Updated Guidance Released for SB 1162 – California’s New 2023 Pay Data Reporting Requirement for Workers Provided by Third Parties

The California Civil Rights Department (CRD) released amended FAQs providing guidance on compliance with the new pay data reporting requirements. PDR FAQs – 2022 Reporting Year | CRD (ca.gov)  As previously reported here and here, Senate Bill 1162 amended Labor Code section 432.3 and Government Code section 12999 as part of California’s ongoing efforts to promote workplace pay transparency as a means to combat pay discrimination. Companies need to act now to be prepared to comply with the obligation to not only report data for their W-2 employees, but also the new obligation to compile and report data for workers supplied by staffing agencies and other third parties that are either working at, or assigned to, any California locations. This blog discusses the CRD guidance regarding this significant new development, together with takeaways for compliance.

What is the New Deadline to Submit Pay Data Reports under Senate Bill 1162?

The reporting deadline has been pushed back from March 31 to May 10, 2023. The FAQs have a link to the online portal and templates that employers can use to create their reports. Additional resources will continue to come online for employers.

How does Senate Bill 1162 amend the pay data reporting requirements?

  • A private employer of at least 100 employees anywhere, and with at least 1 employee based in California, must file a “Payroll Employee Report” regardless of whether the employer files a federal EEO-1 report. Also, employers are not permitted to submit a federal EEO-1 report to comply with the state reporting requirement.
  • A private employer using 100 or more FT or PT workers supplied through labor contractors to work anywhere, and with at least one contract worker in/assigned to California, must also file a “Labor Contractor Employee Report.” The Report will cover any of the contractor’s employees working in and/or assigned to the client employer’s California establishment(s). This obligation cannot be delegated to the labor contractor(s).
  • The Payroll Employee Report (and the Labor Contractor Employee Report) must include the mean and median hourly rate of employees (and the contractor’s employees) grouped within the same establishment, job category, race, ethnicity and sex combination.
  • CRD may obtain penalties against employers that fail to timely file their pay data reports and against labor contractors that fail to provide data to their client employers. The penalties are up to $100 per employee for any employer who fails to timely file the required report and $200 per employee for a subsequent violation, plus costs in any enforcement action.

What is a Labor Contractor?

A “labor contractor” is an individual or entity that supplies, either with or without a contract, a client employer with workers to perform labor within the client employer’s usual course of business.

What is a Labor Contractor Employee?

A “labor contractor employee” (LCE) is 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 that individual’s wages and who performs labor for a client employer within the client employer’s “usual course of business.” For example, presumably a cafeteria worker assigned to work at the offices of a pharmaceutical company would be considered outside the “usual course of business” and excluded from any reporting requirement.

What is the “Reporting Year” for the Labor Contractor Employee Report?

A report that is due in 2023 will contain pay data from calendar year 2022 for LCEs working for the employer during the relevant “Snapshot Period,” which is a single pay period between October 1 and December 31 of the Reporting Year. The FAQs encourage employers to use one Snapshot Period across all Labor Contractors.

What Must be Included in the Labor Contractor Employee Report?

Labor Contractors need to supply data and information to the client employer including mean and median hourly rates by establishment, job category, race/ethnicity and sex for the LCEs working at and/or assigned to the client’s California locations/establishments. However, the guidance does not include a deadline by which Labor Contractors must provide this information to their client employers.

The employer must disclose the ownership names of all labor contractors used to supply LCEs. An employer only submits one “Labor Contractor Employee Report” even if the employer uses multiple labor contractors and any of those contractors provide LCEs to multiple locations.

How are Teleworkers Reported?

If an LCE is working at and/or assigned to an establishment in California, then the LCE should be included in the report. The FAQs specify that an LCE working in California but reporting to a client establishment in a U.S. Territory or in a foreign country should be included in the report. LCEs living in California but working at/reporting to an establishment outside of California would not be reported.

The FAQs also apply these guidelines to the client employer’s remote W-2 employees for reporting on the Payroll Employee Report.

How are the Mean and Median Hourly Rates Calculated?

The same method is used for W-2 employees as for LCEs. First, the hourly rate needs to be derived from an employee’s total annual earnings for the entire Reporting Year, as shown on IRS Form W-2 Box 5. The FAQs discuss how to calculate hourly rates for exempt and non-exempt employees and the direction to include PTO in the calculation.

For the mean hourly rate, employees should be grouped within the same establishment, job category, race/ethnicity, and sex combination. The mean hourly rate is calculated by adding the individual hourly rates for each employee in the group, then dividing that sum by the number of employees in the group.

For the median hourly rate, employees should still be grouped within the same establishment, job category, race/ethnicity, and sex combination. The median hourly rate is generally calculated by adding the individual hourly rates for each employee in the group, then ordering the rates by smallest to largest and using the middle number.

Can the Client Employer Ask the Labor Contractor to Certify the Report?

No, an official of the Client Employer must certify the Labor Contractor Report. The Client Employer can have the PEO, HRO or Labor Contractor assist in the completion of the report but cannot delegate responsibility for certifying the accuracy of the report. However, a certifying official may authorize another person to electronically file the certification on their behalf.

What if the Labor Contractor is Unable to Provide All of the Information Needed for the Report?

Employee self-identification is the preferred method of identifying sex, race and national origin. Absent self-identification, employers are expected to use reliable employment records (including an employee’s self-identified pronouns for sex or observer perception for race/ethnicity) to provide that information for the reports. For the 2022 Reporting Year only (the reports to be filed in May 2023), the CRD is permitting client employers to submit Labor Contractor Reports that list gender/race/national origin as unknown. However, the CRD cautions that employers and labor contractors should not expect this option in the future. Therefore, employers should implement a plan to obtain accurate information from their labor contractors for subsequent reporting years.

Does the CRD Enforce SB 1162’s Pay-scale Disclosure Requirement for Job Postings?

No. The pay scale disclosure requirement will be enforced by the Labor Commission’s Office of the Department of Industrial Relations. The requirement for employers to disclose pay ranges in job postings went into effect on January 1, 2023. SB 1162 also requires employers to provide existing employees with the pay scale for the position the employee currently holds upon request.

Where are the Amended Pay Data Reporting Requirements Codified in Law?

The pay data reporting requirements can be found in Government Code section 12999. CRD also intends to issue separate regulations in addition to these FAQs.

Next Steps for Employers

The May deadline to comply with the new pay data reporting requirements is fast-approaching. Employers should determine whether they must submit a separate Labor Contractor Employee Report in addition to the Employee Payroll Report. Employers should immediately put their Labor Contractors on notice of the responsibility to provide accurate and timely data for the report filing in a manner consistent with the format required by CRD well in advance of the May deadline. The obligation to collect and maintain accurate data should be included in applicable contracts, together with other potentially applicable clauses.

Employers should continue to prioritize privileged pay equity audits to review and analyze the data before reporting to agencies who use it for potential enforcement action. Also, in 2022 the CRD published aggregate results from the data reported by employers in 2020 and in 2023 will report results from the 2021 reporting year. CRD’s guidance clearly states that it expects employers to review these results and assess their own pay data reports and pay practices for purposes of compliance. Privileged pay audits are the best means to accomplish that review, and proactively address any issues in an informed manner. The need for such audits is even more pressing given the salary disclosure obligations also required by SB 1162. Managers and HR professionals are now being faced with questions from current employees about what factors impact how their compensation is determined, especially when viewed in comparison to posted salary ranges for comparable positions. Privileged pay equity audits can ensure that those questions are answered accurately and to identify where additional training and remedial action may be warranted as a proactive means to limit confusion and potential claims.

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