A common inquiry in both job interviews and applications is gathering information about a candidate’s compensation history for purposes evaluating a candidate and preparing a job offer. Many states and localities have now made compensation fairness a priority, and these wage-gap initiatives are gaining momentum throughout the country. The reasoning behind this prohibition is to close the compensation gap among gender and minorities because of the view that gender or equal pay laws currently in place fail to protect women and minorities when it comes to compensation.
This trend generally prohibits employers from inquiring about an applicant’s prior wages or benefits during the pre-employment process or considering that information when making interview, hiring, or compensation decisions. The goal of this ban is to ensure that compensation is based on job-relevant criteria, such as an applicant’s qualifications, job duties and responsibilities, and market factors. The leading argument in favor of compensation history bans is that using past compensation in future employment decisions continues existing compensation disparities among women and minorities.
With the goal of creating a level compensation playing field, several state and local governments have enacted compensation history bans, and employers should expect this prohibitory trend to continue across the county. Compensation history ban prohibitions and exemptions vary widely among state and local jurisdictions. Currently, California, Delaware, Louisiana, Massachusetts, Oregon, and Puerto Rico have banned state-wide compensation history inquiries. While not state-wide, various counties within New Jersey, Pennsylvania, and New York have enacted the ban. As of this writing, over 20 other states are evaluating enacting compensation history bans.
How does your company view the purposes of the ban? Will your company prohibit the use of applicant compensation history in all cases, even where otherwise permissible in jurisdictions where you do business? If your company is large enough that you are subject to multi-jurisdictional compliance, you have the choice to comply with the most restrictive jurisdiction’s prohibition uniformly. Evaluate if compliance is improved by using a single compensation history information policy for all jurisdictions. If you choose to comply on a case-by-case basis, you expose your company to the risk of mistakenly applying the wrong law. If your company follows each jurisdiction’s laws, be careful to implement a separate pre-employment policy for each jurisdiction with a compensation history ban.
Depending on the jurisdiction, asking about an applicant’s salary, hourly, weekly, monthly, or piece-rate wages; commissions; bonuses; and benefits, such as health insurance coverage, stock options, and a car allowance may be in violation of the applicable law.
Because no two jurisdictions are exactly the same in what is permitted, the purpose of this column is to provide you, as the prospective employer, with an overview of recommendations in approaching compensation issues with and applicant during the pre-employment process.
Importantly, determine the jurisdictional reach of the ban, including (1) whether it extends to your locations (i.e., headquarters, offices, or other worksites); (2) the actual location of where the employment will be undertaken such as your brick-and-mortar facility, at client locations, or from the applicant’s home; and (3) the location where the recruiting and hiring activities such as the interview, will occur. Next, identify who is subject to the ban – are you, as the representative of the prospective employer? Does the jurisdiction’s ban extend to your third-party agents such as recruiters, headhunters, and employment agencies? Does it extend to representatives of the applicant who may negotiates the employment contract on their behalf? Identify what type of compensation information is prohibited from inquiry. Finally, understand when the ban applies – may you inquire about compensation history during the applicant’s screening? How about during communications with an applicant, whether verbally or in writing, directly or indirectly such as through a recruiter? May you inquire during interviews with the applicant, whether remote or in person? Are you permitted to consider compensation history when making pre-employment decisions, such as hiring or compensation? What about when screening the applicant such as verifying the applicant’s references or non-compensation history information, or when investigating the applicant’s background or credit history? The answers to all of these questions will, of course, depend on the law of the applicable jurisdiction(s).
Most bans, however, permit limited circumstances in which employers may inquire about, verify, or rely on compensation history information during the pre-employment process. However, permissible use varies among jurisdictions, and employers should understand the limits, including whether the ban permits discussions with applicants about their compensation and benefits expectations for the position; discussions with applicants about any deferred compensation or unvested equity they forfeit if they leave their current employment, asking applicants about offers and counter-offers they have received; and discussions with applicants about objective measures of their performance, such as sales’ volume, gross revenues, and valuing books of business. Some jurisdictions permit follow-up questions and verification after the applicant voluntarily discloses compensation information.
