Navigating Pay Secrecy and Confidentiality Rules for Employers

Megan J. Muoio, May 21, 2014.

Recent Supreme Court decisions and federal legislation have addressed the issue of when it is appropriate for employees to discuss pay and salary issues amongst themselves and what options, if any, do employers have to prevent disclosures made among employees. Many employers discourage or outright prohibit employees from disclosing or discussing pay and salary information. These prohibitions are often contained within employment handbooks or simply conveyed verbally to employees. However, despite their frequent use, pay and salary confidentiality rules have been prohibited by the National Labor Relations Board and the federal courts in nearly every circumstance.

The National Labor Relations Act prohibits unfair labor practices, which are practices that have an effect on the substantive rights of employees to self-organize and “engage in concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Section 8(a) of the NLRA prohibits unfair labor practices on the part of employers, regardless of whether their employees are unionized.

If an employee who has been subject to an adverse employment action as a result of pay or salary disclosure brings a complaint against his employer to the NLRB, the NLRB will first seek to establish whether the employee is subject to protection under the NLRA. The NLRB has determined that employees who discuss their salary and pay information are eligible for protection under the NLRA because pay and salary discussion can be classified as concerted activity and because the discussion is for the employees’ mutual aid and protection. The NLRB and the federal courts have held that discussion of pay disparities between employees can be the “grist on which concerted activity feeds” and such discussion can provide the basis for concerted employee action.

The employer will then have an opportunity to advance a legitimate and substantial business justification for limiting the employee’s rights to disclose wage and compensation information. There have only been a few legitimate business justifications accepted by the NLRB over the years. One such justification is when the wage information complied and kept as confidential information by the employer. For example, in an action before the NLRB, an employee of IBM had been terminated for distributing wage information to other employees. The wage information had been centralized by the employer and was classified as confidential. The employee had signed an agreement upon hiring that required him to agree not to disclose information that IBM had classified as confidential. The NLRB found that IBM had a legitimate business justification for the termination of the employee and that the employee was not entitled to protection under the NLRA. Had the employee simply discussed his own salary or pay information with another employee for the purposes permitted under the act, he would have been granted the protection of the NLRA.

This issue has received recent national attention, with President Obama signing an Executive Order on April 8, 2014, prohibiting government officers and contractors from retaliating against employees who disclose compensation information. The stated purpose of the Executive Order is to make as much salary and pay information available in an effort to make Federal contracting more efficient, and to enable the discussion of unlawful discriminatory labor practices so that compensation discrimination is discovered and remediated.

With the NLRB’s clear prohibition of pay and salary non-disclosure provisions and the Federal government’s current involvement in this area, why do employers still continue to use such provisions, either formally in their employee handbooks and manuals or informally? Perhaps it is because the NLRB complaint procedure is arduous for employees and may deter the filing of a substantial number of claims. Further, if the Board finds in favor of an employee, it can only order reinstatement and limited back pay, but the employee cannot recover additional damages. In addition, although an effort to strengthen the reach of the NLRB in this area has been made in recent years, possible legislative efforts such as the Paycheck Fairness Act have been defeated. Private sector employers who fear the ramifications of the widespread disclosure of pay and salary information may take the risk of adverse action and elect to continue to prohibit disclosure in their formal employment policies if they determine the benefits of such a prohibition outweigh the risk of rehiring a terminated employee and paying limited back pay as a result of the filing of a complaint with the NLRB.