California Expands Pay Transparency Requirements

Beginning January 1, 2023, employers in California will be subject to several new requirements aimed at promoting pay equity, as follows:

• Employers with 15 or more employees (located anywhere) will be required to post the pay scale for an open position in their job postings. Pay scale is defined as the salary or hourly wage range that the employer reasonably expects to pay for the position. Third parties posting on behalf of these employers will also need to post the range.
• Upon request, employers of all sizes will be required to provide an employee with the pay scale for their current position.
• Employers of all sizes will need to keep records of job title and wage rate history for each employee throughout their employment and for three years after termination.
• Pay data reporting will be required for any employer with 100 or more employees, regardless of whether they must submit the federal EEO-1 report.
• Employers with 100 or more employees hired through labor contractors in the prior calendar year will have to file a separate pay data report for those workers.
• Pay data reports will be due on May 10, 2023, and the second Wednesday in May each year afterward.
• Pay data reports will need to include the median and mean hourly rate for each combination of race, ethnicity, and sex in each job category.
• Employers with multiple establishments will need to submit a separate pay data report for each establishment.

Broader Implications

The intent of the requirement to post pay scales in job postings is to promote pay equity and to help close the wage gap for those who are disadvantaged in the job market through no fault of their own. While the approach may feel drastic to private employers, it has been used successfully in the public sector for many years. In fact, after the initial rough patch (which may require a fair bit of work from employers who lack documentation around their pay structure), these pay transparency requirements are likely to streamline hiring, compensation, and talent development processes and make your business run more efficiently. And in 2023, it’s estimated that 25% of all private employers will be required to post pay ranges with their job ads.

What to Expect

You should anticipate that employees will start asking about their own pay ranges and that they’ll see your job ads and react to the pay scales provided there as well.

If the ranges you post in ads or provide to current employees when asked seem too wide, they may think you're providing bogus information. This will breed distrust and could potentially lead to employees reporting you. Or they may wonder who among them makes that little or that much, and why. If the ranges are reasonable but you have current employees outside of those ranges, that will likely lead to some immediate feedback.

In many cases, employees will begin discussing this new information with their coworkers. Discussing wages is protected by both federal and California law, so employers should not attempt to stop or prevent these conversations or punish employees for having them. The result of this sharing may be that employees discover one-off or systematic pay inequality, in which case you may have issues with morale, turnover, union organizing, or lawsuits. Even if your pay choices are perfectly logical across the board, employees will not necessarily know or understand why they are paid less than a coworker who they consider their equal, and you should be prepared to explain those discrepancies.

What to Do Now

Don’t panic. If you don’t have documented pay ranges, start working on them—you have three months to get your systems in order. You may want to consider hiring outside help if you don’t already have a basic, defensible pay structure and fairly comprehensive job descriptions.

If you are preparing for this on your own, here are some tips:

• Pay ranges should align with specific job descriptions.
• If you have employees whose titles or job descriptions don’t match what they’re doing, update their job title or description.
• Within each pay range, you should have an explanation of how an employee moves from the bottom of the range to the top.
• You should also be able to explain how an employee goes from one pay range to another and if pay ranges overlap, why.
• Be prepared to explain why employees with the same job title or job description receive different compensation using only the allowable reasons for pay differentials in California (this list includes factors like seniority and merit but doesn’t include market factors). To answer this question well, you may want to consider doing a pay equity audit.
• If you are already aware of pay equity issues or become aware of them over the next few months, start correcting them as soon as possible. You may want to consult with an employment attorney in California to strategize how to limit your liability.