California's Commitment to Wage Transparency Comes at a Cost to Employers

I. CALIFORNIA SEEKS TO PIERCE THE VEIL OF WAGE SECRECY WITH SB 1162

With the commitment to wage transparency sweeping the nation, California joins the ranks of jurisdictions such as Colorado, Washington, and New York City, with the passing of the wage transparency initiative Senate Bill 1162. With the implementation of SB 1162, California seeks to combat inequities in compensation among women and minority groups in the workplace.

On September 27, 2022, Governor Gavin Newsom signed SB 1162 into law. The bill was sponsored by Senator Monique Limόn and the California Legislative Women's Caucus. Effective January 1, 2023, SB 1162 amends California Labor Code § 432.3 and Government Code §12999 to expand pay data reporting and increase pay scale transparency.

SB 1162 imposes two significant requirements on private and public employers dependent on the number of workers it employs. First, the law imposes new rules for disclosing pay scale information in job postings. Second, the law imposes new requirements regarding record keeping and reporting.

By compelling pay transparency in job advertisements, California seeks to advance its mission of tackling wage disparities among women and minorities by empowering these groups to leverage employer-provided pay scale information during salary negotiations and thereby strengthen bargaining power. In addition, California expects that the imposition of enhanced reporting and record-keeping requirements will promote the identification of gender and race-based pay disparities and prevent discriminatory compensation and hiring practices. As a means of enforcing this plan, employers found to be in violation of SB 1162's provisions could face civil penalties anywhere from $100 to $10,000, depending on the violation.

While this law promotes fairness and equity within the workplace, SB 1162 may have significant legal and financial implications for employers. SB 1162's private right of action as well as its enforcement mechanism, could mean that employers face increased legal exposure as well as the imposition of exorbitant civil penalties.

II. WHAT SB 1162 MEANS FOR EMPLOYERS

a. Job Postings

SB 1162 requires employers with 15 employees or more to disclose pay scales to applicants and employees for available positions in job postings. This requirement applies to an employer who engages a third party to announce, post, publish, or otherwise make known a job posting to provide the pay scale to the third party and required the third party to include the pay scale in the job posting.

Existing law defines "pay scale" as the salary or hourly wage range that the employer reasonably expects to pay for the position. The Labor Commissioner has clarified that pay scale information does not include bonuses, commissions, health benefits, or paid time off.

b. Pay Requests By Applicants and Employees

Applicants would be entitled to pay scale information upon reasonable request, regardless of whether the applicant had an interview with the prospective employer. Under existing law, an applicant means an individual who is seeking employment with the employer and is not currently employed with that employer in any capacity or position.1 The law would also require an employer, upon request, to provide an employee with the pay scale for the position in which the employee is currently employed.

c. Record Retention

The law also imposes new record retention requirements on California employers. The law would require an employer to maintain records of a job title and wage rate history for the duration of each employee's employment plus three years after the end of employment. These records must be made available for inspection by the Labor Commissioner in order to determine if there is any pattern of wage discrepancy. An employer's failure to maintain these records creates a rebuttable presumption in favor of an employee's or applicant's claim.

d. Annual Reporting

Existing law requires companies with 100 or more employees to report pay data of their employees and contractors by race, ethnicity, and gender. However, SB 1162 revises the timeframe in which an employer is required to submit this information to a deadline of on or before the second Wednesday of May.2 Employers must file an annual report with the Civil Rights Department that discloses certain pay data according to race, ethnicity, and gender within the following job categories:

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

In addition, the following information must be disclosed in the Annual Pay Data Report:

• The number of employees by race, ethnicity, and gender in the above 10 categories;
• Within each of the above job categories, for each combination of race, ethnicity, and gender, the mean and median hourly rate (using W-2s);
• The number of employees by race, ethnicity, and gender whose annual earning falls within each of the pay bands used by the U.S. Bureau of Labor Statistics in the Occupational Employment Statistics Survey (using W-2s);
• The total number of hours worked by each employee counted in each pay band during the reporting year; and
• For covered employees with multiple establishments, there must be a separate report with this pay data, above, which covers each establishment.

