California’s New Pay Data Reporting Law: 6 Actions Employers Should Take

According to California’s Commission on the Status of Women and Girls, some 97% of the state’s companies have a gender wage gap.

To close that gap, the state legislature has instituted a new law, SB 973, also known as the “pay data reporting law.” Beginning this year, employers with more than 100 employees must report pay data annually to California’s Department of Fair Employment and Housing (DFEH).

1. Assemble a team

With the March 31, 2021 submission deadline now passed, most California businesses have likely discovered internal pay disparities at some level. The way in which the disparities are addressed—and how quickly they’re resolved—can have a profound impact on business operations going forward.

Regardless of whether your employer is a public or private company, a compensation equity analysis and remediation process begins with your SB 973 compliance team, which should include your Chief Financial Officer, Chief Operating Officer, and Chief Executive Officer; in-house counsel (provided you have one), a board of director’s liaison and a representative from Human Resources. The team should also include an experienced employment attorney and a data analyst. Outside counsel will not only advise you on the legal aspects of any pay disparity issues, but also ensure the discussions are protected by attorney/client privilege.

With the team fully assembled, you can begin examining pay disparities, outline initial and longer-term pay equity mediation goals and establish a timetable for meeting them.

2. Assemble your data

Since your data has already been collected and submitted to the DFEH, much of the initial heavy lifting has been done.

Your DFEH report identifies the number of employees you have by race, ethnicity, and sex (female, male, and nonbinary) within the following job categories: executive or senior level officials and managers; first or mid-level officials and managers; professionals; technicians; sales workers; administrative support workers; craft workers; operatives; laborers and helpers; and service workers.

The report lists these employees by race, ethnicity, and sex; their annual earnings, which fall within each of 12 pay bands established the federal Bureau of Labor Statistics; and the total number of hours worked by employees in each pay band.

Out of state entities with employees assigned to California, or in-state companies with employees working out of state, must submit reports as well. However, the DFEH expects that a single-establishment employer in California will include on its pay data report all employees (including any employees outside of California) whether or not they are teleworking. A single employer with multiple establishments must submit one consolidated report covering all its employees and separate pay data reports for each establishment.

3. Implement a Compensation Equity Analysis

Once you’ve created this rich database and submitted it to the DFEH, you can take the next step and perform a Compensation Equity Analysis. Also known as a “pay equity audit,” the analysis aims to answer three questions regarding your employee compensation:

  • * Do pay disparities exist?
  • * Are they limited to certain portions of the population (one office or department)?

Can they be explained by legitimate business justifications other than a protected class characteristic?

While pay equity analyses are typically driven by the C-suite in cooperation with the HR department, the initiative is increasingly originating with the Board of Directors. That’s because boards are becoming more diverse worldwide and previously underrepresented members—those who have likely experienced pay inequities first-hand—1) want to examine the company’s pay equity data and 2) often ask to have it tracked over time.

There is no universal one-size-fits-all method for measuring pay equity. For relatively large companies, or companies that have never collected and analyzed pay equity data before, it can be a time-consuming process.

One of the key benefits to including a data analyst on your compensation equity and DFEH compliance team is that they can help you consolidate and review information from different internal data sources. Many companies store payroll data in one system, equity in another, and HR data and demographics in yet another. Though it can be costly, it might make sense to purchase internal compensation management software to streamline your pay equity audit.

4. Understand your pay gap(s)

Depending on your findings, you may also want to consider employing an outside firm to conduct a more robust independent analysis. While many companies perform their own analyses, contracting with an independent advisor can provide a number of key advantages. At the outset it alleviates internal pressure on both the HR team and your CFO. More importantly, an outside firm provides employees and other stakeholders with greater assurance about the neutrality and accuracy of the findings.

5. Remediation

At this point, you’ve identified your company’s problem areas. Now you must decide what information you need to address them. What specifically are you interested in? Is it simply a case of determining whether the company is paying men and women fairly? Or do you want to drill down further and examine pay equity data by state, division, director, department, or team? Perhaps it’s all of the above.

You may also wish to review compensation information beyond just the DFEH requirement. For example: how long do women in your company remain in the same position before moving on? Are there further discrepancies when you take equity compensation into consideration? Does your company have a “motherhood penalty” issue, in which women with children make less than men with children or women without children?

Keep in mind that doing this type of proactive analysis ultimately gives you more control – you now have the chance to make needed changes and head off any judgments or conclusions others might draw from the raw data you submitted to the DFEH.

6. Embrace Transparency

Finally, embrace transparency.

Pay transparency initiatives are occurring with greater frequency throughout the U.S. and other countries. And in the digital age, it is quite common for employees to share compensation information online. As a result, every company will be well-served to embrace pay equity sooner rather than later.

Consider the following:

In the UK, employers with 250 or more workers must submit annual male/female pay gap data to the government, which then posts it online for anyone to review. Since the program’s inception in 2017, pay differences between men and women have begun to shrink.

In mergers and acquisitions (M&A) transactions, diligence experts recommend that both targets and acquirers to evaluate pay gap data when reviewing a potential deal’s risks and rewards review, and before a transaction is consummated. Pay gaps are increasingly viewed as a risk, while strong equity compensation practices are viewed as a benefit.

Employers can no longer forbid employees – either verbally or in written policy – from discussing salaries or other job conditions among themselves. Further, workers across a number of industries are creating their own widely shared salary databases, with employees anonymously entering their earnings for all to see.

Tackling and resolving pay equity issues increases employee morale, efficiency, and productivity. Embracing transparency and clearly demonstrating equal pay measures allows a company to hand-pick the best employees from greater pool of applicants, while also reducing staff turnover and absenteeism, increasing employee commitment to the company, and improving the bottom line.

By complying with SB 973 in March, employers have already laid the groundwork. Taking the next step—collecting and analyzing pay data and implementing needed changes throughout the organization—can pay handsome dividends down the road.

Simply put, embracing pay equity is good for business.


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