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What Businesses Need to Know About California’s New Pay Transparency Legislation

, | Sep 30, 2022 1:12:30 PM | By

 

Authored by Noreen Farrell, Executive Director of Equal Rights Advocates and Emily Sweet, VP of Social Impact at OpenComp.

On September 27, 2022, California Governor Newsom signed into law Senate Bill 1162, a groundbreaking pay transparency bill that will have a direct impact on employers and employees across the state.

As of January 1, 2023, California will join Colorado, Washington, New York City and other municipalities by requiring employers of 15 or more employees to include salary ranges in all job postings.

The legislation, however, breaks new ground by requiring employers with 100 or more contract workers hired through third party staffing agencies to begin reporting pay data for those workers broken down by gender, race, ethnicity, and job category. Note: the reporting required under this legislation does not apply to independent contractors. The legislation expands on a California bill signed in 2020 requiring employers of 100 or more direct-hire employees to report this information to the California Civil Rights Department.

This article will share insights on why this pay transparency law matters, what it means for businesses in CA, and how you can set your organization up for success.

How This Legislation is Poised to Help Close the Gender and Race/Ethnicity Pay Gaps

Data collected in 2021 as a result of the earlier legislation (and released in March 2022) reveals that women, Latinos and Black workers were overrepresented in the lowest pay bands.

California’s newly strengthened pay transparency requirements provide employers with necessary information to identify unjust pay disparities between direct-hire employees and contract workers who often do the same work, but receive less pay and fewer benefits. Research shows that contract workers are more often women, people of color, and nonbinary. The new law also provides job applicants with the information they need to weigh job offers, negotiate on an even playing field, and seek higher paid opportunities. Providing job applicants with the salary range for the position can also help employers more efficiently and accurately match with candidates whose salary requirements are aligned with what the employer can offer.

This law builds on a powerful set of policy changes in California on the pay equity front that prohibit discrimination in pay for substantially similar work, end employer reliance on salary history in pay decisions, prohibit employer retaliation against employees for discussing or disclosing pay, require reporting of employee compensation to the state, and require employers to justify the full amount of a pay differential on factors other than sex, race, or ethnic origin that are reasonably related to business necessity.

 

What Companies Must Now Report on and What the Consequences are for not Complying

While this SHRM article on the California Pay Transparency Law does a great job of summarizing this new legislation, following is a high-level breakdown of what is included in the law:

Employers with 15 or more employees are required to include pay scales (salary ranges) in all of their job postings.

Employers of any size, upon request, must provide to an employee the pay scale for the position in which they are currently employed.

Private employers with 100 or more employees who are already required under existing law to submit an annual pay data report, must now include the median and mean hourly rates for race, ethnicity, and sex within each job category to the California Civiil Rights Department (CRD).

This report must include the number of employees by race, ethnicity and sex whose annual earnings fall within each of the pay bands used by the U.S. Bureau of Labor Statistics in the Occupational Employment Statistics survey, as well as the number of employees by race, ethnicity and sex in these job categories:

  • Executive- or senior-level officials and managers.
  • First- or mid-level officials and managers.
  • Professionals.
  • Technicians.
  • Sales workers.
  • Administrative support workers.
  • Craft workers.
  • Operatives.
  • Laborers and helpers.
  • Service workers.

Starting in 2023, private employers with 100 or more employees hired through labor contractors must also submit a separate pay data report to the CRD for those employees. The employer must also disclose on the report the ownership names of all labor contractors used to supply employees. A labor contractor must supply all necessary pay data to the private employer.

Employers with multiple establishments will only have to submit a report for each establishment and will no longer have to also submit a consolidated report.
The pay data reports will not be publicly accessible.

Employers may be subject to civil penalties for violating the law. Upon request by the CRD, a court may impose a civil penalty of $100 per employee upon any employer who fails to file the required report and $200 for repeat failures to file reports.
If the employer is unable to submit a complete and accurate report because a labor contractor has not provided the pay data as required under the law, a court may apportion an appropriate amount of penalties to the labor contractor that has failed to provide the pay data to the employer.

 

Top Questions Employers Might Have

To help your organization prepare for these new changes, here are answers to some of your burning questions…

What Are The Dos and Don’ts of Determining Salary Ranges?

Creating salary ranges can sometimes feel more like an art than a science, but there are clear best practices companies can adopt to set your organization up for success.

The most important is to use fresh and reliable market data, which implies knowing the difference between good and bad compensation data. In summary, good compensation data must:

  • Be no older than 3 months
  • Be reported by employers, not employees
  • Compare jobs by responsibility, not title
  • Reflect your exact industry, company size, and location

Without the right data, salary ranges are just numbers.

Companies must also determine how wide or narrow to make the bands, as well as how to account for years of experience and location. If bands are too wide, they may leave room for inequity creep. If bands are too short, they may limit employee growth within the same role, impacting employee morale and productivity.

Download this guide to learn more.

What Is The Best Way To Communicate Pay Ranges With Candidates?

Candidates are looking for transparency and clarity when it comes to compensation.

Here’s an example of how to share a pay band or salary band with a job candidate: For a marketing manager with five to seven years of experience, we pay between $100,000 to $120,000 based upon San Francisco benchmarks, regardless of where someone lives.

How Will Seeing Pay Ranges in Job Postings Impact Current Employee Morale?

This is a commonly raised question and concern among employers as they navigate how this new law will impact current employees.

While it is becoming increasingly clear that posting salary ranges is good for candidate recruitment - 63% of U.S. employees said they prefer to work at a company that discloses pay information - it can also cause problems if pay ranges aren’t communicated throughout the organization.

Healthy company cultures are built on trust and transparency. Communicating how your organization determines compensation helps employees understand that pay isn’t random. It also allows them to see where there are opportunities for growth.

If you haven’t made it a practice of routinely talking about comp with your team members, there is no time like the present to start. Your employees will thank you and you’ll see a positive impact on your retention rates.

How Do We Solve for Market Shifts that Could Impact Base Pay?

Market shifts will undoubtedly influence your company’s pay ranges, which may need to be adjusted over time, generally once a year.

It’s important to pay attention to these fluctuations, especially when bringing on new employees at a higher starting point than existing team members.

During merit cycles (also referred to as annual reviews or focal reviews) employees are commonly rewarded with raises, promotions or bonuses. Merit cycles are also opportunities to make salary adjustments that correct pay inequities as well as leveling or market inaccuracies.

When preparing for merit cycles, make sure you budget for any adjustments required to sustain fair and equitable pay practices. There are tools out there that can help.

In economic downturns this can feel daunting, but it is easier and ultimately less costly to do this now than to be faced with a lawsuit down the road.

 

Resources That Could Help

The good news for companies with California-based employees is that you don’t have to navigate these changes alone.

Resources like OpenComp’s Range Builder can get you set up with professional-grade pay ranges in just 3 clicks. Businesses can sign up for free at opencomp.com.

Companies can also join OPEN Imperative (Organizations for Pay Equity Now) to participate in community programs, obtain best practice guidance, and access pay equity assessment tools, reports, and experts. Join for free at openimperative.org.

Equal Rights Advocates serves as an Advisor to OPEN Imperative and will be a regular featured contributor of educational content.

Equal Rights Advocates also welcomes all OPEN Imperative members to join its Corporate Champion Circle, which features employers making a strong commitment to equal pay and other gender equity efforts in the workplace and provides programmatic and philanthropic opportunities to advance this work. Please contact CorporateChampions@equalrights.org to learn more.