You Can Check Your Own Pay Equity Without Hiring a PEO

None of the California laws I read requires a PEO to check pay equity. Labor Code 1197.5 puts the burden on the employer to explain any pay difference between people doing substantially similar work, and the Labor Commissioner tells employers to evaluate those jobs themselves. A spreadsheet, clear job groups and a written reason for each gap is a workable start.

I am Mac Malbrough. I hold a J.D. and an MS-HRM, I am not an attorney, and I write for owners who want to stay in control of their payroll and their people decisions. I hear from many minority-owned small businesses that they fear a wage claim, and they also fear handing the whole company to an outside vendor to fix it. You do not have to choose.

What does the law actually ask of a small employer?

It asks you to pay people the same for substantially similar work, regardless of sex, race or ethnicity, unless you can show a legitimate reason. Labor Code 1197.5 makes this rule apply to employers of every size, according to the Labor Commissioner’s equal pay FAQ. The test for similar work is a composite of skill, effort and responsibility under similar working conditions.

The burden sits with you. When two people do substantially similar work and are paid differently, you must show a seniority system, a merit system, a production-based system or a bona fide factor that is job-related and consistent with business necessity. The factor has to explain the whole difference. One more rule matters for hiring: the statute says prior salary cannot justify a disparity, and my guide to the salary history ban covers the hiring side.

Why do the stakes feel so high?

Because the remedy is built to hurt. A successful claim recovers the wage difference plus interest and an equal amount in liquidated damages, and the statute adds costs and attorney’s fees. An employee can sue within three years after the last date the violation occurred, and relief can reach back up to six years. You must also keep the records on file for three years.

That is a real exposure for a company of 12 people. It is also a manageable one, since the first step is to look.

Do you need a PEO to do this?

No. I read Labor Code sections 226, 246, 432.3, 1197.5, 2810.5, 3700 and 6401.9, plus Unemployment Insurance Code 1086 and the state safety-program regulation, and none of them requires a professional employer organization. The state’s own PEO guidance treats an outside employee leasing company as an option to consider. I cannot prove a negative, so the safe wording is that none of those laws requires one.

A PEO sells payroll, benefits and compliance support, and some small employers like the trade. The cost is shared control over how people are hired, paid and managed. I compare the paths in my guide to fractional HR, PEO and a first HR hire, and the short version is that a pay equity review is a one-time analysis you can own.

How do you run the check in an afternoon?

Five steps, using a spreadsheet you already have. I use this order with small teams.

• List every employee with title, hire date, full-time or part-time status, pay rate and annual earnings.
• Group people into jobs that are substantially similar, based on the work itself and not the title on the badge.
• Within each group, compare pay by sex, race and ethnicity, and flag any gap.
• For each flagged gap, write the reason in one sentence and check that it is true, job-related and complete.
• Decide what to adjust, by how much and on what date, and keep the file.

Step two is where owners go wrong. A receptionist and an office manager might do different work, or the office manager title might only be a promotion in name. Look at the skill the work needs, the effort it takes and the responsibility it carries, and ask what an outside reviewer would say. My pay equity audit page shows the full method, and the pay equity audit workbook gives you the spreadsheet with the formulas built in.

What counts as a good reason for a gap?

One that is documented, applied consistently and large enough to explain the whole difference. Seniority is an acceptable system if you actually use it. Merit pay works if you have written criteria and the ratings are real. A starting salary that matched the market on the day you hired someone can also be a factor, as long as you can show the market data and the same logic was open to everyone.

These reasons fail more often than owners expect.

• “She negotiated harder” fails if you cannot show you offered the same room to everyone.
• “He had a higher salary before” fails by statute, because prior salary cannot justify a disparity.
• “He has been here longer” works only if the gap tracks the tenure and you pay the same way across the group.

Write the reason down on the day you review it. A reason you invent after a complaint reads very differently from one with a date on it.

What if the check finds a gap?

Fix the pay going forward, and then ask counsel about the past. A raise to close the gap is lawful and stops the exposure from growing. Whether to pay back amounts, and how to word the adjustment, depends on facts and on whether the review is protected, so call an employment attorney before you announce anything. I would rather you find the problem with a lawyer in the room than learn about it from a demand letter.

Plan the money in stages if the cost is large. Closing a gap over two pay periods or two quarters, with a written schedule, is more realistic than a single payroll hit, and it shows good faith. My guide to setting a pay range for a new role helps you prevent the next gap at the hiring stage.

Does the pay scale rule matter here too?

Yes, once you reach 15 employees. Labor Code 432.3 requires employers with 15 or more employees to include the pay scale in job postings and to give a current employee the pay scale for their position on request. A pay equity review gives you the data to write honest ranges. My piece on pay ranges for employers with fewer than 15 employees covers the smaller side.

What should you do this week?

Block two hours and build the list. Open a spreadsheet, enter every employee with the six data points above, and sort by job group. You will know by the end of the afternoon whether you have a pattern to look into.

If you want the method and the formulas ready to go, use the pay equity audit workbook, and read the pay equity audit page for the review steps. If you want a second reader on the whole payroll, my HR compliance check-up covers pay equity with the rest of your wage and hour practices.

If you are near 100 employees, also read pay data report penalties, which covers the state report and its penalties.

Keep the result on the one-page HR dashboard so you can check it every year. Pay is system two of five inclusive HR systems a small employer can run.

For a related angle, see building a reusable HR reporting workbook and a one-page total compensation statement.

Sources

• Labor Code section 1197.5, read October 29, 2026
• California Labor Commissioner, equal pay FAQ, read October 29, 2026
• California DIR, professional employer organizations, read October 29, 2026
• Labor Code section 432.3, read October 29, 2026

McKinley holds a J.D. but is not a licensed attorney. Articles here are general information, not legal advice. For your specific situation, talk with an employment attorney.