Home / Recruiting Strategies / Compensation Strategy & Planning / How pay equity laws can affect compensation strategies

How pay equity laws can affect compensation strategies

How pay equity laws can affect compensation strategies

The Equal Pay Act was passed in 1963, but the war for equal pay rages on. Although the gap has narrowed, women are still paid less than men for comparable work. That’s why a growing number of states have enacted gender pay equity laws which increase pressure on employers to rectify these disparities.

Employers and employees alike are finding that these measures affect salary negotiations and compensation trends in a variety of ways. So, recruiters need to know how these laws and trends might affect compensation strategies during the hiring process.

Federal and state pay equity laws

The Equal Pay Act of 1963 prohibits sex-based wage discrimination for jobs that require “substantially equal skill, effort, and responsibility under similar working conditions.” State provisions go further in attempting to rectify gender-based disparities.

For example, the Massachusetts equal pay law bars companies from asking job candidates for their salary history, and says that companies can’t forbid workers discussing their salaries with each other. Similarly, California’s pay equity law mandates equal pay for “substantially similar work” (a broader category than the federal law), and applies its protections to race and ethnicity in addition to sex. Although many states have been steadily strengthening their pay gap laws, Nannina Angioni, a California labor and employment attorney, thinks it’s only a matter of time until every state implements similar measures.

Employers feel pressure to audit and rationalize their compensation structures

Although compliance has varied, employers have long been mandated to pay equally for equal work. But some of the new laws require equal pay for “comparable” or “substantially similar” work, and it’s not entirely clear what that means. “Companies audit internally to determine whether employees are being paid identically for the exact same job,” says Dana Hooper, a partner at law firm Greenberg Traurig. “But now they need to go further.”

Many employers in the affected states are revisiting their compensation plans. In California, for example, employers are required to use objective criteria to calculate salaries. This puts a greater emphasis on the position and duties rather than the candidate because employers need to have gender-neutral explanations to point to when pay disparities arise.

Incumbent salaries in play

Employers in states with stricter pay equity laws may be required to apply salary offers to job candidates as well as existing employees. So, companies hiring new employees are looking around to determine if they need to give raises to incumbent employees as well.

That door swings the other way, too. “Existing internal salaries will be one of the pieces of information that employers rely on to calculate salary offers,” says Robin Pinkley, professor of management and organizations at the Southern Methodist University Cox School of Business. Although this certainly complicates the hiring process, Pinkley explains that employers have an opportunity, here, to decrease pay disparities. For example, if women are more hesitant to negotiate than men, they’re more likely to accept a lower-paid job offer and the disparities will continue.

New laws leave less room for companies to maneuver

Employers in states with new gender-pay equity measures cannot legally offer female candidates the pay they ask for if that amount is less than the pay of male employees doing similar work, according to Nannina Angioni.

“These laws can limit employers’ negotiating power with job applicants and limit wiggle room,” she says. “In some ways this is a positive development to narrow the gender gap; in other ways the laws might be too restrictive in practice.” And as more states and cities enact additional pay equity laws, the employer’s responsibilities in this arena only get more complicated.

Savvy candidates will adjust their negotiation strategies accordingly

“The new laws don’t necessarily guarantee equity of pay offers,” says Pinkley. “But they do increase opportunities for candidates to change their own strategies, to bring their own information to the negotiation.”

Younger workers in particular may be more apt to leverage new rights during compensation discussions. Recently enacted pay-equity measures typically give workers the right to divulge and discuss what they’re paid and therefore to use that information in salary negotiations. And since millennials are more likely to discuss salary than the generations that came before them, these workers are especially poised to act on that information.

Make hiring decisions with pay gaps in mind

The full effects of pay equity laws won’t be determined until after the measures have been adjudicated in court and by state labor relations agencies. Making hiring decisions with these laws in mind will can help avoid audit and compliance costs down the road. Get help with this and other hiring challenges by signing up for Monster Hiring Solutions where you’ll get expert advice, the latest hiring trends, and more.

Legal Disclaimer: None of the information provided herein constitutes legal advice on behalf of Monster.