SB1162 (2022) Complicates Life for Some Churches and Ministries

Does your church or ministry have 15 or more employees? If you answered “YES” . . . you need to read on. If you answered “NO” . . . you might just want to continue reading this anyway.

Known as “California Pay Transparency,” SB1162 amended existing state law (Government Code §12999) which requires certain wage information to be disclosed to employees, job applicants, and the State of California. Like numerous other labor laws, churches and religious organizations are not exempt from the requirements. Not yet, at least. The law establishes pay “equity” and “transparency” regulations, with the ultimate goal of assuring equal pay for equal work regardless of certain other factors.

The premise may be laudable, but the details are disturbing. Originally applicable to employers with 200 or more employees, now those with 15 or more employees who fail to report the required information to the State will be fined $100 per employee. Subsequent violations increase the fines to $200 per employee. The first such annual report is due on or before May 10, 2023. These fines are “civil” penalties, so at least no one is being threatened with jail time. However, if there is not substantial compliance with this reporting requirement, you could expect the legislature to amend the law again and make failure to report a criminal offense. (NOTE: Pay Data Reporting does NOT include any ministerial employee whose wages are not subject to FICA withholding.)

What are employers required to do, to report . . . and to whom? Here’s the short list:

• Provide a pay scale to existing employees for the position in which they are currently employed

• Include pay ranges for any new or existing job posting

• Pay scales may be published in hourly or salary ranges

• Provide pay data reports for every employee to the California Civil Rights Department by the second Wednesday of every May, starting May 10, 2023 (No paper forms! Reports are only filed electronically through the "Pay Data Reporting Portal")

• Pay data reports must include the median and mean hourly rate for each combination of race, ethnicity, and gender (sex) for employees within each job category ("Median" is the midpoint in the list . . . half of the listed wage rates are above that amount, half are below. "Mean" is the average of all actual hourly wage rates.)

▸ Take note of the fact that there are 2,520 possible combinations of job category, pay band, and race/ethnicity/sex: 10 job categories x 12 pay bands x 21 race/ethnicity/sex combinations = 2,520

Enforcement of themreporting requirements will be handled by the Civil Rights Department (formerly the Department of Fair Employment and Housing), to whom the report is due. Don’t think they know anything about the number of employees you have? It’s all right there on your DE-9/DE-9C wage reports filed with the Employee Development Department. Are you misclassifying employees as independent contractors? Your 1099-NECs may be reviewed and could be subject to inquiry. Misclassification of employees could lead to “wage theft” and that IS a crime! Although most identifiable information is not allowed to be made public, the Civil Rights Department is authorized to share the Pay Data Report information with the Labor Commissioner’s Division of Labor Standards Enforcement (DLSE), which investigates and prosecutes both civil and criminal violations of the Labor Code.

What must your church do if you are subject to these complex and confusing reporting requirements? Perhaps it‘s time to take a couple of aspirin, acetaminophen, or ibuprofen . . .

• Establish pay ranges for every position in your organization

▸ For exempt employees (other than ministers), these are salary ranges (i.e., $64,480 - $75,000/year)

▸ For non-exempt positions these are typically hourly ranges (i.e., $15.50 - $25.00/hour)

• Ensure your jobs are currently and properly classified as exempt and non-exempt under the FLSA

▸ Ensure your “contractors” fully meet all three of the “A-B-C” tests of AB5 (2019)

• Gather all salary data and employee information for your ministry

▸ You must include sex, race, ethnicity, age, and hours worked for each employee and/or all employees in each of the ten different job categories collectively

• Include pay ranges in all of your job postings (the Pay Data Report specifies 12 different “bands” of pay ranges which probably don’t coincide exactly with your pay ranges)

• Be prepared to give your current employees current pay range information for the jobs they occupy

If your church is a typical employer, you have probably never asked your employees for their race or ethnicity demographics, as well as their gender. You’ll have to do that now. The “official” lists for Pay Data Reporting look like this:

RACE:

• White (Non-Hispanic White)

• Black or African American

• Asian

• American Indian or Alaska Native

• Native Hawaiian or Other Pacific Islander

• Two or more races

ETHNICITY:

• Hispanic or Latino (White or Non-White)

GENDER:

• Male

• Female

• Non-binary

What if an employee fails to provide this information? Employers still have a responsibility to report according to what they think the correct combination might be. There is no liability for making a “good faith mistake” when the employee fails to furnish the information.

And if your church is a typical employer, you’ve probably never thought about, let alone established, a “pay range” for any employee. Now you’ll have to do that, too, which begs the question: “On what basis would a person’s pay increase within a range?” The law doesn’t dictate how this works, but the essence of the law is to find out if employers discriminate in pay on the basis of race, ethnicity, or gender, and to punish them for doing so.

Every church’s or ministry’s Board of Directors is responsible for determining what “reasonable” compensation is for every employee. The Internal Revenue Code simply says that nonprofit employees’ compensation cannot be “unreasonable.” There are numerous ways to justify a person’s compensation, and the answer largely depends on a broad overview of the organization’s financial picture, including its funding and its expenses. Other factors include the cost of living in a particular geographical location.

Nevertheless, it’s up to the Board to determine what is “reasonable,” and to not pay what is “unreasonable,” because a church’s or ministry’s tax-exempt status could be revoked for paying unreasonable compensation to any employee, but mostly to the person(s) “at the top” . . . a Senior Pastor or Executive Director. Although you may be able to “justify” a certain amount of compensation, you can’t pay it if you don’t have it.

Compensation is a much harder question for smaller organizations than for larger ones, because, ideally, total staff compensation, including the cost of benefits and employer’s share of FICA, should not exceed 50%. Above this point, you are significantly impairing the amount of funds available for your “Kingdom work” – the real reason for a church or evangelical ministry to exist. In a very small church, for example, the pastor may be the only employee, and his “reasonable” compensation could easily exceed 60% of total expenses. But if it’s approaching or exceeds 70%, in my opinion, that’s reaching or crossing the “unreasonable” threshold. If you don’t have 15 or more employees, then you’re off the hook at least with regard to SB1162’s pay data reporting.

CMCC has appropriate tools available to help you with determining compensation ranges for any member of your staff. We can also help you understand how to compile the information needed to complete the Excel worksheet for filing with the Civil Rights Department. This is not something that you can put off until the night before the deadline – it's time-consuming and incredibly complex. Just give us a call or send us an email and we’ll work with you to help keep your church or ministry as compliant as possible.