NYC Pay Transparency Law May Result in Pay Compression

Allen Smith, J.D. By Allen Smith, J.D. August 1, 2022
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​New York City's Wage Transparency Law takes effect Nov. 1, and employers—including businesses outside the city with job ads for remote work—are realizing one of the unintended outcomes of complying with the law may be pay compression.

The New York City Pay Transparency Law amended the New York City Human Rights Law, making it an unlawful discriminatory practice to post any job listing that does not include the minimum and maximum salary or hourly wage offered for the position. The law "comes as part of a trend to promote wage equity for groups who, historically, received lower compensation—such as women and people of color," stated Carol Goodman and Meaghan Roe, attorneys with Herrick in New York City, in a joint e-mail.

Pay Compression

"Pay compression occurs when there is minimal difference in pay between tenured employees and new hires despite differences in their respective knowledge, skills, experience or abilities," said LaKeisha Caton, an attorney with Pryor Cashman in New York City. The publication of salary ranges might exacerbate the problem of pay compression because employers may feel pressured to offer higher starting salaries to attract strong applicants, while the salaries of tenured employees remain stagnant to balance the increased costs, she said.

"As a result, new hires could earn nearly the same compensation, or more, than tenured employees in the same position," Caton said.

Pay compression can lead to low employee morale and high turnover rates, said Eli Freedberg, an attorney with Littler in New York City.

To address the morale and pay equity problems that pay compression may cause, employers should analyze their pay practices carefully, said Ian Carleton Schaefer, an attorney with Loeb & Loeb in New York City. First, determine appropriate pay ranges for each position. Then assess what criteria—such as education, experience, special training, time in position and years of service—influence where applicants and current employees fit within that pay range, he said.

Intended Results of Law

Other results of the law are intended.

"Pay transparency allows applicants to assess from an initial job posting whether the position is a viable financial option for them," Schaefer said. Pay transparency also provides applicants with a starting pay range for negotiation purposes, so applicants are less likely to undervalue their worth and ask for or accept an offer of compensation that is significantly lower than what the employer was willing to pay. "In theory, pay transparency will require employers to take a more deliberate approach to pay decisions and should eliminate, or at least lessen, variances in pay offered to similarly situated applicants," he said.

For employers, pay transparency is an opportunity to analyze organizations' compensation and ensure pay decisions are tied to objective, job-related qualities of applicants, Schaefer said. "This can prevent underpaying and potentially losing qualified applicants and employees; and overpaying less qualified applicants who demanded higher pay and whom a hiring manager liked for reasons that may not be directly related to the job—such as, for example, attending the same college as the hiring manager."

Another effect of the law is that it could result in a pre-employment evaluation of what the employer is willing to pay a particular candidate within the posted range. "A candidate offered at the low end may perceive that they may not be the employer's first choice, while the candidate offered at the top of the range may feel more enthusiastic about the job," said David Harmon, an attorney with Norris McLaughlin in New York City. An employer could make the opening offer to be on the higher end of the range to better attract strong applicants because they will know the salary range, he added.

Remote Work

An employee who works remotely but attends periodic meetings in New York City will subject the company to the requirements of the law, Harmon said.

The law excludes from coverage positions that cannot or will not be performed, at least in part, in New York City. So a covered New York employer that also has an office in Arizona and advertises an in-person position to be filled in the Arizona office will not likely have to comply with the law for that position, he said.

By contrast, a fully remote position "will likely be covered by the law because the position can be filled by someone who lives in New York City," Harmon added. More guidance on the permutations of remote and in-office employment is expected.

Law's Definitions of Salary and Advertisement

Under the law, salary includes the base wage or rate of pay, whether measured as a salary or hourly wage, Goodman and Roe noted. This is the information that must be included in an advertisement.

"Salary does not include other forms of compensation or benefits offered in connection with the advertised job, promotion or transfer opportunity," they said. "Thus, an advertisement does not have to include health insurance, time off, severance pay, overtime pay, commissions, tips, bonuses, stock [or] 401(k) plans."
Employers should clarify that the ranges include only base salary and not necessarily total compensation, they said.

An advertisement is a written description of an available job, promotion or transfer opportunity that is publicized to a pool of potential applicants, regardless of the medium, they said. An ad includes internal bulletin boards, Internet advertisements, printed flyers distributed at job fairs and newspaper ads.

"Companies that do not want to post salary ranges at all can hire without using an advertisement as there is no obligation to advertise opportunities, including internal opportunities," Goodman and Roe said.

"The reality is that compliance will be extremely complex for most employers," said Marc Mandelman, an attorney with Epstein Becker Green in New York City. "The widespread continuation of remote work following COVID will mean that many employers nationwide are posting for wholly remote positions that could be performed anywhere, including by residents of New York City."

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