Monday, December 18, 2017
You Can’t Ask About Employee Compensation Anymore. Now What?

The new laws governing employee compensation.

Note: This post is not intended as legal or human resource advice; rather, consider it a social sharing of information gathered over the last six months from a variety of sources and conversations. Don't make legal or HR decisions based on this content; seek formal legal or HR advice.

The laws for evaluating and discussing employee compensation are undergoing dramatic changes. Under these laws, you can no longer ask a candidate about their past compensation, and, in some cases, even if it’s voluntarily provided without prompting, you can’t make future offers based on that information. If you’re in the business of recruiting, hiring, or managing employees, you need to prepare yourself for the new normal to avoid penalty.  

The Laws

The new laws aim to close the income inequality gap by eliminating past compensation as the basis for future compensation. As of the time of writing, there are six new laws either currently in place or that will be phased in over the course of 2018. They are:
 

  • New York City - Intro 1253 (Effective as of Oct. 2017)
  • Delaware - HB 1 (Effective as of Dec. 2017)
  • California - AB168 (Effective as of Jan. 2018)
  • San Francisco - “Parity in Pay Ordinance” (Effective as of July 2018)
  • Massachusetts - St. 2016, c.177 “Pay Equity Act” (Effective as of July 2018)
  • Oregon - HB 2005 “The Equal Pay Law” (Effective as of Jan. 2019)
  • As of this writing, Philadelphia legislation was pending, as were several other cities.  

 

What You Can (and Can’t) Do

Every law is slightly different. We’ve outlined a set of common themes below. However, the details are material, so it’s best to know the letter of the law in your state or municipality.

Can’t Do:  

  • You can’t ask verbally or in writing about a candidate’s current or prior compensation, which includes any type of compensation like: Base salary, bonus, commissions, and in most cases equity grants, although in some cases you can ask about unvested equity.
  • You can’t make future compensation decisions based on past compensation history.
  • Neither employees of the company seeking to hire the candidate, nor its agents can expressly ask about compensation history. This includes recruiters or other consultants who are paid by the company.


Can Do:   

  • You can discuss a candidate's salary expectations. In California, AB 168 requires an employer to disclose the “pay scale” for a position to the candidate; however, that’s not expressly defined.
  • You can accept compensation information if volunteered by the candidate “without prompting.” There are exceptions to this. In San Francisco, for instance, even if a candidate voluntarily discloses salary information, it’s not permitted to be used.    
  • Oddly, in some cases you can discuss unvested equity or deferred compensation that the candidate may forfeit.  
  • Generally, it seems that discussion of competing offers is permissible.
     

Best Practices

Regardless of the specifics of the laws in your city or state, there are some general best practices that all those involved in the hiring process can put into action immediately.
 

  1. Specifically define the compensation bracket for the role: You must know what market value is for the role you are recruiting, and you should define a salary range for that specific role to use in negotiation. Subscribe to compensation studies and surveys – one will not be enough. Some, like Radford, are great for larger public company roles but may not be entirely on point for private, venture-backed roles.  
  2. Ask for expectations on future compensation, NOT for specifics on past or current compensation: You should ask a candidate for their expectations on compensation. Take special care to make that question feel non-threatening, and make sure that the candidate does not feel like you’re asking for historical specifics.   
  3. Create your own compensation survey: To help facilitate compensation expectation conversations, create your own internal compensation survey. This may be a good way to leverage data you already have, but the key is not associating it with individuals and not using it as the basis for an individual’s specific salary. Anonymous data surveys have been an effective way to still allow for data-driven decisions but protect individual confidentiality under other government regulations.  
  4. HR should drive compensation conversations: HR must rapidly develop a defined policy and method of engagement around compensation to ensure compliance. While the new laws are being worked out, respective heads of HR should drive the compensation negotiation process, and you should consider whether HR personnel are the ONLY ones who should discuss compensation with a prospective candidate in order to minimize risk from these new laws. 

 

Grey Areas

As with any new set of laws, it will take some time, and litigation, before they are clearly defined. As a result, there will be many grey areas to consider.

  • Sales compensation or commissioned employee’s compensation. In most cases, it’s permissible to ask about attainment against quota and the mechanics of a sales compensation model. It may be possible to reverse engineer someone’s compensation through the understanding of their commission plan; however, this is not recommended so as to avoid liability under these laws.     
  • Public disclosure of compensation. If the candidate’s compensation is subject to public disclosure that information could be fair game. On the other hand, some laws seem to indicate that “public searching of a candidate's salary history” is also off limits.   
  • The definition of “employee.” The laws vary in how they define what an employee is (i.e. contractor versus full-time W2 employee). In most cases, the laws pertain to W2 wage earners, but some are more expansive. 
  • Location. That is, if a company is headquartered in a state with a compensation law, and the employee will work at a branch office in another state where such a law does not exist, it is unclear which takes precedence. 
  • Voluntary information. If a candidate voluntarily shares compensation information, it is likely permissible (although not in San Francisco). However, the laws are fairly unspecific as to whether you can write that down and share it.  
  • Record keeping. One of the biggest challenges facing any data-driven company will be the effect of these laws on record keeping. Most of the new laws have prohibitions against keeping historical compensation data on record. This will present a myriad of challenges. Nearly all companies have this type of information currently on file. Are they now out of compliance?


2018 will be a year of adjustment for everyone involved in the recruiting process, companies, hiring managers, and their agents. The time is now to figure out your plan. Typically, these types of laws are clarified over time through court action. You definitely don’t want to be in the class of the unfortunate few who help define the statute through litigation. 


Charles Hubbard, Partner

Copyright 2017 Charles Hubbard, All Rights Reserved