No more repeating history: a new age of making compensation offers without prior wage information

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Developing an initial pay package for a prospective employee has been a fairly straightforward process at most companies. There are certain data points that are often considered, including external market data, the company’s established pay range for the position, internal benchmarks and the candidate’s qualifications (e.g., years of experience, education and performance level).

To understand the candidate’s negotiating position, it has also been common practice to inquire about his or her current or prior wage history. However, a growing number of US states and municipalities are prohibiting employers from asking for wage history with the objective of avoiding the generation or carryover of potential discriminatory pay practices as an employee moves from one organization to the next.

Where does this apply?

New York City will be the first US location with an effected law banning employers from inquiring about a candidate’s salary history during all stages of the employment process. Under Intro. 1253-A, effective October 31, 2017, local employers will be prohibited from inquiring about the salary history of a candidate for employment.

In additional to the prohibition on said inquiries, the employer may not rely on the salary history of a candidate in determining the salary, benefits or other compensation for such candidate during the hiring process, including the offer stage and ultimately in the negotiation of employment terms.

Several US states and cities have adopted similar laws with a future effective date.  Delaware, Massachusetts and Oregon are early adopters at the state level, although the lawmakers have attempted to provide a reasonable period of time for local companies to make adjustments before the effective dates of their guidelines. Other cities that have adopted similar laws include Philadelphia (currently on hold) and San Francisco.

How are employers preparing for the new laws?

There are two key steps that companies are taking in anticipation of the wage history prohibition. First, they are identifying the various entry points for this type of data and defining new policies and processes to help ensure that it will not be obtained. Second and in parallel, employers are rethinking the offer process to determine the best approach to manage costs while securing key talent without insight on the candidate’s wage history. Let’s explore each of these two work streams in greater detail below.

Wage history typically enters the process through either formal or informal conversations or it is required during the application process. Internal recruiters, contingency and retained search firms and the hiring manager may inquire about a candidate’s current wage level. This is often documented in the applicant tracking system.

Less formal conversations with the candidate, potentially occurring before they have even entered the formal recruiting process, may have involved pay discussions. And finally, most background checks include wage information for validation purposes, although depending on the timing that these enter the process, this may or may not be an issue.

Once the windows allowing entry of wage history have been identified, it is important for companies to consider the policies, processes and technology that enabled its collection to determine the need for change. Here are some common areas requiring a new or modified approach:

  • Interview questions and guides: Rather than asking about a candidate’s wage history, the laws allow for the employer to reframe the question to better understand his or her pay expectations. While it is not an identical question, it does provide some perspective on the potential employee’s expectations before the offer package is developed.
  • Application and other hiring forms: Employers are reviewing existing forms supporting the application, recruitment and employment process to eliminate any questions requesting wage history or Form W-2 details.
  • Defined roles: Depending on the corporate culture and historical practices, some companies have decided to restrict who can be involved with wage discussions. For example, to avoid a situation where hiring managers inadvertently ask a prohibited question around wages, some companies are only allowing recruiters and/or Human Resource (HR) professionals to have pay discussions, both expectations and the offer.
  • Documentation for upward adjustments in wage offer: If the company develops a standard method to be used to generate the initial pay offer, the justification for negotiating higher levels should be documented. In the event that the employer comes under audit or discrimination claims are made by employees, this documentation, assuming it presents legitimate reasons for a difference in pay, could be used to evidence the reasoning. Without it, the employer is left to try to surmise the factors and generate the paper trail after the fact.
  • HR system: To the extent that wage history is currently housed in applicant tracking and other HR information systems, many companies are being cautious by removing those fields. This avoids the appearance that the information can or should be collected on a go-forward basis.
  • Voluntary disclosure of wage history by the candidate: In situations where candidates voluntarily discloses their wage history, the company will have a few questions to ask internally. Should disclosed wage be considered in making the offer? Should the interviewer be required to sign a document acknowledging the wage information was voluntarily disclosed without prompting to minimize potential risk? Should the candidate be required to sign a document acknowledging that the wage information was voluntarily disclosed to avoid any future dispute?
  • Recruiting resources: Since there is a heavy reliance on the recruiting team to comply with the new laws, companies must make all aware and require them to act in accordance with the new policies and practices. Worth noting are non-US recruiters that may be used to source and place for US positions. Another common arrangement is the use of third-party recruiters, and leading employers are amending contracts to ensure that outsourced agencies are in compliance.
  • Uniform or geography-specific focus: Knowing that there are at least a dozen further states with proposed legislation, employers are trying to understand whether to adopt special procedures for only those affected locations or to assume that the movement will ultimately require a uniform approach across the US. While some may be piloting their new policies and processes in the early adopting geographies, many US employers are planning for a uniform national approach. The reasons cited are that it will be too complicated for recruiters and hiring managers to try to apply varied rules appropriately. Also, candidates may initially apply for one location and then ultimately get an offer for another. If the rules in the second location are more prohibitive, a violation may occur inadvertently.

In addition to avoiding the introduction of wage history data to the process, employers are trying to understand how this reduced data set will impact their offer process. Without prior history, the company could inflate costs by making offers that are higher than what would otherwise have been agreed.

Additionally, if the company chooses to start with an offer at the lower end of their acceptable range, they could create a greater importance on negotiations to come to agreement. This could lead to pay disparities based on negotiating abilities of the candidates – a trait that may not be valued for a given position.

What has become clear is that there will be a greater reliance on internal and external compensation data to serve as a strong guide. Most companies already leverage published survey sources and other market benchmarks for their respective peer group. Where possible, some employers are using this external data along with the internal data points to tighten pay ranges. This may be tested if there is an inability to attract, and more importantly – hire the necessary talent required to support the business.

What is next?

Two things are clear as wage history prohibition laws gain acceptance. The regulators are showing no signs of conceding on the wage history topic. In fact, with the adoption in Massachusetts (effective in 2018), the momentum is growing. And finally, it is imperative for employers to take action now to rethink their offer policies and processes in order to maintain compliance, manage costs and secure the talent needed to thrive.