Will the new pay secrecy amendment keep everyone happy?

By Gary Anders

When it comes to office conversations, asking a co-worker how much they earn is one of the top “no-go zones”.

However, it may also qualify as a breach of contract, with many existing employment contracts containing clauses that prohibit workers from discussing their pay, even by choice.

Australia’s position has now changed in law, with the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Act 2022 (the Act) receiving Royal Assent on 6 December 2022.

The Act, among other things, prohibits pay secrecy clauses in all new employment contracts. It also introduces workplace rights that legally permit employees to talk to each other about their remuneration, including any terms and conditions of their employment relevant to remuneration outcomes. Pay secrecy terms in existing employment contracts will also no longer be enforceable.

Employees may use this information, if provided by one or more co-workers, to assess whether their remuneration is fair and comparable to that of others in the same workplace or industry, and in the same or in a similar role.

Global momentum

In a sense, Australia is playing catch-up.

The removal of pay secrecy clauses in new employment contracts mirrors the progress in other countries, particularly in the US, the UK and throughout Europe.

The move is part of a broad push by many governments towards achieving greater pay transparency, to help eliminate wage discrepancies based on gender, race and other unfair workplace practices.

At the same time, other legal changes overseas are aimed at helping job seekers avoid applying for roles with salaries below their expectations.

In the US, for example, New York City recently enacted legislation that requires companies to include the minimum and maximum pay for all their job listings, regardless of the role being advertised.

Employers who fail to post salaries will receive a warning. Repeat offenders can face fines of up to US$250,000 (A$361,167) per violation.

Advertised salary ranges have been widely used across Australia for quite some time, most prominently for all public sector positions.

More recently, momentum towards increased pay transparency across the private sector has grown, with some major banks actively removing pay secrecy clauses from their permanent and temporary employment contracts.

Michelle Brown, professor of human resource management at the University of Melbourne, says trying to reduce the gender pay gap is a common theme underscoring these changes.

“That’s been a very substantial motivation for this legislation, because there is a lot of research to suggest that pay secrecy is a contributor to the gender pay gap.”

Brown points to research covering 11 states in the US that have introduced prohibitions on pay secrecy, where a labour market economist compared the wage outcomes for women in those states to women in states where pay secrecy is still permitted.

“There was a difference in pay of anywhere between 4 per cent and 12 per cent, with the women where there is a prohibition on pay secrecy getting paid more than the women in the other states,” Brown says.

“It does seem to make a difference,” she adds.

How does the prohibition on pay secrecy lead to women being paid more?

“We know that under conditions of secrecy, organisations can make decisions that may be ad hoc and may reflect other stereotypes.

When you have transparency, organisations simply must have better systems, which they can defend,” Brown says.

Jessica Pratt, senior lawyer at Toop Workplace Law, agrees that removing pay secrecy is about limiting the incidence of gender pay discrimination and making employers more accountable.

The new pay transparency laws prohibit employers from entering into new employment contracts with pay secrecy clauses. In existing employment contracts, such terms will have no legal effect. This means employers will not be able to enforce pay secrecy terms in existing contracts.

Pratt recommends that employers update employment contract templates to remove any pay secrecy clauses, review existing contracts and arrangements, and adopt a best practice approach.

 

"Employers should go beyond compliance and implement best practice by having robust remuneration processes in place, so that they ensure they adopt a holistic strategy in order to create a more equitable workplace."

 

“My view is that employers should go beyond compliance and implement best practice by having robust remuneration processes in place, so that they ensure they adopt a holistic strategy in order to create a more equitable workplace,” Pratt says.

“It has to be part of a broader strategy of ensuring there are proper processes in place to confirm that an organisation’s remuneration practices are inclusive, up-to-date and that regular gender pay audits are conducted, so there are no unintended consequences.”

Pratt believes there may be a rise in discrimination claims against some employers, but that transparency should have positive outcomes for organisations, especially in staff retention.

Tony Peters CPA, director of professional services at IT recruitment and information technology advisory firm Implementium, says he still sees a lot of employment contracts with pay secrecy clauses.

