A new pay data disclosure rule in California is reminder that pay equity legislation will continue to be pervasive and employers need to conduct regular pay equity audits to be prepared.
Most pay equity regulations around the United States (U.S.) have focused on ensuring companies don’t discriminate in their pay decisions and are setting fair starting pay by limiting questions about salary history. However, a new law in California goes a step further and requires greater disclosure around employee compensation.
Not wanting to wait on federal rules, which have been considered and debated within the U.S. Equal Employment Opportunity Commissions (EEOC) for several years, California Governor Gavin Newsom signed into law SB 973 on September 30, 2020. The law mandates certain disclosure of employee pay for those living, working and/or assigned to a company location in California.
Beginning this year, most California employers will need to submit annually their employees' pay by gender, race and ethnicity to the state's Department of Fair Employment and Housing (DFEH). The new law applies to employers with 100 or more employees that file an annual Employer Information Report (EEO-1) under federal law. Read full details about the law here. The first report is due March 31, 2021.
A comparable federal disclosure requirement was announced in January 2016, when the EEOC revised the EEO-1 Report to include disclosure of aggregate employee pay data by gender, race and ethnicity. In 2017, the Trump Administration postponed this pay data collection indefinitely. President Trump’s decision was legally challenged, and a court ordered the EEOC to reinstate the collection for the 2017 and 2018 filing years.
The EEOC responded to the court decision to reinstate pay data collection by first examining the quality and utility of the pay data it intended to collect, but has said that as of now, it believes the burden on employers outweighs the unproven benefits of the pay data. As such, the commission discontinued all efforts to implement pay data collection.
Which Employees Are Counted?
The California Department of Fair Employment and Housing (DFEH) released FAQs in December addressing key issues in complying with the new law. In the FAQs, the agency discussed the details about how to calculate the 100-employee threshold for reporting. The agency said U.S. employees located inside and outside of California are counted when determining whether an employer has enough employees (100 or more) to trigger pay data reporting. Therefore, if an employer has at least one employee who lives or works in California, that employer must submit a report even if its 99 other employees work elsewhere throughout the country. Part-time employees count towards the 100-employee threshold, but contract or temporary workers do not (except in rare circumstances).
Equal pay reports need to include all employees who work or live in California or are assigned to locations in California. This nuance becomes more important in an era where more employees are working remotely and may be assigned as working in a state that is different than where they currently reside. For example, an employee that works remotely in Nevada (where their employer doesn’t have an office), but is assigned to the employer’s closest regional office in California, would count in the pay reporting requirement.
California employers should not wait to prepare for the new disclosure rule. We recommend taking the following steps now:
- Determine which employees the company will be required to report on; this includes deciding whether to voluntarily expand reporting beyond California employees (which may be preferable for privacy concerns if California employees are a small group or if the company wants to plan early in anticipation of a similar federal requirement)
- Ensure you have and are able to report on the data needed to categorize employees’ race, ethnicity and sex along with current pay data
- Preview the data that will be reported and proactively review what your disclosure will show; identify whether gathering additional information or conducting a more detailed pay equity analysis is necessary, to better understand the what the data shows
- Evaluate your EEO-1 classifications, job architecture, job leveling and salary ranges for reporting purposes to ensure these systems still meet the needs of the organization
- Make sure your compensation philosophy, salary ranges, benchmarking and pay administration practices are up-to-date so that managers and HR are making pay decisions that rely on accurate data and consider only non-discriminatory factors
The latest pay equity law is another reminder that this type of legislation will continue to be more pervasive. Therefore, even if employers are not subject to the state law, we recommend they familiarize themselves with what is needed to comply with the disclosure. If a company hasn’t yet conducted a pay equity analysis in their organization, now is the time to do so. We recommend companies conduct annual pay equity audits to maintain fair and transparent pay structures.
For questions or assistance in complying with the California pay equity law or other pay equity issues, please contact one of the authors or write to email@example.com.