Businesses need to assess their pay transparency policies, as the practice has increasingly become a legal requirement. Adding to a growing number of state and city pay transparency laws, a recent local NYC law affects any business employing a remote worker operating out of New York City. Similar laws are likely to follow.
Even if companies aren’t required to do so, they should familiarize and consider transparent pay policies. That’s because the practice is very popular among employees. One study found a 98% approval among participants. Wage transparency is part of a major shift in work culture and will only grow in importance in the coming years. Businesses need to learn about pay transparency practices and how to best implement them.
So what exactly is pay transparency and how can companies implement it? How can a business determine which laws they are required to follow? This guide will answer these questions and provide guidelines on how to make the necessary changes while avoiding pitfalls. As Caryn Hubbard, the VP of finance at Buffer, told Built In, “[Pay transparency] is not super easy, but it also brings on a level of reward that you might not be able to anticipate or project.”
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Pay transparency is when a company or business discloses how much it plans to compensate employees for all available work opportunities—both to prospective employees and current workers. That means employers can’t adjust salaries or wages based on a prospective employee’s experience or background.
The practice can go well beyond job listings. Once a company adopts transparent pay policies, employees will be able to discover how much their co-workers earn. This can lead to businesses altering their work culture for the better. Employees will be able to openly discuss their earnings with both management and their co-workers. Implemented properly, this practice can help them feel that they are being properly valued for their work.
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Studies show that employees frequently receive different salaries for the same position based on their gender, ethnicity, background, and ability. Pay equity studies have analyzed these discrepancies in detail, leading to long-term proposals for addressing these problems. Pay transparency policies have been shown to effectively address equity issues for both compensation and job advancement.
Just how widespread is the practice? Inc. Magazine declared 2022 “The Year of Pay Transparency,” saying that “companies that embrace pay transparency will likely have an easier time finding and retaining workers.” That’s because, as a report by people management platform Lattice found, “67% of employees agree employers should be more transparent with their pay practices and 35% strongly agree.”
Wage transparency is attractive to prospective workers as well as current employees; as SHRM notes, “current employees will notice the salary ranges in job ads and compare those to their own pay.” Dave Carhart, vice president of advisory services at Lattice, told CNBC that as pay transparency becomes widespread, “it will seem odd, or secretive, for companies not to share [pay rates], even if there’s not a legal requirement to do so.”
Adopting pay transparency policies will help companies stay competitive. Diane Domeyer, a managing director at human resources consultancy Robert Half, told LinkedIn that “organizations have an advantage in being ahead of legislation and demonstrating to employees they’re about equity and inclusion.”
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Pay transparency has become less of a strategy and more of a legal requirement. Laws have been passed at the city, state, and federal level, as well as overseas. The most common type of pay transparency law, already adopted by a large number of states, bars companies from determining an employee’s salary based on their wage history. According to Business Report, “by the beginning of 2023, 20% of all U.S. workers will be covered under pay transparency laws.”
As legal platform K&L Gates points out, “many of the laws apply even if an employer does not have a physical location in the jurisdiction.” Certain laws cover remote workers, “such as New York City, where coverage exists if a worker could perform the job in the regulated location, or Colorado, where employers with at least one employee residing in the state must comply.” Alexandra Barnett, a lawyer with Alston & Bird in Atlanta, told SHRM that employers “need to be cognizant that employing a hybrid or remote worker in New York City could cause them to become covered under the law and require their compliance with its pay disclosure requirements."
According to a comprehensive guide published by Zippia, 30 states have enacted pay transparency laws as of Nov. 8, 2022. Certain municipalities, such as New York City and St. Louis, have additional laws in effect, over and above the state laws. K&L Gates reported that many pay transparency laws “include document retention obligations, pay equity reporting, and requirements related to compensating employees equitably irrespective of a protected class, such as gender.”
Furthermore, new laws, requirements, and changes are likely in the near future. The Biden administration announced that pay transparency is a priority. The White House already issued an executive order in 2021 that prohibited federal agencies from seeking or relying on an applicant’s salary history. More federal laws could get passed in the next few years.
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Which pay transparency laws apply to a business depends on a number of factors. Smaller companies with only one or two employees may not be required to adhere to the same laws that affect larger companies with hundreds of workers. Likewise, businesses that rely on remote work may need a range of state and local laws. Businesses should start by learning about the pay transparency laws in the cities and states where they employ workers (we recommend starting with resources from GovDocs and Zippia) and discussing all requirements with their lawyer.
Business owners should keep in mind that adhering to any necessary legal requirements is only the first step. Effectively implementing pay transparency requires lots of attention to detail and will create extensive changes to any business. After adopting pay transparency practices, companies should be prepared for candid discussions with their employees. That’s why it is vital to create an effective roll-out strategy that includes direct managers. As the Harvard Business Review notes, managers may be asked to explain pay decisions even though they “may not have the final say over what [employees] are paid.”
Step 1: Assess legal requirements and make a long-range plan.
- Determine which laws apply to your business.
- Discuss what’s required with your lawyer.
- Consider upcoming laws that are likely to take effect.
Step 2: Assess your company’s current pay transparency.
- Construct a coherent picture of your company’s current pay culture.
- Determine all your executive-level goals.
- Loop in managers and discuss their direct experience.
- Create a company-wide query or survey.
- Determine what is working and what needs development.
Step 3: Devise and implement a strategy for changing payroll.
- Develop a coherent pay philosophy that can be implemented company-wide.
- Review all wages and salary before adopting any changes.
- Make any necessary adjustments to ensure pay equity for all current positions.
- When adjusting salary, use web resources like this one.
- Use the same pay philosophy for both new and old employees and positions.
- Ensure that all decisions can be easily explained in one-on-one conversations with employees.
Step 4: Collaborate with managers to create a successful culture of pay transparency.
- Discuss with direct managers all pay transparency policies and changes.
- Make sure managers understand and can explain your company’s pay transparency philosophy.
- Ensure that direct managers feel prepared to answer questions from employees.
- Consider requiring training sessions and issuing a reference guidebook.
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If pay transparency seems a little daunting, businesses should review this list of things to consider (as well as avoid).
Do:
- Discuss the current pay transparency laws with your lawyer
- Consider the spirit and intent of pay transparency, while making decisions that work for your company
- Take the time to research a fair and objective system for determining employees’ salaries and wages
- Correct any unfair gaps in pay between your current employees prior to adopting pay transparency practices
- Communicate with your managers and get their feedback, so they feel oriented before any new policy is implemented
- Anticipate pay transparency becoming the norm in U.S. work culture and make the necessary adjustments now, rather than putting them off
Don’t:
- Fail to provide explanations for your employees’ salaries
- Be defensive when communicating with employees about their pay
- Wait until the last minute to implement legally mandated changes
- Leave your managers out of the loop, forcing them to defend policies they don’t understand
- Make only the bare minimum of adjustments necessary to adhere to the laws that apply to your company right now, ignoring how pay transparency is changing work culture
Pay transparency is a forward-thinking policy that shifts the relationship between a business and its employees. Adopting the practice in a systematic and careful manner will create a stronger work culture, as well as give employers an advantage going forward.
