• California’s new pay transparency law will require employers with 15 or more employees to post the pay scale for an open position in their job posting.

• Employers (of all sizes) will be required to provide current employees with information about their own pay range upon request.

• Employers will need to keep records of job titles and wage rate history for each employee throughout their employment and for three years after termination.

• Employers have less than two months to prepare to comply with this new pay transparency law and prepare for inquiries by employees.

Compensation laws are changing – and one about pay transparency is coming directly for employers in the state of California. Trendsetting as usual, California will become the second state – Colorado was the first – to require that employers post the range for open positions in job ads (the state of Washington will also mandate pay range posting starting January 1). California will also require that employers provide current employees with their own pay range, if they ask. The pay transparency law will likely cause an uptick in workplace wage discussions, and as a result, could draw significant attention to pay equity issues.

To help small and medium-sized businesses in California, we’ve put together this information to help you stay on top of the latest legislative change.

What’s Changing and Who’s Impacted?

Beginning January 1, 2023, California employers will be subject to several new requirements to promote pay equity. These initiatives are aimed at improving equality and promoting transparency. Here are the upcoming changes:

• California employers with 15 or more employees (located anywhere in the country) will be required to post the pay scale for an open position in their job postings, as will third parties posting on their behalf. (Pay scale is the salary or hourly wage range the employer expects to pay for the position.)
• Upon request, employers of all sizes will be required to provide employees with the pay scale for their current position.
• Employers of all sizes will need to keep records of job titles 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 must file a separate pay data report for those workers.
• Pay data reports 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 must submit a separate pay data report for each.

Reasons for the Pay Transparency Law

This new requirement intends to promote pay equity and help close the wage gap for those 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 businesses run more efficiently.

What Employers Can Expect

Employers should expect that their employees will start asking about their pay ranges and will react to the pay ranges provided by their employer in job ads. If the ranges posted in ads, or provided to current employees when asked, seem too broad, employees may think they’re getting bogus information from management. This will breed distrust and potentially lead to employees reporting the company for violating the law. Employees may also wonder who among them makes that little or that much and why.

If the ranges are reasonable, but there are current employees outside of those ranges, that will likely lead to some immediate feedback that employers should be ready to receive.

When employees begin discussing this new information with their coworkers, employers need to remember that wage discussions are protected by federal and California law, so they should not attempt to stop or prevent these conversations or punish employees for having them. This information sharing may result in employees discovering one-off or systematic pay inequality, in which case employers may have issues with morale, turnover, union organizing, or lawsuits.

Even if an employer’s pay choices are perfectly logical across the board, employees will not necessarily know or understand why they are paid less than a coworker they consider their equal. Although employers are not required to give explanations for pay ranges or pay rates – only provide the numbers as required by the law – being able to provide a coherent explanation of the company pay structure will go a long way toward maintaining employee morale and trust.

What Employers Should Do Now

If you’re an employer and you don’t already have documented pay ranges, start working on them—you have two 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 titles or description.
• You should have an explanation of how an employee moves from the bottom to the top of a pay range.
• 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 be able to answer this question well, you may want to consider doing a pay equity audit.
• If you are 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 an employment attorney in California to strategize how to limit your liability.

While many of the suggestions above may seem obvious, if your systems aren’t written down anywhere (and shared with those who will be asked the questions), you will likely run into issues answering questions about your pay structure in a cohesive and consistent way. And having multiple managers answering these tough questions differently will only add to the potential drama and liability.

Additionally, having clear documentation of the legitimate reasons for each employee’s wage rate will be helpful if you do find yourself in any pay equity litigation. To that end, I recommend using the rest of the year to document your pay structures, plan your responses, and prepare for new challenges in 2023.