Update: Governor Newsom signed SB 973 into law on September 30, 2020.

It appears that employers in the Golden State will be required, starting next year, to collect and submit worker compensation data to the state.  Senate Bill 973 (SB 973) has cleared both houses of the state legislature, and Governor Gavin Newsom is expected to sign the bill into law.  Similar legislation was introduced in last year’s legislative session, but that bill died in committee. 

Under SB 973, California employers with 100 or more employees will be required to submit to the Department of Fair Employment and Housing (DFEH) a “pay data report” by no later than March 31, 2021, and annually thereafter.  Under the bill, the pay data report must include a breakdown of employees by race, ethnicity, and sex in 10 broadly defined job categories.¹ The report must further include a breakdown of employee compensation in one of 11 pay bands used by the United States Bureau of Labor Statistics in its Occupational Employee Survey, ranging from a low of “less than $19,239” to a high of “more than $208,000” again by race, ethnicity, and sex.  Employers will use W-2 income for this reporting.  Finally, employers must report total hours worked by each employee within a given pay band during the reporting year.

The bill provides that the report must include a section for employers to provide “clarifying remarks” although they are not required to do so.  The report must be filed in a format that allows DFEH to electronically search it using commonly available software.  DFEH is authorized to publish annual reports containing aggregate data, and provide copies of individual reports to the Division of Labor Standards Employment upon that agency’s request.

The state’s proposal mirrors the federal EEO-1 “Component 2” filing that employers were required to submit in 2019 to the U.S. Equal Employment Opportunity Commission (EEOC).  The agency subsequently announced that it would discontinue this requirement, citing the cost of collection and the lack of utility of the data.  EEOC’s expanded EEO-1 was the subject of significant criticism from the employer community.  Critics noted that sorting workers into broad job categories does not indicate whether similarly situated employees are in fact performing substantially similar work (for example, in a hospital, the “professional” category would include employees ranging from surgeons to dieticians to bookkeepers, making any comparison of wages paid among these different employees meaningless).  Similarly, the use of W-2 wages was criticized as being potentially misleading—W-2 wages reflect a number of choices employees make individually, ranging from decisions about overtime and premium shifts to elective deferrals such as 401(k) plan contributions.

It is fair to surmise that the elimination of the federal filing requirement led California to adopt this requirement under state law.  In fact, state senator Hannah-Beth Jackson, who authored and introduced California’s Fair Pay Act back in 2015—which spurred a number of states to enact pay equity laws—introduced this bill in an effort to further address pay inequities based on gender, race, and ethnicity by encouraging employers to identify and correct their pay practices.  We predict other states may follow suit, particularly those states where Democrats control the legislature and governorship.  In light of these upcoming reporting requirements, California employers may wish to consider auditing their current compensation systems to ensure they are paying workers appropriately, and to flag any potential pay equity issues sooner, rather than later.  A discussion of the utility and advantages of such audits can be found here.

Littler’s Workplace Policy Institute (WPI) will keep employers advised of relevant developments.