This year, employers in California have updated pay data reports to submit to the state’s Civil Rights Department (CRD).  Senate Bill (SB) 1162, passed in 2022, updated previous employee pay data reporting obligations and created an entirely new obligation to pay data reporting related to “employees hired through labor contractors.”  This year, these pay data reports are due by May 10^th.

In January, the state issued Frequently Asked Questions to assist employers to navigate these new requirements—in particular regarding the requirement to submit pay data reports on “labor contractor employees.”

California’s initial guidance was that “labor contractor employees” included only workers

1. “on a labor contractor’s payroll,”

2. “for whom labor contractor is required to withhold federal social security taxes from that individual’s wages,” and

3. “who performs labor for a client employer within the client employer’s usual course of business.” 

Because the phrase “who performs labor of a client employer within the client employer’s usual course of business” was not defined, many employers and commentators reasonably interpreted the reporting to be limited to workers who are involved with the actual functioning or immediate support of the employer’s business. 

This interpretation includes, for example, administrative augmentation, information technology support, call center workers, and contract labor performing the same work as the company’s employees.  But it would exclude ancillary workers, such as overnight custodial staff, parking attendants, and groundskeepers from “labor contractor employee” pay data reporting.

However, the California Civil Rights Department (CRD) updated its Frequently Asked Questions Page on February 22, 2023.  One of CRD’s new FAQs clarifies that the CRD believes “the client employer’s usual course of business” is far broader than most understood. 

What is “labor . . . within the client employer’s usual course of business,” such that workers performing that labor are “labor contractor employees” who must be reported on?

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. Gov. Code. § 12999(k)(2).

A client employer’s “usual course of business” means the regular and customary work of the client employer. “Regular and customary work” means work that is performed on a regular or routine basis that is either part of the client employer’s customary business or necessary for its preservation or maintenance. “Regular and customary work” does not include isolated or one-time tasks.

Example: Farmworkers contracted seasonally to pick fruit for a client employer’s farm would be performing work within the client employer’s usual course of business because the work is performed on a routine basis and is part of the client employer’s customary business.

Example: Janitorial staff performing nightly cleaning and general maintenance of a client employer’s premises would be performing work within the employer’s usual course of business because the work is performed on a regular basis and is necessary for the maintenance of the client employer’s customary business.

Example: Catering staff contracted to serve food at a trucking company’s tenth anniversary party would not be performing work within the client employer’s usual course of business, assuming catering a party is an isolated occurrence for the company.

Example: Accountants hired to perform an external audit of a fitness company’s financial statements would not be performing work within the client employer’s usual course of business, assuming financial auditing is an isolated occurrence for the company.

An individual performing work within the client employer’s usual course of business is a labor contractor employee if that individual is on a labor contractor’s payroll and the labor contractor is required to withhold federal social security taxes from that individual’s wages. For more information, see the FAQs “Which employers are required to submit Labor Contractor Employee Reports to CRD?” and “For Labor Contractor Employee Reports, what is the ‘Snapshot Period?’”

This new guidance shifts the focus away from the substance of the worker’s contribution to the client employer’s business.  Instead, the critical question becomes whether the function is (a) “performed on a regular or routine basis” and (b) “either part of the client employer’s customary business or necessary for its preservation or maintenance.”  Moreover, the examples make clear that CRD intends workers like custodial staff should be included in the annual labor contractor pay data report. 

This new FAQ will require employers to revisit their pay data reporting plans.  Under this new guidance, far more “workers” may be “labor contractors” who must be included in the reporting.