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Guidance clarifies California law on collecting and reporting pay data

Executive Compensation|Health and Benefits|Inclusion and Diversity|Total Rewards
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By Stephen Douglas , Rich Gisonny , Laura Rickey and Lindsay Wiggins | January 14, 2021

Under the new California law, employers must submit their first report, covering 2020 calendar-year data, by March 31, 2021.

The California Department of Fair Employment and Housing (DFEH) has issued FAQs that clarify certain issues surrounding a new California law (SB 973) that requires covered employers to collect pay and hours worked data and to report that information no later than March 31 of the following year.1 This equal pay report is similar to the now-rescinded “Component 2” of the federal EEO-1 form that would have required employers to collect and report similar information. Among the important issues clarified in the FAQs is how an employer should determine whether it meets the 100 employee threshold and, as a result, would therefore be required to submit the report.

The following Q&As are intended to help employers start preparing now for filing a timely report and reflect the latest guidance from the DFEH.

Q. Which employers are covered by the new law?

The new law applies to private employers with 100 or more employees that are required to file the EEO-1 form under federal law. The DFEH has confirmed that employers must count employees located both inside and outside of California; however, employers with no employees in California during the reporting year are not required to file a report. The FAQs also clarify that part-time employees are counted the same as full-time employees, and those on employer-approved paid or unpaid leave are also counted.

A report must be filed if the employer either employed 100 or more employees in the “snapshot pay period” (as described below) or employed on a regular basis 100 or more employees during the reporting year. According to the FAQs, “regular basis refers to the nature of a business that is recurring, rather than constant.” The FAQs provide an example: In a seasonal industry, an employer that employs 100 or more employees during that season would be required to file a pay data report, if an EEO-1 report is also required to be filed.

Q. Which employees are included in a report?

Employers must submit information based on a snapshot date taken from the end of any pay period between October 1 and December 31. The report must account for and include all employees who were active as of that snapshot pay period, regardless of whether the employee worked for the employer the entire calendar year.

The DFEH also includes a detailed FAQ explaining which employees must be included in a report (e.g., employees assigned to California establishments and/or working within California, including teleworkers) and which employees may be included, (e.g., employees located outside of California, and working for a non-California establishment).

Employers may want to consult legal counsel on whether to report data for employees who neither work at nor are assigned to a California establishment.

Q. When must reports be filed?

The California law requires employers to submit their first report, covering 2020 calendar-year data, by March 31, 2021. Future reports must be filed by March 31 of each subsequent year.

Q. Where are the reports filed and on what forms?

The reports are filed with the California DFEH. Employers with multiple establishments are required to submit a report for each establishment and a consolidated report that includes all employees. The law defines an “establishment” merely as “an economic unit producing goods or services.” According to the FAQs, an employer’s headquarters is an establishment for purposes of pay data reporting to DFEH.

The DFEH is in the process of creating a “secure online reporting system” and will issue standard reports for employers to use in submitting their information.

Q. What data must be collected and reported?

The report must include two categories of information submitted in a searchable and sortable format:

  1. 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.
  2. 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. The 12 pay bands span from $19,239 and under to $208,000 and over. Employers must submit annual W-2 earnings for each employee identified in the snapshot pay period, regardless of whether the employee worked a full year. Employers must also report total hours worked by each employee within a given pay band during the reporting year.

Reporting the total number of hours worked for exempt employees, or any employees who do not file time sheets or track hours worked, will be challenging. The DFEH intends to issue further guidance related to hours worked. It’s uncertain whether that guidance will permit employers to use a standard number of hours as a default (e.g., 40 hours per week for full-time employees and a lower number for part-time employees) as was done for the Component 2.

The FAQs provide that employers should report employees’ sex in three officially recognized categories — female, male and nonbinary — with the preferred identification method being employee self-identification.

Q. What happens with the data?

The law requires the DFEH to make the reports available to the California Division of Labor Standards Enforcement (DLSE) upon request and to maintain the pay data reports for a minimum of 10 years. It also authorizes the DFEH to seek an order requiring non-reporting employers to comply. The law authorizes the DFEH to “receive, investigate, conciliate, mediate, and prosecute complaints” alleging unlawful wage discrimination practices. It also prohibits the DFEH or DLSE from making public any individually identifiable reporting data before certain investigation or enforcement proceedings begin, and requires the Employment Development Department to provide the DFEH with the names and addresses of all businesses with 100 or more employees.

The FAQs provide some additional details about retention and potential publication of submitted data (e.g., in aggregate reports).

Q. Where can employers find more guidance?

Employers should monitor the DFEH website for regularly updated FAQs. The DFEH website indicates that guidance will be posted soon on certain issues not addressed in the initial round of FAQs, including those related to pay; hours worked; multi-establishment employers; and corporate transactions, such as mergers, acquisitions and spinoffs. In addition, employers may submit questions to the DFEH at paydata.reporting@dfeh.ca.gov.

Q. What concerns have employers raised about the pay data reports?

The same criticisms of the federal EEO-1 Component 2 also apply to the new California law. For instance, some employers have argued that the collection of W-2 earnings will unnecessarily open the door to increased scrutiny and investigations because there are limited opportunities for employers to explain legitimate non-discriminatory reasons for pay disparities (e.g., education, training, experience, tenure, merit). Similarly, the new law also does not take into account certain other differences between jobs, such as eligibility for overtime, commissions and bonuses, and employees working less than the entire year or promoted during the year.

Although employers may provide “clarifying remarks,” it is unclear how those might affect enforcement efforts. Employers have also expressed concerns about data privacy as well as the time and resources required to complete a report that may include data that are of limited value.

The FAQs have done little to alleviate these various concerns; in fact, the guidance that addresses the inclusion and calculation of out-of-state employees will likely heighten the time-consuming complexities faced by many California employers.

Q. How should employers start preparing?

Employers should start to determine how they will collect the necessary data by:

  • Ensuring that jobs are correctly classified according to the EEOC guidelines
  • Comparing and linking existing pay bands to those used by the Bureau of Labor Statistics
  • Determining how to report hours worked for exempt employees

Employers will also want to consider conducting a pay equity analysis to 1) identify existing wage differences between employees doing “substantially similar work,” 2) evaluate the reasons for the differentials, and 3) make adjustments where necessary.

Finally, all employers, even those without any California employees, should be aware that the Biden administration may attempt to reinstitute the Component 2 requirement of the federal EEO-1 form. If resurrected, all employers that are required to file the federal EEO-1 form will have to collect and report additional pay and hours worked data.

Footnote

1 See “New California law requires employers to collect and report pay data,” Insider, November 2020.

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