Are pay secrecy clauses on their way out?

Is pay secrecy a clause for concern? This FWC hearing could influence how they’re used in the future.

Pay secrecy clauses, which prevent employees from discussing and revealing their salary, bonuses and other financial incentives to others, are lawful in Australia and a common feature in employment agreements.

In what may be one of the first challenges to the enforceability of pay secrecy clauses, the Finance Sector Union (FSU) recently launched legal action against a large Australian employer who allegedly terminated an employee for breaching a pay secrecy provision in their employment contract by discussing his overtime payments with his colleagues. 

The FSU is calling on the employer to scrap pay secrecy clauses from its contracts, noting the important role that transparency plays in advancing gender pay parity.

However, the employer denies that the reason for terminating the employee was purely based on the breach of the pay secrecy clause. The employer has contended that the reasons for the employee’s dismissal, as outlined in his dismissal letter, included other alleged poor behaviour, such as a lack of punctuality, inappropriate conduct during meetings and giving out incorrect information to customers.

This dispute, which is set to appear before the FWC on 23 December 2021, may shine a new light on wage transparency from an underpayment and workplace rights perspective.  

A new context for wage transparency 

Conversations about wage transparency, or the practice of allowing employees to discuss their salary with others, generally revolve around addressing the gender pay gap. 

It has been suggested that creating greater visibility around remuneration can help to remove unjustified discrepancies in pay between men and women. 

While the pros and cons of wage transparency and its effectiveness in closing the gender pay gap continue to be debated, less focus has been given to pay secrecy clauses in light of general protections legislation and rising underpayment claims. 

Private organisations are not legally obliged to reveal information about their employees’ salaries or embed wage transparency as part of their workplace practices. Employers can lawfully require that employees not disclose their salaries to others, and these provisions remain popular in many industries ─ particularly those with discretionary incentive and bonus payments. 

Nevertheless, under the Fair Work Act 2009 (FW Act), employees have a workplace right to make complaints and inquiries ─ including in relation to their pay. The term ‘workplace right’ is broadly defined under the FW Act, but generally includes an employee’s right to make a complaint or inquiry to a person or body to seek compliance with that workplace law or workplace instrument in relation to their employment. 

The FW Act prohibits anyone from taking adverse action against another person for exercising, or intending to exercise, a genuine workplace right. Adverse action can take many forms, but in essence involves altering someone’s employment in a negative way because that person exercised a workplace right. 

Adverse action and pay secrecy clauses

Until recently, adverse action cases involving employees making an inquiry or complaint about their pay have not been in the context of pay secrecy clauses. 

Successful adverse action cases have traditionally involved employees receiving threats from their employer to reduce their salary, being issued a formal warning letter, or not being allowed to take up an overseas posting they applied for, for example, after exercising a workplace right. 

“Employers can lawfully require that employees not disclose their salaries to others, and these provisions remain popular in many industries ─ particularly those with discretionary incentive and bonus payments.”

However, an employee who is terminated after asking their employer about a discrepancy in their salary following a casual conversation with a colleague over the water cooler (or Zoom…), could very possibly count as adverse action. 

To go a step further, adverse action also includes coercion. It is unlawful for a person to take or even threaten action with the intention to coerce another person to use or not use a workplace right, or to use it in a particular way. 

In theory, although it remains unchallenged, if an employer prevents an employee from making an inquiry about their pay, whether it be to management or to an external third party such as the Fair Work Ombudsman (FWO), there is a risk the employer has engaged in adverse action.  

It’s also worth noting that the FW Act’s protection of workplace rights and prohibition of adverse action applies not just to employees, but to prospective employees and independent contractors as well.  

A changing environment for wage transparency  

It’s no secret that the FWO has been cracking down on employers for underpaying their employees’ wages and entitlements, and has recently prosecuted a string of businesses for wage non-compliance. Although underpayment is unintentional in most cases, intense media scrutiny has led to greater public awareness of wage underpayment, and no doubt a growing curiosity from employees about what they and their colleagues get paid.  

