet.
Pay transparency in other states
As we mentioned earlier in the post, California isn’t the only state to implement laws that promote pay transparency. In fact, there are currently 30 pay transparency laws in the US. This includes the states of Connecticut, Maryland, Nevada, Rhode Island, and Washington, which all require employers to disclose information about salary ranges for open positions or promotions.
This list also includes New York and Colorado where pay transparency laws have been enacted this year. For example, New York City requires job postings to include the minimum and maximum salary for the position. And in Colorado, job vacancies must disclose the hourly wage or salary. They must also include a general description of all offered benefits.
Although many states such as these have enacted laws to prevent pay discrimination and provide employees with the ability to discuss their salaries, compared to the California pay transparency law, obligations are quite limited, and most states are yet to focus on the reporting of mean and median pay data to better identify gender and race-based pay disparities. This makes California a pioneering state that is leading the nation towards a working environment and culture based on equity and fair pay for all.