III. ENFORCEMENT OF SB 1162 BY THE CALIFORNIA CIVIL RIGHTS DEPARTMENT

S.B. 1162 would require the Labor Commissioner to investigate complaints alleging violations of these requirements and would authorize the Commissioner to order an employer to pay a civil penalty upon finding an employer has violated these provisions.

For technical violations of the pay scale job posting requirements, employers would not incur penalties for a first violation, if corrected. However, for subsequent violations, an employer may incur civil penalties of no less than $100 and no more than $10,000 per violation.3

For violations of reporting requirements, an employer can be subject to civil penalties of $100 per employee for the first offense and $200 per employee for subsequent violations.4 For employers with 100 employees, civil penalties could amount to a $10,000 fine. The law authorizes the Civil Rights Department to recover the costs of compelling an employer to comply with the reporting requirements.

IV. LEGAL IMPLICATIONS FOR EMPLOYERS

a. Private Right of Action

SB 1162 establishes a private right of action for an employee or job applicant aggrieved by an employer's violation of the pay scale job posting requirement under Labor Code § 432.3(c)(5). By way of SB 1162, a person is authorized to bring a civil action for injunctive and other appropriate relief.5 A person can also file a written complaint with the Labor Commissioner within one year from the date they learned of the violation (not when the violation may have occurred.)

Should an employee or job applicant avail themselves of the private right of action, employers could face increased exposure to litigation if they fail to comply with the requirements set forth in SB 1162. When SB 1162 was first enacted, it was unclear whether the pay transparency law affected nationwide job postings, however, the Labor Commissioner has provided guidance clarifying that the pay scale information must be included in job postings if the position may ever be filled in California, either in-person or remote. This means that multistate and fully remote employers must ensure compliance with SB 1162 to mitigate litigation exposure.

b. Wage Discrimination

Another foreseeable consequence of wage transparency is claims from current employees. Under SB 1162, a current employee has a right to request pay scale information for their current position, which could, in turn, create the potential claim for wage discrimination if it is revealed that the employee is being underpaid. Wage transparency in job postings could also mean that an employee finds out that an employer is offering higher compensation for the same or similar position as the employee, but the employee is being paid less. While employers should not be faulted for offering higher compensation to attract talent, employers must be prepared to articulate valid reasons for the disparity in compensation. Failure to prepare for these conversations could mean that an employer is faced with wage discrimination claims if the basis for the discrepancy is not due to reasonable factors such as seniority, experience, education, or the like.

Whether it is a civil action seeking injunctive relief based on SB 1162's establishment of a private right of action or a claim for wage discrimination based on the employer's disclosure of pay scale information, SB 1162 will have legal consequences for those employers who fail to prepare. Employers should take preemptive action to set pay scale ranges for each covered job position and assess current employee pay for outliers. In addition, employers should conduct payroll audits to analyze relevant metrics to identify pay data discrepancies in order to avoid potential claims for wage discrimination.

V. WAGE TRANSPARENCY BENEFITS ALL

The growing national trend of pay transparency in the workplace will benefit employers and employees, given the accessibility and exchange of pay scale information. This information will provide employees with strengthened bargaining power during salary negotiations, with the ultimate goal of closing the wage gap for historically underpaid groups. On the other side of the coin, employers will be able to assess and adjust pay ranges in order to attract and retain talent and ultimately avoid costly litigation for noncompliance and/or wage discrimination suits.

SB 1162's required disclosures of pay scale information in job advertisements and enhanced reporting and recording keeping ultimately benefits all parties involved, notwithstanding the additional obligations placed on employers. Despite its legal and financial implications for employers, SB 1162 incentivizes employers to place a stronger emphasis on pay transparency and identifying disparities in compensation as a means of avoiding the cost of litigation. The carrot and stick approach of SB 1162 promotes the free exchange of pay scale information and undoubtedly serves as a positive driving force in closing the wage gap.

Jasmine M. Samuels is a member of California Lawyers Association's Litigation Section and a labor and employment attorney at Klinedinst PC in San Diego.