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Compensation History Ban: What it’s all About

Thanks to new legislation going into effect, it will soon be illegal in an increasing number of states for a prospective employer to ask a candidate about his or her salary history, or to take volunteered salary history information into consideration when making an offer.

What?!, you may ask, I can’t ask for, or verify, a candidate’s current compensation?

Questions abound: What am I allowed to do under the new law? How do I avoid getting myself, and my company, into hot water? How will I make offers that get accepted? Are we at a competitive disadvantage compared to companies in other states? How do candidates feel about it?

Don’t fret, here come the answers.

Well-meaning, but still a work in progress

There has been a federal equal pay law on the books since the 1960s. Now, almost sixty years later, why all the fuss?

It’s been determined that the federal law did not prove to be very useful. Pay gaps, especially gender gaps, persist. Several studies show that for identical jobs, women earn only 80 cents on the man’s dollar. The federal law´s ineffectiveness had to do in part with half-hearted enforcement, but also with a lack of awareness among employers.

So, as legislators across the country were looking for new ways to close the gap, they stumbled upon something called the “start low, stay low phenomenon.” Turns out that employees, especially women who start their careers on a low salary, stay below the average permanently. One of the reasons is that every time they interview for a new job, they are forced to unveil their previous salary level.  The offered salary is then calculated as an increase on current salary.  In other words, the rationale behind the new equal pay laws is that asking a candidate for their salary history perpetuates discrimination.

In a nutshell, the new rules make it illegal for an employer to ask for the compensation history from a candidate or another source, like the former employer. A candidate can offer to give it voluntarily, though that doesn’t make it legal to use the information when crafting an employment offer.

Where things stand 

Massachusetts was first to pass a law banning employers from seeking information about applicants’ compensation history in the hiring process. It will go into effect in July 2018.

However, the idea caught on quickly. Numerous states and cities have followed Massachusetts´ lead or are thinking about it. In some places, the new rules only affect public employees, in other places, those in private companies as well.

Since it is a moving target, it is a bit difficult to say where things stand as of March 2018. But the following have already passed compensation history ban rules: California, Delaware, Massachusetts, New York City, New Orleans, Oregon, Philadelphia, Pittsburgh, Puerto Rico, and San Francisco.

At least eight more states are contemplating similar legislation: Illinois, Maryland, New Jersey, New York (State), Pennsylvania, Rhode Island, and Vermont.

If this proliferation worries you, read on.

Surprise: could this be a good thing?

One could take the stance that the new laws are intrusive, and won’t have the desired impact of creating equal pay, but rather, will only create challenges and inefficiencies in the recruiting and hiring process.

However, I see some good arguments that if practiced correctly, this new legislative trend may work to the advantage of everybody.

The biggest positive change these laws might bring about is a more widespread, thoughtful, market-based approach to compensation policies. Think about it: isn´t it simplistic to base compensation for a position on what the candidate earned in their current or last role? While the job title may be similar, the level of the position, the complexity, the current market rate for that role, company, geography, and other factors may be completely different.

Wouldn’t it make more sense to put a system in place that allows you to put a market range on each position in your company, and then adjust up or down according to a unique individual’s experience, track record of contributions, and skill set instead of their compensation history? Some companies take this approach, but too many employers fall back on what a candidate is currently earning, or earned in the past, as the measuring stick by which they are valued.

This new legislation could highlight the employers who are most innovative and forward-thinking in designing their compensation plans. The organizations who proactively do their diligence on market pay rates, adjust their pay ranges accordingly and in real time, and focus on providing competitive compensation based on each candidate’s individual merits, will gain competitive advantage. This is employer branding at work. And in today’s highly candidate-short unmanned labor market, this is surely nothing to sneeze about.

Now what?

So much for the broader picture. Now you need to know what all this means for your day-to-day practices. In one of my next letters, I will answer questions like how to have a salary discussion, what to ask the candidate, and how to adjust your compensation planning under this new regime.

Spoiler alert: you can still negotiate with candidates!

ManUP today for success tomorrow…