[UPDATE: Guidance issued by the California Department of Fair Employment and Housing on these new requirements may be found here.

California employers with 100 or more employees are now required to file with the state detailed annual reports setting out demographic, pay and position information on their employees. As for the purpose of requiring the reports, Senate Bill 973 pulls no punches: state government agencies will use the reports against employers for “targeted enforcement” of California pay equity, anti-discrimination and wage and hour laws. Covered employers must file the first of their reports no later than March 31, 2021. Governor Gavin Newsom signed SB 973 into law last week.

The new requirements are similar in respects to the federal requirement to file EEO-1s. However, unlike the federal EEO-1 process, which has been troubled in recent years, SB 973 requires that employers feed data that may appear unfavorable directly to California state agencies that are among the most aggressive state agencies in the U.S. in enforcing employee-protective legislation. Employers must place a corresponding level of attention and priority on managing their reporting under SB 973.

The Employers Subject to the Reporting Requirements

Private sector employers that both have 100 or more employees and are required by federal law to file an annual Employer Information Report (EEO-1) are subject to the new California requirements. A summary of the federal requirements for who must file an EEO-1 is here. As you may know, the U.S. Equal Employment Opportunity Commission (EEOC) temporarily suspended the obligation to file EEO-1 data, in part, for reporting year 2019 as a step in alleviating businesses of administrative burdens during the Coronavirus pandemic. The new California legislation does not include any such reprieve; employers subject to SB 973 must file their California reports in full for reporting year 2020 no later than March 31, 2021.

The Data Employers must Report

The new legislation requires that covered employers file annually with the California Department of Fair Employment and Housing (DFEH) a “pay data report.” The report will set out the required information for all employees who were on the employer’s payroll in any single pay period of the employer’s selection in the last three months of the prior calendar year, referred to as the “reporting year.” For example, for its first annual report due by March 31, 2021 for reporting year 2020, a covered employer will select one payroll period within the timeframe from October 1 through December 31, 2020 as the period to be the subject of its pay data report – the “snap shot” payroll period.

The pay data report must set out, for employees on the payroll in the snap shot period, the number of employees by race, ethnicity and sex in each of the following 10 job categories: (1) executive or senior level officials and managers; (2) first or mid-level officials and managers; (3) professionals; (4) technicians; (5) sales workers; (6) administrative support workers; (7) craft workers; (8) operatives; (9) laborers and helpers; and, (10) service workers. All employees on payroll in the snap shot period – full and part-time, exempt and non-exempt — must be included. SB 973 does not define or provide descriptions of these job categories. The 10 job categories, however, are the same categories around which the federal EEO-1 is organized. EEOC guidance for understanding how that agency construes the job categories for purposes of the EEO-1 found here.

Apart from the demographic information of employees in each job category, SB 973 also requires that the California pay data reports set out the number of employees, by race, ethnicity and sex, whose annual W-2 earnings for the reporting year fall within each of the pay bands used by the U.S. Bureau of Labor Statistics. The employer must also include the total number of hours worked by each employee counted in each pay band during the reporting year.

Importantly for employers, the pay data reports will include a section “to provide clarifying remarks” regarding any data employers report. This provision is likely to become an important tool for employers who see strategic advantage in placing required data in context or volunteering additional information in order to attempt to pre-empt an agency drawing mistaken conclusions from data disclosed in a particular pay data report.

SB 973 permits employers to submit their federal EEO-1 to the state as compliance with the new state legislation so long as the EEO-1 contains “the same or substantially similar” information required by SB 973.

Employers with Multiple Production Sites

Employers with more than one “establishment,” meaning “an economic unit producing goods or services,” must file one pay data report for each establishment and a consolidated report that covers all employees at all sites. An employer with manufacturing sites, retail outlets, or facilities providing services to consumers in different cities or from multiple locations within a city are required to file one report for each location plus a consolidated report encompassing all employees at all locations. By its terms, SB 973 covers all such “establishments,” regardless of how many or few employees work there.

While federal law requires covered employers to file an EEO-1 specifically concerning employees at their headquarters, SB 973 is silent on whether the new California law views a company headquarters – not itself directly “producing goods or services” – as an “establishment” with respect to which a pay data report must be filed.

California Agencies will Use the Reports in Enforcement Actions against Employers

Discrimination and Pay Equity Actions

Employers will file their pay data reports with the California Department of Fair Employment and Housing, the agency charged with enforcing California state laws barring unlawful discrimination in employment. The new legislation clearly contemplates the DFEH using pay data reports in investigations and enforcement actions against employers under the California Fair Employment and Housing Act (FEHA), the state-law scheme barring discrimination in employment on grounds including race, ethnicity and sex.

