Alabama, California, Colorado, Hawaii, Illinois, Maine, and Massachusetts are among the states that have enacted laws to prohibit or restrict employer salary history inquiries. These bans are meant to help close the gender pay gap by preventing employers from determining new salaries for new hires based on a job applicant’s previous earnings. They have also been enforced in regional and municipal governments, such as New York City.
Typically, employers will use previous salary information to gain an upper hand in salary negotiations with new or potential hires. Past salaries can often influence what an organization may pay in salary when hiring someone, which can affect job compensation over the long term.
An example of this impact is found in a Goldman Sachs study from 2018. The study looked, among other things, the long-term financial impact the gender wage gap can have on women. The study compared the compensation of a college-educated man and a college-educated woman. Both worked full-time management jobs in a professional services industry. The study looked at their earnings potential from age 25 to 65.
The study found that the woman must stay in the workforce longer than the man to earn the same gross income over their lifetime. “If the woman worked full-time from age 25 until age 65, she would earn an estimated total of $3.4 million over her career,” stated the study. “The comparable figure for the man would be $3.9 million. As we show in Exhibit 13, closing this $545,000 lifetime gross income gap would require the woman to continue to work full-time for an additional 4.2 years – until after age 69 – while her male counterpart retired at age 65.”
The study also found that the woman’s lower compensation resulted in lower long-term savings.
At the time of the Goldman Sachs study, salary history bans were starting to be put into place. This was noted in the study: “Some state and local governments, including California and New York City, have recently barred employers from asking job applicants about their salary history, while some states have also banned state and local agencies from requesting this information. The intent is generally to make it easier for applicants to benchmark against current market rates rather than against a salary history that may have been negatively affected by prior bias or by extended time out of the labor force. Put another way, it gives women in particular the chance to de-anchor from previous pay.”
The study concluded that “these types of policies may prove effective in narrowing the wage gap between a man and a similar woman applying for the same job.”
Currently, 17 states and 19 municipalities have salary history bans in place, according to HR Dive. Thirteen of those states passed these laws since the Goldman Sachs study was released in October 2018, adding new levels of complexity to what employers must do to comply with pay equity laws.
A new report from Harvard Business Review Analytic Services, done in association with Trusaic, noted that in the U.S. “federal reporting requirements have been expanded and more congressional initiatives are in the works, while a groundswell of states and localities are changing their laws to fill in the gaps in federal enforcement of regulations.”
The Harvard report notes that a pay equity audit can be a valuable tool as a “first defense when it comes to compliance with federal, state, and local regulations.”
A pay equity audit is an analytical tool that seeks to explain internal differences in pay across the workforce in terms of justifiable business factors, usually involving a regression analysis of an organization’s pay groups. It is something worth looking into if you are concerned that your organization may have pay equity issues to address.
Progress on this issue seems to be inevitable as we see a more diverse electorate engage with the U.S. political system and elected to government offices. Is your organization prepared to address this changing pay equity landscape?