Incorporator The Journal of U.S. Formation
Start Free Quiz
Editorial 7 MIN READ

California's pay transparency law and small-cap hiring

SB 1162 hit on January 1, and the threshold is fifteen employees anywhere, not fifteen in California

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 7 sections
  1. What the statute actually requires
  2. The fifteen-employee trap
  3. Penalties and the PAGA multiplier
  4. How the comparison states stack up
  5. What compliance actually looks like on the ground
  6. The rule of thumb for a founder with fourteen employees
  7. Sources

alifornia's pay transparency law took effect on January 1, 2023, and the threshold most founders get wrong is the headcount. SB 1162 applies to any employer with fifteen or more employees anywhere in the world if even one of those employees is in California, or if a single posting could be filled by a California worker.

The statute is Cal. Labor Code § 432.3, as amended by SB 1162 (Durazo), signed by Governor Newsom on September 27, 2022. It is short. It is also the most expensive employment-law change for remote-first startups since the AB 5 contractor rules, and it lands in a quarter where most Delaware C-corps with fewer than fifty employees were not thinking about California at all.

What the statute actually requires

Section 432.3(c)(3) reads, in relevant part, that an employer with fifteen or more employees "shall include the pay scale for a position in any job posting." The scale is defined in § 432.3(a) as "the salary or hourly wage range that the employer reasonably expects to pay for the position." A single number does not satisfy the rule; "competitive" and "DOE" do not satisfy the rule; posting the minimum with an asterisk does not satisfy the rule. The Labor Commissioner has taken the position, in guidance issued January 27, 2023, that piece-rate or commission-based positions must disclose the piece rate or commission structure in the posting itself.

Two other obligations sit alongside the posting rule. Section 432.3(c)(1) gives every current employee the right, on request, to be told the pay scale for the position they currently hold. Section 432.3(c)(4) requires the employer to maintain "records of a job title and wage rate history for each employee" for the duration of employment plus three years, and makes those records subject to Labor Commissioner inspection. The records rule is the one that trips up companies that thought they had satisfied compliance by editing their Greenhouse template.

Separately, Cal. Gov. Code § 12999, as amended by the same bill, expanded the California Civil Rights Department's pay-data reporting regime. Private employers with 100 or more employees must file an annual pay-data report by the second Wednesday of May, with median and mean hourly rates broken out by race, ethnicity, and sex within each job category. The 2023 report, covering 2022 data, was due May 10, 2023. Employers that use 100 or more labor-contractor workers file a separate report on the same date.

The fifteen-employee trap

The threshold is the part founders misread. A Delaware C-corp with fourteen employees is not covered. A Delaware C-corp with fifteen employees, one of whom lives in Oakland and fourteen of whom live in Austin, is covered. A Delaware C-corp with zero California employees but a remote job posting that a Californian could apply to is covered, because the Labor Commissioner's January 2023 FAQ reads the "could be filled" language in § 432.3(c)(3) to include any posting that does not affirmatively exclude California applicants, and exclusion itself raises separate problems under California's unfair competition statute and the Fair Employment and Housing Act.

The practical effect is that the moment your company's global headcount crosses fifteen, your job postings have to carry a salary range if any of them are remote-eligible in California. There is no "we're a Delaware company" carve-out. There is no "we only have one person in California" carve-out. Incorporation state does not reach the question; the connecting factor is the employment relationship, and California uses the broadest version of that factor in the country.

For context on how little the state of formation insulates an employer from California employment law, see our earlier explainer on Delaware LLC formation. The entity picks its chartering state. The employees pick their employer's exposure.

Penalties and the PAGA multiplier

Section 432.3(d) authorizes civil penalties from $100 to $10,000 per violation, recoverable in a civil action by the Labor Commissioner or by an aggrieved person. Each noncompliant posting is its own violation. A company that runs ten job listings without salary ranges for a quarter is looking at a maximum statutory exposure of $100,000 before anyone has been hired or harmed.

