Almost sixty years after President John F. Kennedy signed the Equal Pay Act of 1963 banning pay discrimination based on sex, the gender pay gap still exists.
To help address decades-long pay inequalities, cities like New York City and Jersey City, along with states such as California, Colorado, and Connecticut, have enacted new pay transparency laws requiring employers to be open about salaries. Others will follow.
So what will this legislation mean for your business?
In this article, we’ll explain the potential fallout for employers who adopt pay transparency. We’ll also reveal how you can protect yourself against unintended consequences and adopt pay transparency successfully.
We’ll also outline the primary new pay transparency laws to expect in 2023.
Contact us if you need help navigating new pay transparency laws to ensure compliance.
What is Pay Transparency?
Pay transparency is the degree to which employers are open about salary and pay information. Furthermore, it includes the ease at which workers can find out the compensation of other staff members at work.
There has been a recent push in American society for pay transparency.
With The U.S. lagging behind many developed countries in the global gender gap index 2022, lawmakers have introduced more legislation to close pay inequalities.
And this call for more transparency is being answered. Various states are mandating employers to have salary disclosure requirements at multiple stages, including pre-offer, upon request, and upon hire.
Some states ban employers from asking applicants about pay history; others also require employers to allow salary discussions among employees.
If employers don’t comply, they risk fines and potential lawsuits.
Colorado and Connecticut, along with other states and cities, have enacted or will pass pay transparency laws covering nearly a quarter of the civilian U.S. workforce.
For instance, Colorado’s Equal Pay for Equal Work Act requires employers to include compensation in job postings, notify staff of promotional opportunities and transfers, and allow workers to discuss pay.
Are pay transparency laws effective? A recent International Labour Organization (ILO) study concludes that pay transparency measures may help address the gender pay gap.
Still, there have been drawbacks, with major companies like Johnson & Johnson and commercial real estate company CBRE Group Inc. excluding Colorado residents from applying for remote jobs.
Also, a Bloomberg News analysis of more than 400 open jobs in New York City revealed extensive salary ranges, with a technology engineer role potentially paying between $73,000 to $152,000.
And while pay transparency can build employee trust and form a branding tool for employers in a scarce labor market, there can be negative consequences for employers. So, it is prudent to take measures before adopting it.
What is Pay Compression?
Pay compression, also known as salary or wage compression, means a situation where workers who have been in the same role for a long time earn less than new hires in the same job. This can be a consequence of pay transparency.
Pay compression can damage morale and lead to staff turnover.
A study by professors Zoe B. Cullen and Bobak Pakzad-Hurson into the compensation of four million workers in pay transparency states revealed overall pay fell by about 2%, with managers refusing to pay high salaries to avoid costly renegotiations with ‘everyone else.’
And according to the Academy of Management, research, transparency-induced pay compression can increase hidden pay inequality.
When employees realize asking for a pay rise is futile, they might look for idiosyncratic deals (i-deals), like extra training or additional health benefits. The special deals negotiated with supervisors are often discreetly given to them by managers keen to maintain talent and team morale.
These extras can contribute to invisible inequality as many employees don’t realize their colleagues successfully negotiated them.
So how can you prepare your business for compliance with pay transparency laws while avoiding pay compression?
Follow our advice to enhance your success in pay transparency.
Ensure compliance: failure to comply can lead to penalties and potential lawsuits by job seekers and workers.
Conduct a pay study to analyze whether you pay staff competitively and equitably.
Close gaps by increasing pay for current employees. This helps prevent workers from feeling slighted when new hires have a higher starting pay.
Establish transparent pay ranges to ensure the link between pay and performance is transparent and objective.&n
Organize training for managers to ensure they know how to communicate with employees on pay issues.
Consider including ‘i-deals’ and bonuses in your reward structure. This helps to prevent extra benefits from being hidden and only accessible to a few.
Update job postings with salary information.
If you need help with compliance, contact us.
New Pay Laws in 2023
The U.S. legal landscape is moving towards pay transparency, with more states enacting (updated) pay transparency laws this year, for instance:
California’s Senate Bill 1162: enacted on January 1, 2023, all employers must provide a pay scale on request to employees for their current job.
Employers with 15 or more workers must include salary ranges in job postings. Employers also must keep records of salary histories and job titles.
New York State – with the signature of its first female Governor, Kathy Hochul, New York established a statewide pay transparency law in December 2022. The legislation will come into effect in mid-September of 2023.
The law requires employers with four or more staff members to disclose the salary or a salary range for each job advertisement, promotion, and transfer that an employee can or will perform in, or partly, the State of New York.
Employers must also include a job description in the above instances if one exists.
Also, employers must maintain records of salary histories, job titles, promotions, transfers, and job descriptions (if they exist).
Rhode Island’s Pay Equity Act – enacted on January 1, 2023, requires employers to share pay ranges during application, upon hire, when changing jobs, and upon request.
Washington Equal Pay And Opportunities Act – taking effect on January 1, 2023. Employers with 15 workers or more must disclose the compensation for each job opening in every job posting and share the wage scale. This includes the starting and general range and other compensation and benefits.
With a persistent gender pay gap, several states and cities are moving to end pay inequality by enacting pay transparency laws.
These laws mostly:
ban employers from asking about candidates’ salary history
require employers to publish salary ranges in the job offer
allow salary discussion among employees
on-compliance can mean fines and potential lawsuits.
Pay transparency can build employee trust and help attract new hires. But, it might also cause pay compression, so follow our advice for successful pay transparency.
If you’d like to speak to an HR representative about your business, contact us.