By: Bill Osterndorf
On Friday, January 20, 2023, the State of California published updated Frequently Asked Questions (FAQs) regarding the pay data reporting that employers must do. These FAQs were meant to respond to questions surrounding changes to reporting associated with the passage of Senate Bill 1162 (SB-1162). SB-1162 significantly expanded the nature of the pay data reporting that employers must do.
There are FAQs that focus on the following changes under SB-1162:
- Most critically, reporting on “employees hired through labor contractors”
- Reporting on median and mean hourly rates
- Reporting for multi-site employers
Reporting on Payroll Employees
As was the case for reporting in 2021 and 2022, employers must provide the following information for employees on their direct payrolls:
- Data on the race, ethnicity, and sex of employees by EEO-1 category, grouped within 12 pay bands
- Data on hours worked by EEO-1 category, grouped within 12 pay bands
An employer with 100 or more employees on the payroll in any location and at least one employee on the payroll based in California must file the pay data report on “payroll employees.” A payroll employee is defined as “An individual on an employer’s payroll, including a part-time individual, for whom the employer is required to withhold federal social security taxes from that individual’s wages.”
For payroll employees, employers are required to provide pay data reporting on “all employees assigned to California establishments and/or working within California.” The FAQs do not define the term “assigned to.” The FAQs frequently refer to employees assigned to California establishments “whether or not teleworking…” This suggests that employees whose manager works at a California establishment and employees whose work is controlled by a California establishment should be included in the California pay reporting on payroll employees.
Mean and Median Hourly Rates
Most FAQs on payroll employees have not changed significantly for 2023. However, California has added FAQs regarding reporting on median and mean hourly rates. An FAQ on hourly rates states that the “hourly rate is derived from an employee’s total annual earnings for the entire Reporting Year, as shown on [the employee’s] W-2 Box 5. To calculate the hourly rate, divide the employee’s W-2 Box 5 income by the number of hours the employee worked.”
There is an FAQ on the mean hourly rate that states the “mean hourly rate is calculated by adding the individual hourly rates for each employee in the group, then dividing that sum by the number of employees in the group.” There is a separate FAQ on the median hourly rate that states the “median hourly rate for each grouping of employees with the same establishment, job category, race/ethnicity, and sex combination. The median hourly rate is calculated by ordering the hourly wages of each employee in the group from smallest to largest and selecting the middle number.” For both mean and median hourly rate calculations, employees are separated into combinations of EEO-1 category, race/ethnicity, and sex. Calculations for mean and median hourly rates are NOT done by pay bands.
Reporting on “Employees Hired Through Labor Contractors”
Much of the reporting regarding “employees hired through labor contractors” parallels the reporting for payroll employees. Employers must provide:
- Data on the race, ethnicity, and sex of these employees by EEO-1 category, grouped within 12 pay bands
- Data on hours worked by EEO-1 category, grouped within 12 pay bands
- Mean and median wages for these employees by EEO-1 category
Pay data must reflect wages for the persons hired through labor contractors as shown on the relevant employee’s W-2 Box 5.
There are significant issues employers will face for this reporting on “employees hired through labor contractors” (who are more commonly referred to by terms such as “contingent workers”).
- Employers do not routinely collect race, ethnicity, and sex information on contingent workers
- Employers do not always track the specific job that contingent workers are doing, which would prevent an employer from assigning the contingent worker to an EEO-1 category
- Employers of contingent workers have no access to W-2 forms for contingent workers, as these workers are either paid via a 1099 form as an independent contractor or are paid through the labor contractor providing the contingent workers
The agency responsible for the California pay data reporting, the California Civil Rights Department (CRD), has stated in its FAQs that “Senate Bill 1162 requires the employer’s labor contractors to provide necessary data and information to the employer submitting the report.” This conforms to the language in SB-1162 that states “A labor contractor shall supply all necessary pay data to the private employer.” However, SB-1162 does not provide a mechanism for transmitting the necessary data from labor contractors to an employer, nor does it mandate that data such as race, ethnicity, sex, and job title for each employment assignment be collected and stored for each person assigned to an employer.
Threshold for Reporting on Contingent Workers
CRD’s FAQs state that an employer must report on contingent workers if the employer had 100 or more “labor contract employees” within the prior calendar year in any location and at least one “labor contract employee” in California. The 100 “labor contract employees” (that is, contingent workers) threshold involves one of the following:
- A determination of whether the employer had 100 contingent workers in a snapshot on a given date between October 1 and December 31 of the reporting year
- A determination of whether the employer “regularly” had 100 or more contingent workers during the reporting year
The FAQs indicate that the determination of whether an employer regularly had 100 or more contingent workers is based on an employer having 100 or more contingent workers on a “regular basis” during the reporting year. Both the idea of “regularly” employed and “regular basis” are ill-defined in the FAQs.
“Snapshot Period” for Contingent Workers
For payroll employees, an employer must choose a single pay period between October 1 and December 31 to use as the “snapshot period” for the pay data reporting. Pay data reporting must be provided for all payroll employees who are part of that snapshot, even if these employees subsequently left the company before the end of the reporting year.
For contingent workers, the snapshot period becomes more complex. CRD has an FAQ stating as follows:
The “Snapshot Period” is a single pay period between October 1 and December 31 of the Reporting Year…the Snapshot Period is used by client employers and labor contractors to identify the labor contractor employees to be reported on in the pay data report submitted to CRD…CRD recommends that a client employer, which is ultimately responsible for the Labor Contractor Employee Report, collaborate with each of its labor contractors to choose the single pay period between October 1 and December 31 of the Reporting Year that will serve as their Snapshot Period for that labor contractor. If a client employer has more than one labor contractor, CRD encourages the use of the same Snapshot Period across labor contractors; however, the Snapshot Period does not need to be the same for each labor contractor a client employer uses, provided the Snapshot Period otherwise complies with these instructions.
