California’s New Equal Pay Reality: Why SB 642 Turns Pay Equity Into a Systems and AI Problem

When California passed SB 642, most of the early commentary focused on a familiar theme: pay transparency and equal pay compliance are getting tougher. That’s true, but it undersells what’s really happening. From an in-house perspective, SB 642 quietly rewires how pay equity risk is created, measured, and litigated—especially in organizations where compensation decisions are increasingly shaped by data, technology, and automation.

This isn’t just a change to the Equal Pay Act. It’s a shift in how long pay decisions matter, what counts as “pay,” and how modern workplace systems—especially AI-enabled ones—can unintentionally magnify risk.

Equal pay now means “total compensation,” not just salary

Historically, many employers thought about pay equity primarily in terms of base salary or hourly wages. SB 642 makes that approach obsolete. Beginning in 2026, pay equity must be evaluated based on total compensation, expressly including bonuses, equity awards, profit sharing, housing or lodging benefits, allowances, paid time off, reimbursements, and insurance benefits.

From the inside, this is where things get complicated. In most organizations, total compensation is not set by a single person or team. Base pay may live with HR, bonuses with Finance and business leaders, equity with a separate compensation committee or vendor, and benefits with yet another group. Each piece may be defensible in isolation, but SB 642 treats the end result as one integrated pay decision.

The practical effect is that an employer can have perfectly aligned base salaries and still face equal pay exposure because of how incentives, equity refreshes, allowances, or benefits eligibility are structured or applied over time.

Pay transparency is no longer aspirational

SB 642 also tightens the definition of a “pay scale” in job postings. For employers with 15 or more employees, posted ranges must reflect a good-faith estimate of what the employer reasonably expects to pay upon hire, not a wide band designed to accommodate future promotions or career growth.

For in-house teams, this matters less because of the statute itself and more because of how postings interact with later disputes. When ranges are broad and hires consistently come in at the bottom—or when exceptions quietly become the norm—those postings can undermine credibility. Over time, they also create data points that plaintiffs’ counsel can line up against actual pay practices.

The longer tail: pay decisions stay “alive” much longer

Perhaps the most underappreciated change under SB 642 is how long pay decisions can now follow an employer. The statute extends the time to bring Equal Pay Act claims and adopts a broader continuing-violation framework. In practical terms, employees generally have three years to file, and in some circumstances may seek recovery going back up to six years if an alleged pay disparity persisted.

The critical point for in-house counsel is understanding what this change is—and is not—designed to capture. SB 642 is structured to focus on compensation practices that continue into the post-effective-date period, rather than to reopen issues that were fully corrected and concluded years earlier. The emphasis is on ongoing compensation paid after the law takes effect. Where a prior decision continues to influence what an employee is paid today—whether through base salary, bonuses, equity, or benefits—that continuing effect may remain legally relevant.

In other words, pay decisions are no longer treated as discrete events that naturally fade into the background. They have a long half-life. As long as their effects continue to show up in paychecks, they remain alive.

What this looks like in practice

Consider a common scenario. Sarah Martinez is hired in March 2020 as a senior analyst. Based on her experience, the role’s level, and market data available at the time, her starting base pay lands slightly below some incumbents performing comparable work. At the time, the decision seems reasonable and is approved without controversy.

Over the next several years, Sarah receives regular raises. Her base salary increases in 2021, 2022, and 2023, but it always remains a few percentage points behind colleagues doing comparable work. Some years she receives strong bonuses; other years she does not. Equity refreshes are granted inconsistently, depending on business needs and manager discretion. No one believes Sarah is being underpaid—it is simply the compensation path she was placed on at hire.

By 2024, the original manager has left the company. The compensation framework has been updated. Market data sources have changed. No one is actively thinking about the 2020 decision.

Before SB 642, that early pay decision would likely have faded into the background. Even if Sarah raised concerns years later, potential damages were limited, and the original rationale for her starting salary rarely mattered in a meaningful way.

Under SB 642, the analysis changes.

If Sarah’s compensation in 2026—whether base pay, bonuses, equity, or benefits—still reflects the effects of that original gap, the 2020 decision does not disappear simply because time has passed. The focus is no longer on when the decision was made. It is on whether its effects were ever fully corrected.

If the disparity continues to show up in paychecks issued after January 1, 2026, that earlier decision remains part of the legal story—even though it was made years earlier under very different conditions.

That is the longer tail. The past matters only if it is still shaping the present.

How this shows up in discovery for in-house teams

When a claim like this reaches litigation, the statute of limitations rarely becomes the opening battle. Instead, the pressure shows up in discovery, where in-house teams are asked to explain compensation decisions that span years, multiple stakeholders, and several generations of systems.

In-house counsel preparing for an agency inquiry, internal investigation, or litigation should expect questions like:

• Who set Sarah’s initial base salary in 2020, and what factors were considered at the time?
  Was it market data, internal equity, budget constraints, or a combination? Is that rationale documented anywhere?

• How were annual raises determined from 2020 through 2025?
  Were increases tied to standardized merit guidelines, manager discretion, performance ratings, or automated compensation tools?

• Why did Sarah’s compensation trajectory differ from peers performing substantially similar work?
  Who were the comparators, and how were they identified at the time?

• What role did bonuses play in total compensation each year?
  Were bonus targets or payouts discretionary, formula-based, or influenced by performance scoring systems?

