Last week a US governor signed Senate Bill No.1162, an unassuming-sounding piece of legislation which will have major repercussions for employers in California, but potentially those in the rest of America too.
The bill in question describes what’s quickly been labeled the Pay Transparency Law – one that requires all employers with more than 15 staff to reveal the pay bracket for any new job(s) they promote – whether they’re being advertised internally or externally.
The law has been hailed as a major improvement in the rights of current, and prospective employees. For despite Glassdoor recently finding 67% of people cite salary as being the top thing they look for in job ads, the reality is that in 2020, just 12% of firms published the pay range for advertised roles. This was according to a 2021 report from Seattle-based compensation data company Payscale.
Taking the guesswork out of job-hunting
The aim of the law is clearly to take the guesswork out of wondering what a job pays for job-seekers.
A side-benefit (one which many argue is actually more important), is that in publishing pay, employers also create a culture of pay transparency. Existing staff will be able to see, for instance, if they are also being paid the same amount for doing the same job. In addition, HR commentators claim the longer-term impact will be to start to reduce gender and ethnicity pay gaps. Data already shows that women – for example – are far less likely to negotiate better starting salaries than men; something which continues to perpetuate gender inequality.
“Often people have been undervalued by employers, or job-hunters undervalue themselves by accepting a lower salary than they might otherwise might need to,” says Emily Scace, legal editor at XpertHR, speaking exclusively to TLNT. “So this new legislation will be a significant step-up in achieving pay equality.” She adds: “Firms have long had reasons to keep their pay secret – controlling wage inflation being one of them – but the pendulum is starting to swing towards the benefits of greater transparency. Now, enlightened firms are realizing they can waste huge amounts of time recruiting someone, only to be turned down at the last minute when the applicant is told the role pays $10,000 lower than they were expecting. People don’t like being kept in the dark.”
The changes the new law imposes on firms are large. Most will need to do in-depth pay audits, and have a clear paper-chain that supports how they’ve arrived at different salary levels. In addition to pay disclosures, employers must also maintain records of a person’s job title and wage rate history for each employee for the duration of employment plus three years after the end of employment. These records must be open to inspection by the Labor Commissioner.
Fines for not complying are significant too. The Labor Commissioner can force an employer to pay a civil penalty of between $100-$10,000 per violation, and anyone who thinks this is an isolated piece of legislation, might need to think again. New York City, Colorado and Washington also require salary ranges in job postings, and a similar bill is awaiting signature in New York state. The likelihood is that as other states look on, they might introduce their own legislation too.
Wage spiral fears
The obvious fear from employers is that the with what Scace calls “a leveling of the information playing field,” the practice of HR departments individually negotiating wages with job-seekers [ie ‘only paying what they can get away with’], will end, resulting in an overall salary inflation.
But a secondary fear is that existing employees – upon seeing the salary bands advertised for roles similar to theirs – will bring unequal pay claims – especially if they can see they are being paid substantially less than the role they see being advertised.
But this is where things potentially get tricky, says Scace: “There might be a genuine reason a role needs a higher salary to attract someone at this particular time,” she says. “Maybe market conditions have changed, or the number of people available who can do that job is more scarce than when they previously hired, and so the employer has to reflect this by offering more money.” She adds: “Time of hire (ie market conditions) is not a protected characteristic.” But she also says: “While this might apply in one-off instances, employers could still face problems if they’re found to be systematically paying people less, and have much more variable rates of pay for the same job. This law would now highlight this.”
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What isn’t yet know is how exactly employers will be held to account – whether, for instance, the law relies employees to spot any discrepancies in pay (and then report it themselves), or whether their will be proactive enforcement by the state, in the form of spot-checks. But the understanding is that employers shouldn’t risk this, and they should get all their internal reporting ready for when the law becomes effective – on 1st January 2023 – literally only a few months’ times.
“It’s a tight time-frame,” says Scace, “but this shows there is an expectation that employers take this seriously, and determine pay bands for all their roles.”
Playing the system?
Could employers play the system though, by publishing bands that are so wide, that they are meaningless? “Pay scale” has been previously defined in California Labor Code section 432.3 to mean a salary or hourly wage range (not including bonuses, equity, or other types of compensation), and there is a legitimate fear a band could be used that is so large, it’s effectively meaningless.
“The law does allow employers to interpret how wide their pay range is,” admits Scace. “So there is definitely room for them to be broad in their interpretation of this.” She adds: “It would be too rigid if the law forced employers to peg roles to a very narrow range, because they need to be able to respond to market conditions.”
But, Scace argues, companies should be mindful of the brand reputational impact of not operating within the spirit of the law. She concludes: “It really is better for everyone – employer and employee – when you have transparency.”
What you need to know:
What is it? A new California-wide ‘Pay Transparency’ law
What’s it seeking to solve? Pay inequality. In California, women are paid 88 cents for every dollar paid to a man, with the gap increasing for women of color. Women in the state lose a combined total of $87 billion due to this pay gap, according to the National Partnership for Women and Families.
To whom does it apply? To all employers with more than 15 members of staff. It is thought that around 200,000 employers will fall into this bracket.
What does it require? Firms must publish pay ranges in all of their job postings and publicly report how much certain groups of employees are paid. California’s law also requires private employers with 100 or more workers to submit a pay data report to the state’s Department of Fair Employment and Housing. The report must include the number of employees by race, ethnicity and sex.
Is a pay audit the answer? Yes. According to XpertHR’s own only 1 in 4 employers think pay inequity exists in their organizations, but when employers do a pay equity audit, 4 in 5 employers have to adjust their pay as a result.
When must employers comply by? 1st January 2023
What’s the lie of the land? More states could implement their own legislation. The New York State Legislature recently passed a similar bill that would require employers with four or more employees to include salary ranges in their job ads. Gov. Kathleen Hochul has not signed it yet.