January 19, 2023, the California Civil Rights Department (CRD) updated its California Pay Data Reporting: Frequently Asked Questions to provide additional guidance following the passage of Senate Bill 1162, which became effective on January 1, 2023. As previously reported by DWT here, here and here, Senate Bill 1162, which amended Labor Code section 432.3 and Government Code section 12999, significantly expanded California's already progressive pay transparency and data reporting laws and imposed a new reporting deadline of May 10, 2023. At the end of last year, the California Labor Commissioner provided clarification regarding the pay transparency requirements (summarized here), and now the CRD has offered its own set of updated FAQs regarding the new pay data reporting requirements.
SB 1162 and Updated Pay Data Reporting Laws
First, a little background: in 2020, California passed the nation's first state-imposed pay data reporting obligations, requiring private employers with 100 or more employees (with at least one employee in California) to report annually the number of their employees by race, ethnicity, and sex in specified job categories to the CRD (formerly the Department of Fair Employment and Housing). Now, with the implementation of SB 1162, the following newly expanded pay data reporting requirements became effective on January 1, 2023:
- The new annual pay data report due date is May 10, 2023.
- Private employers with 100 or more employees hired through labor contractors are required to submit a separate pay data report to the CRD for those employees.
- Pay data reports are now required to include the median and mean hourly rate of pay for each combination of race, ethnicity and sex within each category.
- Employers are no longer allowed to submit an Employment Information Report (EEO-1) in lieu of a pay data report.
- Failure to file the pay data report may result in civil penalties, not to exceed $100 per employee for an initial violation, and $200 per employee for each subsequent violation.
Key Clarifications by the CRD
The CRD's updated Pay Data Reporting FAQs is a detailed document that provides definitions of new terms, specific guidance, and multiple examples regarding key areas of the new laws, including the following:
- Separate Payroll Employee and Labor Contractor Employee Reports. One of the most significant changes enacted by SB 1162 is the new and onerous requirement that employers file a separate pay data report on labor contractor employees. The FAQs label the two separate pay data reports as the "Payroll Employee Report" and the "Labor Contractor Employee Report," and although many of the reporting requirements for the two are similar, there are some notable differences.
- Payroll Employee. The FAQs define a payroll employee as an individual on an employer's payroll, including a part-time individual, for whom the employer is required to withhold federal social security taxes from that individual's wages.
- Labor Contractor Employee. The FAQs define a labor contractor employee as an individual on a labor contractor's payroll, including a part-time individual, for whom the labor contractor is required to withhold federal social security taxes from the individual's wages, and who performs labor for a client employer within the client employer's usual course of business.
- Employers Required to File Pay Data Reports. The FAQs make clear that employers are required to file separate pay data reports for payroll employees and labor contractor employees (one report only for each category) if they meet the required number of 100 employees in each category.
- Payroll Employee Report. Private employers with 100 or more payroll employees (with at least one in California) are required to file a Payroll Employee Report. An employer has the requisite number of employees if the employer either employed 100 or more employees in the Snapshot Period (a single pay period between October 1 and December 31) or regularly employed 100 or more employees during the reporting year. The FAQs clarify that part-time employees and employees who are on paid or unpaid leave are to be counted. Additionally, entities with fewer than 100 employees are also required to report if they are part of an "integrated enterprise" and the entire enterprise employees a total of 100 or more employees.
- Labor Contractor Employee Report. Private employers with 100 or more labor contractor employees within the prior calendar year (with at least one labor contractor employee in California) must submit a Labor Contractor Employee Report. An employer has the requisite number of labor contractor employees if the employer either has 100 or more labor contractor employees in the Snapshot Period (a single pay period between October 1 and December 31 of the reporting year) – across all of its labor contractors, not per labor contractor – or regularly had 100 or more labor contractor employees during the reporting year. As with the Payroll Employee Report, the FAQs clarify that part-time labor contractor employees and labor contractor employees who are on paid or unpaid leave are to be counted. Additionally, entities with fewer than 100 labor contractor employees are also required to report if they are part of an "integrated enterprise" and the entire enterprise employees a total of 100 or more labor contractor employees.
- Snapshot Period. The FAQs confirm that the Snapshot Period for the Labor Contractor Employee Report is the same time frame as for the Payroll Employee Report, i.e., a single pay period between October 1 through December 31. Additionally, although the CRD recommends that an employer choose the same Snapshot Period for all of its labor contractors, this is not a requirement.