The larger exposure is private. California's Private Attorneys General Act, Cal. Labor Code § 2698 et seq., lets an "aggrieved employee" bring a representative action on behalf of themselves and other current or former employees, recovering 75% of penalties for the state Labor and Workforce Development Agency and 25% for the affected workers. Wage-and-hour plaintiffs' firms have been building pay-transparency PAGA theories since the law was signed, and the first complaints naming posting violations under § 432.3 were filed in California superior courts in the spring of 2023. Whether § 432.3 supports a PAGA claim is a live question; the statute is a Labor Code section, which is the gating requirement, and the Labor Commissioner's own guidance treats it as one. A company defending a PAGA claim in Alameda Superior Court does not get Chancery's written-opinion discipline or its pace.

How the comparison states stack up

California is not alone, but its version is the strictest in scope. Colorado was first: the Equal Pay for Equal Work Act, SB 19-085, took effect January 1, 2021, and the companion Ensure Equal Pay for Equal Work Act of 2023 amended it to require posting of pay range, benefits, and application deadlines. New York City's local law, Int. 0134-A, took effect November 1, 2022; the statewide New York law, S9427A, took effect September 17, 2023, requiring pay ranges in postings for jobs that will be performed in New York or that report to a supervisor located there. Washington's SB 5761 took effect January 1, 2023 and covers employers with fifteen or more employees nationwide with at least one Washington-based employee. Illinois passed HB 3129 in August 2023 with a January 1, 2025 effective date.

The pattern matters because a startup hiring remote-first is now exposed to at least four different salary-range regimes with different thresholds, different record-keeping rules, and different definitions of what counts as a "posting." The common denominator is fifteen employees total, at least one employee in the covered state, and a public posting. A single well-drafted template that includes a salary range, a benefits summary, and is archived alongside the job description will clear most of them.

What compliance actually looks like on the ground

The working practice that has emerged in the first half of 2023 among mid-size employers has three elements. First, every external posting, including those on third-party boards the company does not directly control, carries a salary range expressed as a minimum and a maximum. "Up to $180,000" is not a range. "$120,000 to $180,000" is.

Second, the range is defensible. § 432.3(a)'s "reasonably expects to pay" language is doing real work. Posting $80,000 to $400,000 on a senior engineer role invites the Labor Commissioner to ask for your compensation band documentation, and if you do not have it, the range is not what you reasonably expect to pay; it is what you reasonably expect to get away with.

Third, records are kept. The three-year, position-history rule in § 432.3(c)(4) means your HRIS needs a mechanism for tracking title and wage changes per employee over time. Most payroll providers have added this as a checkbox in the first quarter of 2023. The companies that will get hurt are the ones on unmanaged spreadsheet systems, and those are mostly startups in the ten-to-fifty employee range.

For a Delaware C-corp with a cap table full of venture preferred, the operational cost of compliance is low and the risk of non- compliance is high. The cost is one policy document, a template edit, and a reporting checkbox. The risk is a PAGA suit brought by a candidate who applied, did not get the job, and read the posting without a range. That fact pattern is both easy to plead and inexpensive to investigate, which is why plaintiffs' firms like it.

The rule of thumb for a founder with fourteen employees

If you are planning to hire your fifteenth employee in 2023, treat that hire as the moment the California pay-transparency rules attach, even if the new hire is in Texas. If any current or future employee works from California, or if any job posting is open to California applicants, publish the range. If you do not want to publish the range, exclude California from the posting affirmatively and be prepared to defend the exclusion under FEHA. And if you outsource hiring to a recruiting agency, remember that § 432.3(c)(3) applies to "an employer," and the Commissioner reads that to include third parties posting on the employer's behalf.

The pay transparency wave is not going to reverse. It is going to keep going east, and the threshold is going to keep being fifteen, because fifteen is where the political coalition for this kind of law has consistently landed. A founder who builds the salary-band habit at the seed stage is building it once. A founder who waits until the Series B is building it under deposition.

Sources

Keep reading

More from the journal.