• How were equity grants and refreshes decided?
  Who approved them, what criteria were used, and were those criteria applied consistently across similarly situated employees?

• Were any market-pricing or benchmarking tools used to set ranges or adjustments?
  If so, what data sources were used, and how often were they updated?

• Did any automated or AI-assisted tools influence job leveling, performance evaluations, or compensation recommendations?
  If yes, who reviewed the outputs, and what human judgment was applied?

• When, if ever, was the original pay gap identified internally?
  What steps were taken to correct it, and when did those corrections take effect?

• Can the company show that compensation paid after January 1, 2026 no longer reflected the earlier disparity?
  And if so, what evidence supports that conclusion?

Individually, these are reasonable questions. Collectively, they expose the challenge SB 642 creates for in-house teams. The issue is rarely whether a decision was defensible at the time it was made. It is whether the organization can reconstruct a clear, consistent explanation years later—after managers have left, systems have changed, and institutional memory has faded.

From an in-house perspective, that is where risk concentrates. SB 642 doesn’t just extend exposure—it raises the bar for how well compensation decisions must be understood, documented, and governed over time.

A quiet but unresolved issue: six years of exposure, three years of records

At this point, many in-house teams notice SB 642 reaffirms California’s three-year pay record retention rule, even as it expands potential Equal Pay Act relief up to six years—creating a mismatch the statute does not directly reconcile.

The statute reaffirms that employers must retain compensation-related records for three years, including wage rates, job classifications, and pay scale histories. At the same time, it allows employees to seek Equal Pay Act relief for up to six years if an alleged pay disparity persisted.

What the statute does not do is reconcile those two timelines.

As a result, employers may be required to defend compensation outcomes reaching back far beyond the period they were legally required to document. In litigation, discovery will still seek older data, explanations, and rationales. And while an employer may have complied fully with statutory retention requirements, the absence of records can still create practical and evidentiary challenges—particularly where the burden rests on the employer to justify pay differentials.

From an in-house perspective, this is one of SB 642’s most consequential features. The law expands how long pay decisions remain relevant, without extending the record-retention framework to match. That tension will likely be resolved over time through discovery disputes and case law, rather than through the statute itself.

Where AI quietly enters the picture

The longer tail created by SB 642 raises a practical question for in-house teams: if pay decisions stay alive longer, what exactly is shaping those decisions over time?

Most employers will say, truthfully, that they do not use AI to “decide” employee pay. That framing, however, is increasingly beside the point.

AI and algorithmic tools influence compensation in indirect but powerful ways. They help generate job descriptions and leveling frameworks. They inform market pricing and benchmarking. They assist with performance calibration, bonus modeling, and even offer-acceptance strategies in recruiting. None of these tools may issue a final pay decision, but each shapes the inputs that determine total compensation.

SB 642 makes those inputs legally consequential. When AI-influenced systems create consistent patterns—who is leveled where, who receives equity refreshes, who qualifies for certain benefits—that consistency can look like policy. And policy is exactly what plaintiffs’ lawyers look for when building equal pay cases.

The risk is not that AI is used—it is that its influence is undocumented, unexamined, or assumed to be neutral without validation.

The real in-house challenge: explaining the “why”

This is where the longer exposure period, expanded definitions of pay, and AI-enabled systems converge.

The hardest Equal Pay Act cases to defend are not the ones with bad facts. They are the ones where no one can reconstruct how compensation decisions were made.

SB 642 magnifies that problem. Longer exposure periods and broader definitions of pay mean employers must be able to explain not just what someone was paid, but why their total compensation looked the way it did—sometimes years later. That explanation increasingly requires tracing decisions across departments, systems, and tools, including those that rely on automated or data-driven logic.

From an in-house perspective, this is less about legal theory and more about governance. Who owns compensation decisions? Who approves exceptions? Which tools influence outcomes? And what records are kept that allow Legal to tell a coherent story when challenged?

Thinking ahead: what proactive employers are doing differently

For employers that recognize these dynamics early, SB 642 is less a compliance surprise and more a governance prompt.

The organizations best positioned for this new environment are not waiting for claims to arise. They are treating pay equity as an ongoing operational discipline rather than a periodic audit. They are aligning HR, Finance, and Legal around total compensation governance. They are tightening controls around exceptions, documenting rationales contemporaneously, and asking harder questions about how AI-enabled tools influence compensation inputs.

Just as importantly, they are recognizing that transparency—both internal and external—is now part of risk management. Job postings, internal guidelines, and compensation philosophy statements are no longer mere communications. They are evidence.

A closing in-house perspective

Taken together, these changes reflect a broader shift in employment law: the move from discrete decisions to system-level accountability.

Pay equity is no longer just about intent or isolated comparators. It is about how organizations design, operate, and document the mechanisms that produce compensation outcomes over time—and how well those mechanisms can be explained when scrutinized years later.

For in-house teams, the opportunity is to get ahead of that shift. Done well, SB 642 becomes less about reacting to new risk and more about helping the business build compensation systems that are competitive, flexible, and aligned with modern tools—while still being explainable, auditable, and resilient in a world where data, technology, and law increasingly intersect.

Disclaimer:
This article is intended for general informational purposes and reflects an in-house perspective on emerging legal and operational issues. It does not constitute legal advice. Legal obligations and risk exposure depend on specific facts, and readers should consult with experienced counsel before taking action.