In Australia, you can direct your employees to not disclose their salary. This is known as ‘pay secrecy.’

Employees are often prohibited from discussing their salary and remuneration through pay secrecy clauses in their employment contract. Pay secrecy clauses are particularly common in industries that offer bonuses or discretionary incentives. Some businesses use these clauses to differentiate pay amongst employees.

So, pay secrecy exists and it is perfectly legal. But is it the best option for your business and employees?

Pay secrecy clauses reduce employee bargaining power and often result in economic disadvantage. Pay secrecy is also known to significantly extend the gender pay gap.

So, if you’re considering incorporating pay secrecy clauses into your employee contracts, it’s important to wrap your head around exactly what a pay secrecy clause is and how it functions.

Read on to make an informed decision about pay secrecy and whether you should incorporate it into your business.

What Are Pay Secrecy Clauses?

Pay secrecy clauses prohibit your employees from discussing their salary and remuneration. These clauses often direct employees to not discuss their pay with their coworkers.

Pay secrecy clauses are legal in Australian employment contracts.

These clauses have, however, been banned and made legally unenforceable in the United States of America and the United Kingdom. The US and UK did this in an attempt to decrease discrimination and disempowerment of employees.

In 2015, Australia’s Gender Pay Gap Bill attempted to ban pay secrecy clauses, but it was unsuccessful.

Pay secrecy clauses act in the same manner as confidentiality clauses. Your employees’ pay is confidential between you and your employee, to the exclusion of all others.

What Are The Disadvantages Of Pay Secrecy Clauses?

Before you introduce pay secrecy clauses into your business, you should be aware of the disadvantages associated with pay secrecy. Incorporating pay secrecy into your employment contracts is ultimately your choice, but it’s important you know the risks involved.

1. Pay Secrecy Can Lead To Workplace Inequality

Pay secrecy can cause both actual and perceived inequality.

Actual inequality can arise when a business uses pay secrecy clauses to unfairly differentiate pay between employees, without the employees knowing.

Perceived inequality can arise when a business incorporates pay secrecy clauses into their employee contracts and, as a result, employees assume that pay inequality exists.

As a business owner, both actual and perceived inequality can be detrimental to your business’ standards and reputation.

Employees reasonably expect to be paid the same as coworkers who engage in the same work as they do. By withholding information through pay secrecy clauses, employees are likely to believe that this is due to unequal pay and unfairness within your business.

Pay secrecy is often associated with extending the gender and racial pay gap, as well as enabling workplace favouritism.

Let’s look further into pay secrecy’s impact on the gender pay gap: 

  • In the public sector, where pay is transparent, the gender pay gap sits at 12.2%.
  • In the private sector, where there is no requirement for pay transparency, there is a gender pay gap of 21.3%.
  • So, there’s a 9.1% difference between the gender pay gaps in the public and private sector. It would be reasonable to state that pay secrecy clauses contribute significantly to these figures.

Understandably, there is a drive to remove pay secrecy and replace it with pay transparency, eradicating inequalities.

2. Pay Secrecy Can Decrease Motivation

Not only does pay secrecy permit an assumption of inequality, it may also decrease your employees’ motivation.

If your employees are under the impression that pay secrecy is amounting to unequal pay, it can have a direct negative impact on their motivation and job satisfaction levels.

Employee motivation stems from reward for efforts. If the employee is putting in significant effort and getting rewarded with pay that they’re not entirely sure is equal to their coworkers, their efforts may decrease.

Employees tend to compare their efforts and outcomes to those of their coworkers. This encourages and motivates employees to continue their efforts in your business. Pay secrecy creates a direct obstacle in achieving this motivation. When employees are unaware of others’ outcomes, such as pay, they’ll probably be less motivated.

3. Pay Secrecy Negatively Impacts Employee Culture

Most employees want to be recognised and appreciated by the business they work for. The business’ appreciation and respect for employees is often symbolised through pay, incentives and bonuses.

When pay is kept secret, especially incentive pay or bonuses, employees’ perception of the business’ respect and appreciation of them becomes blurred and unclear.

Withholding pay information often leads employees to question the motive behind the pay secrecy clause in their contract. Employees can assume that this is due to unfairness and inequality between employees’ pay. This creates a decrease in their trust and loyalty in the business.

Employee culture is super important in small and medium sized businesses. Pay secrecy can cause significant upset amongst employees and negatively affect your business’ reputation and employee culture.

Are There Any Advantages Of Pay Secrecy? 

Sure there are. Pay secrecy wouldn’t exist if there were no advantages in having it. 

Let’s run through some of the key advantages of pay secrecy. 

1. Pay Secrecy Can Create Organisational Control and Less Conflict

Many private companies incorporate pay secrecy clauses into employee contracts to increase organisational control and limit conflict.

Essentially, their argument is that if someone doesn’t know they’re being paid less than their coworker, conflict can’t erupt.

Differences in pay can frequently cause conflict and awkwardness among employees. Pay secrecy bypasses this conflict altogether, as no one knows who’s being paid what.

2. Pay Secrecy Can Help Protect Employees’ Privacy

Pay secrecy clauses can be advantageous in ensuring your employees’ privacy.

How much somebody gets paid is generally considered to be personal and private information. Pay secrecy clauses certainly safeguard this idea.

While this may be an important factor to some, it may not align with the wishes of all your employees. Pay transparency may trump some employees’ value of privacy, so this is something your business will have to weigh up.

3. Pay Secrecy Gives The Employer An Advantage in Salary Negotiation

Pay secrecy strengthens a business’ position in negotiating employees’ salary and working conditions. It gives employers greater bargaining power when discussing an employees salary and work conditions. 

A consequence of this may be as follows:

Person A and person B could do the exact same job, though receive very different pay for their work. Ultimately it would be dependent on the employees’ negotiating skills as to what their salary and work conditions end up being. 

While, from a first glance, this increased bargaining power may seem advantageous to business owners, it’s important to acknowledge pay secrecy can add to the gender pay gap and create inequality.

So, when you’re considering the role of pay secrecy clauses in your organisation, don’t just think about the advantages it brings to you as the employer. This is a sensitive and nuanced issue. You should think about the long-term negative consequences pay secrecy could have on your workplace culture.

So, What Is The Alternative?

Pay transparency.

This is where pay secrecy clauses no longer exist. You could publish pay grades online, make them accessible though the interview process or display them through an accessible employee file.

Pay transparency allows your employees to be aware of how much they are getting paid in comparison to their coworkers and the market value.

Introducing pay transparency can boost the reputation of your business, limit the gender pay gap and provide greater opportunities for employees to enjoy equal bargaining power, appreciation and respect.

Conclusion 

Pay secrecy is a controversial topic.

When determining whether pay secrecy is something you should incorporate into your business, it is important to be aware of the risks involved.

Equally, when determining whether to remove pay secrecy from your business, you should be aware of the advantages you may be foregoing.

If you have any questions regarding pay secrecy, do not hesitate to contact us!

For a free, no-obligations chat, reach out to us at team@sprintlaw.com.au or on 1800 730 617.

About Sprintlaw

Sprintlaw is a new type of law firm that operates completely online and on a fixed-fee basis. We’re on a mission to make quality legal services faster, simpler and more affordable for small business owners and entrepreneurs.

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