San Francisco Will Tax Employers Based On CEO Pay Ratio

Jackson Lewis P.C.

San Francisco’s Measure L, which passed with the overwhelming support of the voters, will be effective in 2022 for businesses operating in the City of San Francisco. Measure L, titled the “Overpaid Executive Gross Receipts Tax,” imposes an additional tax on gross receipts or payroll expenses of any business in which the CEO (or highest-paid managerial employee) earns more than 100 times the median compensation of its employees. Companies with a CEO pay ratio of 100:1 or more will be subject to the Measure L tax, and the tax rate will increase for every additional 100 times the CEO’s pay exceeds the median worker’s pay. The tax rate reaches its maximum level when the ratio reaches 600 to 1, with a maximum tax on payroll of 2.4% or a surcharge on the gross receipts tax of up to .6%. Businesses exempt from the City’s gross receipts tax due to being a small business enterprise are exempt from the pay ratio tax. Also exempt are some nonprofit organizations and businesses exempt from local taxation, such as banks and insurance companies. According to the City of San Francisco estimates, they expect the measure to generate between $60 million and $140 million a year in taxes starting in 2022. Revenue from the tax will become part of San Francisco’s general fund.

While, for the San Francisco tax purposes, the CEO of a business may be located anywhere, the pool of workers that San Francisco identifies for the median pay amount is limited to those workers based in San Francisco. Pay will include compensation made from stock awards, bonuses, commissions, property transferred, and other payment for services. The hospitality industry, already suffering from COVID-19-related restrictions, may be most susceptible to this tax because of the low-paid nature of its workforce. In contrast, the tax may not affect technology companies because most employees are highly paid engineers.

The stated objective of Measure L is to address income disparity. The intent is for companies subject to the new ordinance to address the pay gap between executives and the rest of the workforce. Businesses should include a review of executive total compensation as part of their analysis to address the effect of Measure L.

Jackson Lewis will continue to monitor local, state, and federal regulations regarding employee compensation.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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