Disclaimer: All information provided by this post is for informational purposes only. This is a high level overview of an important labor law change and should not be taken as legal advice. CloserIQ makes no claims as to the accuracy or validity of this information and will not be liable for any damages resulting from its use. We encourage you to find legal counsel for how this directly impacts your business before taking any action.
The New Legislation on Prior Earnings
The New York City Council passed legislation last Wednesday that prohibits employers from asking about salary history in the recruiting process or otherwise relying on salary history to determine salary, benefits or other compensation in a new job.
This law will go into effect in October of 2017; however companies should strongly consider changes to their recruitment and new hire processes as soon as possible given the broad impact that this new law will have on talent acquisition.
The new law considers it a discriminatory practice to ask about the salary history of a job applicant when determining compensation. The measure only applies to new hires, not to internal job candidates applying for a transfer or promotion given that their salary history may already be on file. Importantly, the new law does not prohibit employers from asking potential new hires about past job performance, such sale sales, revenue or other productivity numbers.
The motivation for this legislation is to address the issues around gender-based wage gaps in the country by preventing a perpetuation of past wage inequalities.
There’s a few interesting knock-on effects this will create on the tech sales community you should be aware of:
- You will no longer be able to use prior year W-2 statements to verify performance claims made by sales reps. This general practice has slowly faded in recent years as candidates often view it as intrusive. While it’s a good data point to collect, prior W-2’s have never been itself a reliable indicator of future performance. In our experience, external factors of startup sales such as product-market fit, territory assignment, working environment can often times dominate the performance of a sales rep vs. their raw skills and experiences.
- Reference checks have always been important but will likely increase in popularity due to this change. Be careful to not ask about prior earnings on reference checks as that would still be in violation of the new legislation.
- Recruiting agencies may still be permitted to ask candidates for compensation information, but they may no longer be permitted to share that with employers. While CloserIQ has always adopted a candidate confidentiality policy and have never disclosed candidate’s detailed salary history, recruiting firms or platforms that share prior earnings may be exposing employers to increased risk of discriminatory claims.
- Without being able to have an open conversation about prior earnings, employers will need to get much more precise at defining role requirements, and the corresponding levels of compensation they are willing to pay for differing levels of experience. This is generally a good exercise regardless but will likely be an important element of risk mitigation if there ever was a question on discriminatory compensation practices.
The new legislation will impact everyone differently. Here are some tactical thoughts to help you adjust to this new environment.
1) Educate your team.
Make sure every single interviewer in your company knows they should not discuss compensation in the same way they should not ask about religious affiliations or age of the candidate.
2) Educate your partners.
Perform a thorough audit of all your external recruiting partners, tools, and processes that may be collecting and supplying you with compensation data. For example, recruiters who may be providing you compensation levels, applicant tracking systems that may be soliciting compensation expectations, and contract recruiters who may be asking compensation related questions during phone screens.
3) Reset expectations with recruiting partners.
You will need to trust that they are doing the right thing for you in presenting candidates at the appropriate level of compensation vs. your budget. Experienced recruiting partners will be able to provide market compensation levels and help you devise a comprehensive strategy that helps you stay compliant, while minimizing overpaying for talent.
4) Publicize your compensation ranges.
Compensation levels for junior roles like SDR and SMB Account Executive can often be the limiting factor in offer acceptance decisions. If you find yourself spending a lot of time interviewing but losing candidates due to compensation in the final stages, then you may want to disclose compensation ranges earlier. This will help ensure candidates are interested in the opportunity at the levels you can offer.
5) Create more roles with tighter salary and earnings.
If you have flexibility in your compensation levels, you may want to separate roles into additional tiers. This can help to provide a clearer picture of how you are thinking about the age-old term of “commensurate with experience”. For example, if you previously listed a SDR role of $40-50k base salary depending on experience level, you may want to split that up into a career ladder with corresponding earnings level and requirements for each so you don’t make ad-hoc decisions about compensation.
1) Your W-2 can be an asset.
If you are a top performer with high earnings, it may actually be to your advantage to volunteer your W-2 to employers during the recruiting process. It can actually verify your performance and make it easier for them to verify your claims vs. other candidates. Voluntary disclosure by an applicant of prior earnings, as long as it is not a request in any way by the employer, is not prohibited by the new law.
2) Don’t abuse it.
The spirit of the change in legislation is to prevent propagation of gender-based wage gaps. If you feel as though your prospective employer is taking advantage of your previous compensation level by offering you below market earnings potential, you should probably not even be working there. Filing a lawsuit should be reserved for cases that have true merit of discrimination as there’s a significant reputational damage you incur given how connected the world is today (ie. hiring managers at different companies talk!).
Big thanks to Scott Smedresman of McCarter & English for providing legal feedback on this article. Scott advises startups on legal matters from pre-formation through exit, including raising money, building and scaling customers and an internal team, and ultimately through sale of the business. For a free consultation, please contact Scott directly: firstname.lastname@example.org