Tue Dec 6

Pay secrecy clauses are now banned in Australia; here's how that could benefit you

Written by Michelle Brown, Professor, Human Resource Management, The University of Melbourne

Do you work for an organisation that treats pay information like a state secret? Do you know what your coworkers get paid? Can you tell others what you earn?

Well, now you can, following the passing of the Albanese government’s “Secure Jobs, Better Pay Bill” reform package, which includes a ban on pay secrecy policies.

The ban is primarily aimed at reducing gender-based pay differences – part of a larger suite of reforms that make gender equity a key principle of the Fair Work Act.

But there’s also reason to believe it should benefit other disadvantaged workers in both individual and collective pay negotiations.

Secrecy and the gender pay gap

The gender pay gap in Australia is currently 22.8%^[2]. According to federal employment and workplace relations minister Tony Burke, pay secrecy clauses have long been used to conceal gender pay discrepancies ^[3]:

Banning them will improve transparency and reduce the risk of gender pay discrimination by allowing women to compare their pay with that of their co workers. Differences can be discussed with their manager without fear of punishment.

International evidence support Burke’s claim. Studies in the United Kingdom ^[4], the United States ^[5], Canada ^[6] and Denmark ^[7] all report a decline in the gender pay gap as a result of legislation to promote pay transparency.

US research ^[8] shows women’s wages in states prohibiting pay secrecy clauses are 4-12% higher (depending on how the data was analysed) than in states that allow secrecy clauses.

In Canada, pay secrecy law ^[9] reduced the gender pay gap between men and women by 20-40% (again depending on how data was analysed).

These findings are supported by studies of organisations that have dropped pay secrecy policies. A 2019 study ^[10] covering approximately 9,000 US employees found women’s annual pay growth was 0.4% lower than for men under pay secrecy. This gap disappeared with greater transparency.

It’s possible that just ending secrecy clauses is enough to improve outcomes even without people disclosing how much they earn – that the prospect of pay information being shared is enough to focus an organisation on ensuring fair and equitable remuneration.

Secrecy, by contrast, means managers can make decisions they don’t have to justify ^[11] to employees. This heightens the risk of unconscious bias, favouritism, discrimination and stereotyping affecting pay decisions.

Studies shows pay secrecy contributes to the pay gender gap. Shutterstock

What about conflict?

Not everyone wants to share their pay information. Some people are self-conscious about how it will affect their image. Some worry it will affect work relationships ^[12].

It may be upsetting for coworkers in a similar role to discover they are paid less than you. It is even more upsetting to find out you’re paid less than them.

Employers argue that pay secrecy is needed to minimise conflict between employees ^[13]. This is based on the “jealousy hypothesis ^[14]”, which says that employees reduce their work effort when they find out they are paid less than a colleague.

But such claims are overstated. In fact, employees are more likely to view restrictions on sharing pay information with suspicion ^[15] and as something driven by managerial self-interest, not the best interest of the employees.

This is borne out by research showing pay secrecy leads workers to underestimate supervisors’ pay ^[17] (but overestimate coworkers’ pay).

Most employees deserve to be given more credit. The research shows they understand and accept ^[18] pay differences that can be explained and justified according to work contribution and performance.

Further, studies report that greater pay transparency is associated with higher employee performance ^[19] and job satisfaction ^[20].

Where to now?

While the ban on secrecy clauses is primarily aimed at reducing the gender pay gap, it could deliver positive pay outcomes for other disadvantaged employees as well.

It’s a fundamental principle of economics that sharing of information contributes to more efficient markets. Removing pay secrecy therefore contributes to a more efficient labour market.

Bargaining freely with full information, employees are able to assess their employment options and make better informed choices. The decisions of individuals encourage organisations to ensure they have fair and equitable pay systems.

This should lead to greater fairness for all.