Unfortunately, it is not accurate that SB-1162 defines the snapshot period for contingent workers.1 Thus, we are left with CRD’s interpretation. CRD seems to be saying that an employer can use one snapshot period between October 1 and December 31 or use multiple snapshots if contingent workers are supplied by different labor contractors.
Contingent Workers That Must Be Included in Reports
California has FAQs on the employers that must report on “employees hired through labor contractors” and which of these persons must be included in reports. CRD defines “labor contractor employee” and “labor contractor” as follows:
- A “labor contractor employee” is an individual on a labor contractor’s payroll, including a part-time individual, and for whom the labor contractor is required to withhold federal social security taxes from that individual’s wages, and who performs labor for a client employer within the client employer’s usual course of business.
- A “labor contractor” is an individual or entity that supplies, either with or without a contract, a client employer with workers to perform labor within the client employer’s usual course of business.
In the FAQ regarding “labor contract employees” (that is, contingent workers) to be included in reports, CRD states that “client employers must include their labor contractor employees assigned to California establishments and/or working within California.” This parallels the language used for regular payroll employees.
Pay Data to Use for “Labor Contractor Employee”
Employers must gather W-2 Box 5 wage information from labor contractors to report on pay data for “labor contractor employees.” The employer must gather this information for “labor contractor employees” (that is, contingent workers) who were on an employee snapshot used for contingent workers. (Note that there may be different employee snapshots for contingent workers if different labor contractors use different snapshot dates.) Pay data (including hours worked) for contingent workers must include data for whatever portion of the reporting year the contingent worker was working for the employer. For example, an employer must collect pay data for a contingent worker on an employee snapshot for October 15, 2022, for all periods the contingent worker was working for the employer during 2022, even if this was for discontinuous or limited periods.
Employers must collect W-2 Box 5 pay data for contingent workers. If a labor contractor has extremely good records, the labor contractor may be able to provide exact Box 5 wages for the period the contingent worker was at the employer site. CRD seems to recognize that it is more likely that there will be no effective way to differentiate Box 5 wages. In this case, CRD suggests that the wage data to be used for contingent workers show the portion of Box 5 wages for the timeframe the contingent worker worked for the employer. For example, if a contingent worker was at an employer’s site for 1,500 hours, and the contingent worker was at other employers sites for 500 hours, the employer would assume that 75% of the contingent worker’s Box 5 wages should be reported. CRD provides various examples of calculations to be done in its FAQs.
In regard to total hours worked, CRD expects employers to use actual hours worked for non-exempt employees. It appears that would include reporting on actual hours worked for contingent workers. Employers would need to rely on data provided by labor contractors for these purposes.
Disclosure of Labor Contractors
Along with reporting information on contingent workers, employers are required to provide information on the labor contractors that supply contingent workers for California positions. Both SB-1162 and the CRD FAQs state that the employer must produce the “ownership names of all labor contractors used to supply employees.” It is not clear what “ownership names” means in this regard.
Some organizations will have situations where an individual was self-referred or referred by a current employee for a contingent worker position. It is not clear whether such an individual is both a contingent worker and a labor contractor or just a contingent worker. If such an individual is only paid on a contract via an IRS form 1099 and there is no traditional tax withholding done for by the employer or employee for this position, it is unlikely that CRD would require that such an individual be included in the labor contractor report.
Missing Data and Penalties for Failure to Report
The California FAQs do not provide any instruction on situations where there may be missing data. California assumes that employers have all requisite data on employees, and that employers and their labor contractors have all requisite data on contingent workers. It is not clear that labor contractors will, in fact, have all the requisite data that employers will need to report on contingent workers. It is also not clear that labor contractors will be willing to provide all requisite data to employers.
SB-1162 changed the penalties for failure to file California pay data reports to the following:
If the department does not receive the required report from an employer, the department may seek an order requiring the employer to comply with these requirements and shall be entitled to recover the costs associated with seeking the order for compliance. Upon request by the department, a court may impose a civil penalty not to exceed one hundred dollars ($100) per employee upon any employer who fails to file the required report and not to exceed two hundred dollars ($200) per employee upon any employer for a subsequent failure to file the required report…If the employer is unable to submit a complete and accurate report because a labor contractor has not provided the pay data as required under paragraph (2) of subdivision (a), the court may apportion an appropriate amount of penalties to any labor contractor that has failed to provide the pay data to the employer.
An FAQs published by CRD states that “These penalties are assessable against a labor contractor that has failed to provide required data to a client employer.” However, the FAQs do not provide a mechanism for employers to inform CRD about problems they encounter in retrieving data from labor contractors. The FAQs also do not explain how penalties may be apportioned to labor contractors if labor contractors fail to provide required information.
Summary
The revisions under SB-1162 regarding California pay reporting for regular employees should not be particularly burdensome for employers. Conversely, the revisions under SB-1162 for “employees hired through labor contractors” could be very problematic. While the current FAQs help to establish what is required for reporting on contingent workers, they do not provide insight into how employers should deal with the myriad of problems that may arise in this reporting.
CRD has promised to release additional resources on February 1, 2023, regarding the reporting that must occur this year. DCI will continue to monitor this situation and will be available to assist employers that must meet the complicated requirements in the California pay data reporting law.
References
1 Section 12999 of the California Code, which was modified by SB-1162, states in 12999(b)4 that a snapshot between October 1 and December 31 of the reporting year must be used for payroll employees. There is no similar statement regarding “employees hired through labor contractors.”