This heightened awareness is evident in the FWO’s 2020-2021 data, which recorded almost five million visits to the FWO’s Pay and Conditions Toll (PACT), an online tool that assists employees to calculate their wage and entitlements against the FW Act and other industrial instruments to ensure they are being paid correctly. As a result, PACT has generated almost six million pay and entitlement calculations.

In the same 2020-2021 period, the FWO recovered a record sum of back-paid wages and entitlements of almost $150 million, nearly five times the recoveries achieved in 2017-18. 

The issue of wage transparency has also been the subject of a number of regulatory and legal initiatives in Australia and abroad. In May this year, the European Union announced a proposal to make pay transparency a binding measure for its member states. A similar proposed measure in Australia, the Fair Work Amendment (Gender Pay Gap) Bill 2015 was unsuccessful, although earlier this year the opposition government promised to outlaw pay secrecy clauses for all companies if it wins the federal election in 2022.  

Some private companies are taking a similar approach. Recruitment websites such as Glassdoor offer users the opportunity to anonymously provide detailed information about their current salaries, which is then made publicly available. Cogent, a Melbourne-based firm that helps start-ups manage digital platforms, makes the salary levels of its employees available within the workplace and annual pay rises follow feedback from co-workers, as well as the broader market data. 

In the context of the recent FSU court action, pay secrecy clauses may pose a double-edged sword for employers. On one hand, these provisions restrict employees from disclosing details of their pay. On the other hand, general protections provisions under the FW Act essentially protect employees’ rights to make inquiries, including about their pay. An employer undergoing a FWO underpayment investigation will be required to be transparent about employee salaries. How legitimate, then, are pay secrecy clauses?   

The benefits of pay secrecy clauses 

In practice, offering the kind of transparency around pay outlined above may not be a reasonable or desirable option for all employers. Although abandoning pay secrecy clauses has clear advantages, such as improving a business’ reputation and enhancing workplace culture, these factors must be balanced with the benefits that come with enforcing pay secrecy provisions in certain workplaces. These include: 

• • Minimising the risk of workplace conflict.
  • Protecting employee data and privacy.
  • Being able to reward employees on a discretionary basis for their performance and hard work, including through bonus payments and incentive arrangements. 

A 2019 study about the effects of income transparency on a person’s wellbeing looked at a 2001 decision by the Norwegian Government to make tax records readily available online, allowing everyone in Norway to see the income of everyone else. 

The research concluded that higher transparency around income increased the gap in happiness between richer and poorer individuals by 29 per cent, and increased the life satisfaction gap by 21 per cent. In other words, high-income earners felt greater satisfaction while low-income earners felt worse. 

We may well see similar reports coming out of workplaces providing greater transparency around pay, as the trend towards wage transparency is relatively new and the data to support its effectiveness is still being collated and considered. 

Where to from here? 

Despite the ongoing debate about the enforceability of pay secrecy provisions, in the current legal and regulatory environment it’s important that employers fully understand their obligations and protect themselves by:

• • Understanding what pay secrecy clauses your organisation has in place and the extent to which they can be enforced. 
  • Having clear guidelines around how salaries are assessed and reviewed, obtaining external guidance if necessary about legal minimum rates of pay (ie. modern awards and enterprise agreements) and market industry rates. 
  • Being cautious in handling questions from employees concerning their pay when pay secrecy provisions are in place. 
  • Providing training for managers and HR staff about workplace rights and adverse action to steer the business away from unfortunate decisions or mishandling complaints or inquiries about pay.If workplaces carefully consider and implement the above recommendations, they may be able to utilise pay secrecy clauses without any unintended breaches of the general protections provisions, and still doing the work to advance gender pay parity and avoid underpayment claims.

Aaron Goonrey is a Partner and Bianca Banchetti is a Lawyer and Pro-Bono Coordinator at Lander & Rogers in the Workplace Relations & Safety group.

Want to learn more about the employment law landscape? AHRI’s short course, Introduction to HR Law, will equip you with an understanding of the key elements of legislation, regulation and practices that impact how HR operates in an organisation.

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