In an important development that is being widely overlooked by others writing on SB 973, the new legislation also for the first time empowers the DFEH to accept, investigate and prosecute complaints against employers for violations of the California Fair Pay Act. The Fair Pay Act requires, in brief, that employers pay employees equally for substantially similar work, regardless of an employee’s sex, race or ethnicity. This aspect of the new legislation is a significant expansion of DFEH jurisdiction. Employers and their counsel will now find themselves defending pay equity claims under the Fair Pay Act before the DFEH, a new front for pay equity cases in California. Further, SB 973 permits the DFEH to use pay data reports in investigations and administrative enforcement actions against employers for alleged violations of the Fair Pay Act.

Wage and Hour Actions

The new legislation authorizes the California Labor Commissioner’s Division of Labor Standards Enforcement (DLSE) to obtain employers’ pay data reports from the DFEH on request – and without telling the subject employers. The DLSE enforces California wage and hour law including claims for violations of state minimum wage law and for unpaid wages, unpaid overtime, etc. SB 973 makes clear that the DLSE is given access to the reports in order to use them in investigations and enforcement actions against employers.

Employers should expect the DFEH and DLSE to audit pay data reports looking for what appear to be patterns by industry or within a specific business of discrimination in hiring; glass ceilings impairing the promotion of employees because of their gender, race or ethnicity; or disparities in pay for similar work because of such characteristics. Employers, likewise, should expect the agencies to prioritize industries and employers for investigation and enforcement where pay data reports, alone or along with information from other sources, give the appearance of unlawful employment practices.

Employer Reports are to be Confidential – with Limits

The new legislation designates “individually identifiable information” disclosed on employers’ pay data reports as “confidential” and not to be made “public in any manner whatever,” unless otherwise allowed by the new law. “Individually identifiable information” under the new law means data “that is associated with a specific person or business.” The phrase “or business” should prove important to employers, as it should establish a general rule that no information from employers’ pay data reports can be released if it identifies, “is associated” in any way with or may be used to identify a particular employer. SB 973 goes further and provides that individually identifiable information will not be released pursuant to requests to the DFEH or DLSE under the California Public Records Act.

All that said, SB 973 allows the DFEH or the DLSE, in any particular case, to make public individually identifiable information once the agency begins an investigation or enforcement action “involving that information.” However, in those circumstances, the agency may disclose the information “only to the extent necessary for purposes of the enforcement proceeding.” This language should be construed in the future to mean that neither the DFEH nor the DLSE may release individually identifiable information unless and until one or the other starts an enforcement action (not merely an investigation) and, in that instance, only within the enforcement proceeding and only to the extent “necessary” to that proceeding.

Beyond the rules set out above, the operative provisions of SB 973 do not include any provision authorizing plaintiff’s counsel to obtain an employer-defendant’s pay data reports through discovery in litigation in court or arbitration. I can certainly make forceful arguments that an employer-defendant’s pay data reports should not be available in discovery to plaintiff’s counsel in litigation. Undoubtedly, battles over that question will be fought soon.

Where Employers Fail to File Pay Data Reports

SB 973 equips the DFEH to pursue employers who do not file their reports as required. First, the new legislation authorizes the DFEH to obtain from the California Employment Development Department (EDD), on demand, lists of the names and addresses of all businesses in California with 100 or more employees for the DFEH’s use “in order to ensure compliance” with the new reporting requirements. Where an employer fails to file a required report, the DFEH is empowered to sue the employer for an order that the employer comply and, where the DFEH prevails, the employer will be ordered to pay the DFEH its costs incurred in seeking compliance.

Action Items to Consider

SB 973 becomes effective January 1, 2021. Employers who will be subject to the new requirements should consider the following action items:

  1. Monitor press releases from the DFEH and its website for information describing the system it will implement and require employers to use to submit their pay data reports. The system should be an online portal. Become familiar with the system well in advance of the March 31, 2021 filing deadline.
  2. Ensure now that you are compiling the data that must be included in the pay data reports. Involve IT early in the process in order to build an efficient, user-friendly system for compiling the required information and interfacing efficiently with the DFEH system.
  3. Involve employment counsel, either in-house or from the outside, early in the process of compiling the required data and reviewing your draft pay data report. Qualified, experienced employment counsel are needed to help identify the appearance of any potential pattern or discrepancy that may draw the attention of the DFEH or DLSE. Counsel’s input is needed in order to best determine whether to include the optional, pre-emptive comments in the pay data report and if so, to craft the comments; or, to make the strategic decision to hold back without comments and keep all options open for when and if an agency launches an investigation.

This post provides general information and does not constitute legal advice to any person with respect to any circumstance. This post does not create an attorney-client relationship with any person.