- Employees Who Must Be Reported In Pay Data Reports. The FAQs pose and answer questions regarding which employees must be reported on by employers in the two types of pay data reports and give multiple examples addressing various possible employment scenarios, including remote employment.
- Payroll Employee Report. When preparing the Payroll Employee Report, the FAQs specify that employers must include all payroll employees who were assigned to California establishments and/or working within California during the Snapshot Period. Thus, employees who reside outside of California but are assigned to a California establishment must be included in the report. Employees who reside in California but are assigned to an establishment outside of California must also be reported. Unlike in years past, employers are specifically instructed to not report employees who are both working outside of California and are assigned to an establishment outside of California.
- Labor Contractor Employee Report. The FAQs state that, similar to the Payroll Employee Report, an employer preparing a Labor Contractor Employee Report must include and report on their labor contractor employees assigned to California establishments and/or working within California during the Snapshot Period. As with the payroll employees, the FAQs state that employers should not report labor contractor employees who are both working outside of California and are assigned to an establishment outside of California.
- One Report for Multiple Establishments. The FAQs adopt the Government Code section 12999 definition of establishment as an economic unit producing goods or services. The FAQs state that whether an employer has one establishment or multiple establishments, each employer must only submit a single Payroll Employee Report and/or a single Labor Contractor Employee Report.
- One Report for All Labor Contractors. For Labor Contractor Employee Reports, an employer must submit only one Labor Contractor report, even if they have multiple labor contractors. Thus, if an employer has workers hired through multiple labor contractors, the employer's single report must include the information from their various labor contractors. Additionally, if an employer has multiple establishments, the single Labor Contractor's Report must include information on each labor contractor working for each establishment.
- Mean and Median Hourly Rates. Another significant change enacted by SB 1162 is the added requirement that all Payroll Employee Reports and Labor Contractor Employee Reports include the mean and median hourly rates of all groupings of employees with the same establishment, job category, race/ethnicity, and sex. To obtain the mean and median hourly rates, the FAQs state that an employer must first calculate each employee's individual hourly rate by dividing the employee's W-2 box 5 income by the number of hours the employee worked. Then, the mean hourly rate is calculated for each grouping by adding the individual hourly rates for each employee in the group and then dividing that sum by the number of employees in the group. The median hourly rate is calculated by ordering the hourly wages of each employee in the group from smallest to largest and selecting the middle number.
- Labor Contractors Required to Provide Employers with Pay Data. The FAQs make clear that a labor contractor must provide an employer with the requisite pay data, including race/ethnicity and sex, needed for the Labor Contractor Employee Report. However, the CRD is permitting employers to report unknown race/ethnicity and sex for labor contractors' employees when that information is not reasonably obtainable by the filing date this year. The CRD warns that employers and labor contractors should not expect this option in the future and should implement plans to obtain accurate information from employees for subsequent reporting years.
- Labor Contractor to Allocate Labor Contractor Employee's Pay to Each Employer. The FAQs specify that if a labor contractor employee has worked for more than one employer over the course of the calendar year, the labor contractor should allocate the labor contractor employee's W-2 Box 5 wages respectively to each employer, based on the wages for work performed for that employer. For the purposes of reporting pay data, each employer is to report the portion of their labor contractor employees' annual wages that are attributable to work performed for that employer.
- Penalties Apply to Labor Contractors. The FAQs clarify that the penalties added by SB 1162 against employers who fail to file required pay data reports ($100 per employee for the first failure to file a report and $200 per employee for a subsequent failure) will also apply to labor contractors who fail to provide required pay data to an employer.
Employer Takeaways and Next Steps
With the recent implementation of the new pay data reporting laws and the new reporting deadline of May 10, 2023, it is highly recommended that California employers consult with legal counsel and take the following steps to ensure compliance and avoid potential penalties:
- Start now to assess payroll and labor contractor employees to determine whether a Payroll Employee Report and/or Labor Contractor Employee Report are required to be filed.
- Gather internal pay data and assess and revise data recordkeeping practices as needed.
- Contact any and all labor contractors to gather pay data on labor contractor employees, as needed.
- Ensure proper training for all employees whose duties are impacted by the new pay data reporting laws, including management and human resources employees.
Additionally, the FAQs indicate that the CRD will be providing new versions of pay data reporting resources for the new reporting year, which can be found here.
DWT will continue to monitor the pay data reporting laws and provide updates as they occur. In the meantime, please do not hesitate to contact the DWT Employment Services Group with any questions.