California Governor Creates New Annual Pay Data Reporting Requirements for Employers

On September 30, 2020, California Gov. Gavin Newsom signed SB 973, which imposes new pay reporting requirements on certain employers. The bill takes effect January 1, 2021, with the first report due by March 31, 2021. 

These new reporting requirements aim to reduce gender and racial pay gaps. According to the legislature, this collection of pay data will permit the state to “more efficiently identify wage patterns and allow for targeted enforcement of equal pay or discrimination laws.” These new requirements are in response to the Trump Administration’s order in August 2017 halting an Obama-era revision to the federal Employer Information Report (EEO-1) report that required employers to include pay data by gender, race, and ethnicity beginning in 2018.  

What Does California’s Annual Pay Data Report Require?

This new law requires private employers with 100 employees or more who are required to file an annual EEO-1 report under federal law to submit an annual report to the California Department of Fair Employment and Housing (DFEH). The first report is due on March 31, 2021, and annually thereafter. Each report submitted by March 31 covers the prior calendar year.  

This report to DFEH must include two categories of information. The first tracks the EEO-1 report data, that is, employers must report the number of employees by race, ethnicity, and sex in each of the federally identified job categories. These categories are executive or senior-level officials and managers; first or midlevel officials and managers; professionals; technicians; sales workers; administrative support workers; craft workers; operatives; laborers and helpers; and service workers. Employers will count employees in these groups by creating a “snapshot” pay period. Employers are directed to look at a single pay period of their choosing between October 1 and December 31 and count and report all employees in that “snapshot” period.  

Second, employers are required to report 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. Employers should submit annual W-2 earnings for each employee in the “snapshot” pay period noted above, regardless of whether the employee worked a full year. This report should also include the total number of hours worked by each employee during the reporting year.  

Employers with multiple establishments must submit a consolidated report that includes all employees as well as a separate report for each establishment. All reports must be submitted in a searchable and sortable format. 

Use of the Data and Enforcement Provisions

SB 973 requires that the DFEH make the reports available to the California Department of Labor Standards Enforcement (DLSE) upon request. It prohibits the DFEH or DLSE from making public any individually identifiable information obtained from the report prior to the institution of certain investigation or enforcement proceedings. If the DFEH does not receive the required report from an employer, it may seek an order requiring the employer to comply and recover the costs associated with seeking the order for compliance.

Issues With SB 973

Critics of SB 973 note that pay data collected under this legislation may be prone to identify pay disparities that are actually based on the broad aggregation of dissimilar jobs. The individuals within the broad groups being reported may not perform substantially similar work, which is the standard for analyzing equal pay claims under California law. For example, the job category of “professionals” includes roles ranging from human resources specialists to lawyers to surgeons. The pay data report would combine such diverse roles to somehow determine whether there are pay disparities based on race, gender, or ethnicity. Employers who report pay distributions that appear problematic on their face may have legitimate, nondiscriminatory explanations for the differences, such as tenure, experience, and other nondiscriminatory market factors. 

SB 973 also does not take into account certain other differences between jobs. For example, eligibility for overtime, commissions, bonuses, and other benefits may not be the same for all jobs in the same EEO-1 category.  

Finally, there are several open questions with respect to the mechanics and scope of coverage of the law. Specifically, SB 973 does not specify whether only California employees will be reported in the pay report. It also does not clarify whether the reporting requirements apply to employers with 100 or more employees overall or to employers with 100 or more employees just in California. Furthermore, although employers are required to report the total number of hours worked by each employee in each pay band, the legislation does not address the fact that exempt employees typically do not track hours worked.

What Should Employers Do Now?

Additional guidance from the state to assist employers with compliance with SB 973 may be forthcoming. While awaiting such guidance, employers should evaluate whether they need to adjust their systems to ensure they can generate the required data for the first reports, due March 31, 2021. Employers may also want to review the federally identified job category for each of their jobs to ensure that the category is still the most accurate fit. Because this new reporting requirement may lead to increased scrutiny of pay equity issues, employers may also consider conducting a pay equity analysis to proactively detect potential areas of concern prior to submission of the first report.