Pay Equity vs. Pay Transparency: Defining the Difference and Unscrambling the Jargon

Part of a series  |  Pay Transparency Series

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Pay transparency laws are popping up all over the country on state and local levels. What does that mean for employers? Pay transparency laws take the Equal Pay Act of 1963 a step further, requiring businesses to show pay ranges or report company wages.

Pay transparency is a hot phrase right now. Everyone's using it, writing it, saying it — so what does it mean? Pay equity is another popular one. Are these two phrases the same? Are they interchangeable? Do they refer to the same thing? With all the legal jargon, business owners and HR teams are scrambling to determine how these new laws might affect their businesses.

This article will break down the jargon to help you understand what pay transparency and pay equity are, how they are related and to help you feel more confident moving forward. To go more in-depth, launch this on-demand webcast anytime: Pay Transparency Compliance: Strategic & Practical Consideration.

What is pay transparency?

Pay transparency is the employer practice of disclosing information about employee compensation standards to others — internally, externally or both. Pay transparency is not defined by a single level or degree. Instead, it's described as a spectrum on which employers can choose varying degrees of transparency based on state and local mandates or their own pay strategy.

While laws differ from state to state, some require publishing pay ranges for all open positions. Others require employers to provide the pay range by the time of the final interview or upon request by the applicant, including internal applicants. Still, other states have opted to require businesses to file annual reports showing company wages broken out by race, gender, ethnicity, age and other categories. This rule enforces transparency between companies, applicants, employees and their state's division of labor authority.

What is pay equity?

Pay equity is the concept that equal work deserves equal pay no matter the person, their race, gender identity or age. Equal pay for equal work has been legislated since 1963 with the Equal Pay Act, again in 1964 with the Civil Rights Act and other landmark laws. This concept goes back to one of the most basic ideas of equality: If two people perform the same work, they should receive the same pay. Even though this legislation has been in place on a federal level for decades, it has not stopped companies from paying people different wages for the same work. It doesn't matter whether this is due to intentional decisions or subconscious bias because it's unethical in both cases. It's important to note that while this definition of pay equity is widely accepted in the United States, there may be alternative approaches considered in other countries when defining pay equity.

Regardless of the motive, educating leaders on how pay decisions should be made using a "pay for performance" compensation approach is essential. Discover more in-depth resources about pay equity in this article: Pay Equity.

In this Workforce News Minute video, above, Helena Almeida, Managing Counsel ADP, shares the trends we're seeing in the workforce to work to close the pay gap.

Is pay transparency the same thing as pay equity?

No, pay transparency is not the same thing as pay equity. But they are connected. Pay equity refers to the principle of equal pay for equal work. This standard was initially legislated in the Equal Pay Act of 1963. Moreover, pay equity refers to compensation practices that are fair, unbiased, ethical, and free from discrimination. Pay transparency is likely to be an excellent motivator for companies to practice equitable pay. Interestingly, the fact that pay equity has been federally legislated for over 60 years has not meant that companies have always been committed to equitable pay practices (or following the law). Most labor economists still calculate a pay gap between genders and other protected groups. This gap is most likely why states are stepping in to legislate pay transparency — and, in effect — enforce pay equity.

Why do employees want pay transparency?

Employees want pay transparency because it can help provide reassurance that they aren't being discriminated against by being paid lower wages. Employees and job applicants want to know they are being treated fairly. It was a common workplace rule in the past that employees weren't supposed to discuss what they were paid. Some employers have banned employees from discussing pay with each other, considering it an offense worthy of termination. This practice keeps employees in the dark about whether they are discriminated against or underpaid for whatever reason. But prohibiting employees from talking about their income has been illegal since 1935 (National Labor Relations Act). Yet many employers still discourage employees from talking openly about pay. Now, states are also enacting legislation prohibiting pay secrecy. Managers making pay a taboo topic may be illegal, depending on the state.

Employees want to feel like they can trust their employer. They want to be compensated fairly for their work and feel valued for what they contribute. Many employees are excited about newly enacted pay transparency laws for these reasons.

What are the pros and cons of pay transparency?

The pros of pay transparency are multifaceted and include increased awareness of and commitment to social responsibility, lower likelihood of lawsuits, improved productivity and morale, lower turnover rates, and being attractive to new talent. While committing to the social responsibility of pay transparency is important, pay transparency affects the business's overall brand reputation, which can ultimately impact the bottom line.

The cons of pay transparency can include adverse employee reactions and potential turnover if unethical pay practices are exposed. Shining light on unethical pay practices could also negatively affect the brand image and, in turn, the business's ability to bring in new employees and potential customers.

Is there a federal pay transparency law?

No, currently, there is no federal pay transparency law. Federal law requires equal work for equal pay. But no other federal laws require companies to be transparent about pay practices. Because of the lack of federal law, states are stepping in to enact their own laws requiring pay transparency. Since laws have been passed on a state level, this creates additional complexity for multi-state employers. Even if a single remote employee is working in a state with a specified pay transparency law, the company — even if it's located in another state where there is no pay transparency law — is required to follow the law concerning that employee and, depending on the law, for all other employees as well. If and when more states enact similar laws, employers should stay alert and continue their commitments to pay equity.

The wrap-up

Pay transparency laws aim to move the needle on pay equity and create a workplace where employees are paid fairly for their work. Employers should seek the advice of their employment counsel if they are unsure of how laws may affect them. Ultimately, it is up to business leaders to adhere to pay practices that attract strong talent and comply with the laws in their states and localities.

Did you know?

ADP offers an on-demand webinar that covers pay transparency laws and how they affect organizations. Subject-matter experts broke down the complex language of the law and spelled out how these new rules affect employers. Launch it here, anytime: Pay Transparency Compliance: Strategic & Practical Considerations.

Dive Deeper

Get up-to-date pay transparency resources and best practices at ADP.com/PayTransparency.