If you are subject to the ban, establish guidelines applicable to all applicant communications, including in person, by telephone, and in writing. Review your company’s screening policies and practices. Where prohibited, eliminate the use of compensation ranges or thresholds to screen applicants for interviews or hiring. Revisit your interview procedures to identify and exclude prohibited topics of inquiry or discussion. Revise any of your company’s policies or practices concerning the negotiation of compensation terms, including the personnel authorized to negotiate on behalf of your company, what information may be considered in the negotiations, developing a procedure for documenting an applicant’s voluntary disclosure of compensation history information, establishing a policy for addressing inadvertent discovery or disclosure of an applicant’s compensation history information, and reviewing and updating background check policies and procedures.
Needless to say, establishing guidelines applicable to all applicant communications is doomed to failure unless your company memorializes them. Carefully establish and update as needed written policies concerning your company’s compensation history information policies, including provisions addressing prohibited inquiries and retaliatory conduct. Equally helpful are memorializing your company’s pre-employment procedures, including screening and selecting applicants, interviewing, offers and rejections, and background and reference checks. Consider also updating your company’s equal employment opportunity policy to articulate your company’s commitment to pay equity, including, for example, that compensation decisions are made based on job-relevant factors rather than prior wages or benefits. Don’t forget to distribute your new or updated policies and procedures.
Educating and training your hiring personnel reduces your company’s risk of violating a jurisdictional ban. Identify the personnel involved in your company’s pre-employment process, including individuals who prepare job postings or announcements, recruit for job openings, screen applicants, interact with applicants to schedule interviews or request documents, conduct interviews, verify the applicant references, negotiate employment contract terms, and determine compensation. Consider obtaining a written acknowledgment from each employee that they received, read, and understand the policy.
Don’t limit your education and training to your company’s internal personnel. Similarly educate your third-party representatives. Identify all third-parties involved in your company’s pre-employment process, including recruiters, headhunters, search firms, and background and credit check vendors. Carefully inform them about your company’s restrictions on compensation history information and instruct them to comply with those restrictions. Review and revise your agreements with third-parties to include an acknowledgment and understanding of the restrictions on compensation history information, their agreement to comply with the requirements of compensation history bans in specified jurisdictions, and their agreement to comply with your company’s requirements concerning compensation history information generally, such as excluding that information from background or credit check reports. Finally, consider including an indemnity clause covering a third-party’s disclosure of compensation history information.
Your best efforts to comply with compensation history bans is fruitless unless you monitor ongoing compliance. Conduct regular internal audits of your company’s pre-employment process to ensure ongoing compliance with your internal policies and procedures, including applicant screening, interviews, and compensation decisions; applicable compensation history ban requirements; and broader equal pay obligations under federal, state, and local laws. Be mindful to have a practice in place to monitor ever-changing legal developments, including compensation history bans and broader pay equity initiatives at the federal, state, and local level.
While not a guarantee, your company’s vigilance in following the general recommendations discussed in this column will reduce the risk of going astray from the applicable prohibitions.
The contents of this column are not intended to be a complete summary of the legal issues discussed in this column. Rather, this column is intended to alert you to the broad impact of changes in the law or the means in which to comply with the law to reduce the risk of liability and claims. Because of the complexity of the law, it is recommended that all employers consult with experienced labor and employment counsel to ensure that all policies, procedures, and practices are compliant with applicable laws. Please feel free to reach out to the author at Jroth@TheRothLawFirm.com with any questions, comments, or concerns.
For nearly 30 years and as an AV-rated attorney by his peers, Jim Roth has devoted his practice to corporate, real estate and business-related issues including insurance and insurance-related matters. He regularly represents insurance companies in matters related to fraud investigations, insurance coverage, extra-contractual claims as well as third-party insurance defense, lender placed policy issues and excess and primary workers’ compensation coverage disputes.
You can find more information about him at www.therothlawfirm.com.