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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.

We’ll provide an overview of pay equity laws, a pay equity definition, and tips for how these laws may impact your overall strategy for compensation.

Pay Equity: Definition

We all understand the concept of equal pay for equal work, but is pay equity on a more practical level? Generally, it means paying employees the same amount for the same or similar work, accounting for each workers’ experience, tenure with the employer, and performance. Conversely, pay equity means that factors such as gender, race, national origin, disability status, or sexual orientation may not be a factor (either intentionally or unconciously) in an employee’s pay.

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. Examples include:

  • Massachusetts – The state’s 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.
  • California – The state’s Equal Pay 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.
  • Illinois – The state’s Equal Pay Act prohibits employers from screening job applicants based on current or prior wages, requesting a candidate’s compensation history, or requiring salary history as a condition of employment.

Although many states have been steadily strengthening their pay gap laws (all but Mississippi have such laws), it may only be a matter of time before federal law catches up with—or even exceeds—some of the more progressive state measures.

Employer Pressure to Rationalize Pay 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. So, while companies may audit internally to determine whether employees are being paid identically for the exact same job, they need to approach this with more granularity.

Many employers are revisiting their compensation plans in light of state regulations. 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.

The Impact on Incumbent Salaries

Employers in states with stricter compensation 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, as employers rely on existing internal salaries to calculate salary offers. Although this certainly complicates the hiring process, it also gives employers an opportunity to decrease pay disparities and cultivate a more diverse (and, as a result, more successful) workforce. While data consistently shows that companies with a diverse staff perform better, it should be a no-brainer: Top-performing women and other minorities know they don’t have to settle for less.

Pay Equity Laws Leave Less Room for Companies to Maneuver

Employers in states with 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. This means these laws can limit employers’ negotiating power with job applicants and limit much of the wiggle room employers used to enjoy.

While most people will see this as a positive development in the struggle to narrow the gender gap, some of these 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. For smaller businesses in particular, even good faith efforts at enacting pay equity policies could create additional headaches.

Savvy Candidates Will Negotiate Accordingly

Many of these new laws don’t necessarily guarantee equity of pay offers; but, similar to the shift in power from car dealers to car consumers, they do increase leverage for candidates. Savvy applicants aware of these laws can bring their own information to the negotiation, so you should be prepared to raise the curtain a bit and be open to greater pay transparency.

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. Fully understanding the pay equity definition and making hiring decisions with these laws in mind can help keep audit and compliance costs at bay. Sign up to to receive expert advice, the latest hiring trends, and help with other hiring challenges delivered straight to your inbox.

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