“Predominantly in Australia you do see pay secrecy clauses in contracts stating that employees cannot discuss their pay with anybody, particularly their peers,” Peters says.

Peters says some employers have included clauses for their own protection, to avoid sensitive pay information being discussed internally or leaked to external competitors.

“From an employer point of view, people running a business, there’s an element of confidentiality in terms of what they do.

“But obviously employers can use pay secrecy as a strategy to control wages and salaries. It is a proven strategy or tactic that works. Knowledge is power. Suppress the knowledge and people can’t make decisions.

“If you don’t know what your colleague earns, how can you bargain, how can you negotiate, what is your benchmark? This all feeds into the gender pay gap.”

Greater business accountability

The new pay transparency requirements built into the Act are likely to have farreaching consequences across the Australian employment landscape.

Brown says that, based on developments overseas, many employers will need to become more accountable in justifying their pay decisions to employees.

“The other thing is that we will actually see organisations making different kinds of decisions,” she says. “There are some interesting studies that show that organisations often tend to hire more women into higher paying roles under conditions of pay transparency.

“The changes aren’t just in terms of accountability. We’re also seeing organisations hiring more women into bigger positions or promoting women into higher paying positions as well.

“There does seem to be enough evidence to suggest that a prohibition on pay secrecy will make a difference. The argument that it will not close the gap completely, is probably true. But we do know it makes enough of a difference to be worthwhile,” Brown says.

At a base level, the changes will spur some employees to negotiate for higher salaries. 

To attract applicants, employers are likely to need to provide more salary information in their job advertisements.

“We do know that potential job applicants do look at the amount of information in the job advertisement, and it does have implications for whether they apply or not,” Brown says.

“We do see that people are reluctant to apply for jobs if they don’t see how much they’re going to get paid.

“The other reason why the pay information on a job advertisement is important is because employees see it as telling them something about the fairness and trustworthiness of the organisation.

“It signals that the organisation is going to treat people fairly and equitably because it has pay ranges. Statements like ‘we pay flexibly, competitively’ – jargon you often see in job advertisements – doesn’t tell a potential job applicant anything about what that might mean in practice,” Brown says.

Effect on salaries

In the Australian context, Peters believes that pay transparency will result in labour costs increasing in the short term, because employees will have greater bargaining power.

“Knowledge is power, and that translates into bargaining power, which is increased during negotiations.

“For some employers there will be disharmony, and there will be conflict and disgruntled employees if they find out there’s someone sitting next to them doing the same role and getting paid a different rate. There will be chaos in some places,” Peters says.

However, Peters says candidates who need to find work urgently will accept lower salaries, which will push wages down.

“In the short term, it will be great, because it will start addressing things like the gender pay gap. But, in the longer term, there may be a levelling effect where some pays will go up and some higher pays may come down.”

Research conducted by the Harvard Business Review, entitled “The Unintended Consequences of Pay Transparency,” has found evidence that pay transparency can actually compress pay levels rather than elevate them.

 

"For some employers there will be disharmony, and there will be conflict and disgruntled employees if they find out there’s someone sitting next to them doing the same role and getting paid a different rate."

 

Specifically, it has found that in businesses adopting pay transparency practices, managers were inclined to reduce pay dispersion among employees by making their salaries and others incentives similar.

“It’s often time-consuming and psychologically draining for them to address employee complaints and salary adjustment requests, so we found that they take steps to reduce differences in compensation within the same job level,” Peters says.

Harvard Business Review also found that employees who experience “transparency induced pay compression” are likely to seek “alternative ways to receive the reward they feel is due to them”.

This may include non-monetary benefits, additional career training or other incentives.

“We have done a lot of interviews with organisations about why they have pay secrecy. What is common in every interview we have ever done is that there is a view the organisation will descend into chaos if everybody knows each other’s pay,” Brown says.

“But there is nothing in the legislation that says businesses have to pay everyone the same amount. It simply means that you have to be able to justify differences."

What does this all mean for human resources?

“It means making sure you have a rational, defensible pay system,” Brown says.