Views & Opinions

It’s our secret: pay secrecy clauses in employment contracts

29 October 2018


It’s our secret: pay secrecy clauses in employment contracts

 
Rocio Paradela, Graduate Associate

It’s not uncommon for employers to prohibit employees from sharing details of their salaries. This type of prohibition is commonly referred to as “pay secrecy”. This practice is most often seen in sectors where discretionary incentives and bonus payments are common, such as the financial services industry.

Why does this matter?

In Australia, more than half of all employers commonly include pay secrecy clauses in their employment contracts. The concept of pay secrecy is linked to the gender pay gap. The gender pay gap currently sits at around 14.6% based on average weekly ordinary full-time earnings. This gap is largest when pay levels are secret, but almost non-existent when pay is transparent (for example, where an employer pays the minimum wage rate in accordance with the terms of an award).1

Last month the Labour opposition announced (as part of its election promise) that it will make Australian companies with more than 1,000 employees publicly report on the gender pay gap and also committed to changing the Fair Work Act 2009 (Cth) to prohibit pay secrecy clauses.

The pros and cons

There are competing arguments in this space. On the one hand, pay transparency, in theory encourages employees to be more competitive and can improve productivity and motivation. However, most employers discourage employees from discussing their pay, to avoid resentment amongst employees. The disclosure of pay disparities can create tension between employees and have an impact on overall culture. It can lead to reduced job satisfaction on the part of lower paid workers, and a focus on pay level can contribute to the impression that this is the only indicator of an employee’s worth to an organisation.

While many employers may see the worth of abolishing pay secrecy clauses as a tool to help reduce the gender pay gap, organisations will need to think about the broader impacts of removing pay secrecy clauses. Organisations will have to assess how the fact that workers might choose to disclose or not disclose their salary, could impact on the culture and morale of a work team or the organisation as a whole. If such amendments are implemented, organisations should turn their minds to developing an internal communication strategy to help guide behaviours and expectations around pay disclosures.

Interestingly, the recently published Interim Report of the Financial Services Royal Commission makes the link in a broad way between remuneration and workplace culture, showing that the way in which remuneration is structured can have a significant impact on a company’s overall culture.2

While removing pay secrecy clauses may be one strategy in closing the gender pay gap, employers should not rely on legislative changes as the only solution. Organisations can strive towards overcoming obstacles to gender equality identified in their businesses and ensure that employees are rewarded based on merit rather than personal characteristics that can give rise to allegations of discriminatory treatment. Organisations considering an open salary policy need to deliver a proactive and positive message on this point, and ensure they have defensible non-discriminatory pay practices that match this messaging.


1 Workplace Gender Equality Agency, Australia’s Gender Pay Gap Statistics, available at https://wgea.gov.au/sites/default/files/gender-pay-gap-statistic.pdf
2 Interim Report of the Financial Services Royal Commission, available at https://financialservices.royalcommission.gov.au/Pages/interim-report.aspx

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