EU Pay Transparency Directive now adopted: What does this mean for employers?

After a process spanning over three years, the EU Directive on strengthening the application of the principle of equal pay for equal work or work of equal value between men and women through pay transparency and enforcement mechanisms (“Pay Transparency Directive”) has been formally adopted by the EU Council on 24 April 2023. The Directive will therefore enter into force shortly. Member States will then have three years to transpose its provisions into national law.

All employers who employ people in Member States of the European Union (EU), regardless of their size or sector, will need to comply with the Pay Transparency Directive once implemented locally.

Following on from the previous global briefings in this series of materials focusing on considerations for HR strategists on topical issues, this briefing considers the implications for employers of the Pay Transparency Directive, as well as the key action points.

Minding the gap: the global picture

Equality of pay is universally recognised as a cornerstone of eliminating sex discrimination and bias in employment. The existence of a gender pay gap is often used as an indicative measure of disparity between male and female median wages across organisations/roles, thereby indicating potential inequalities.

In reality, the gender pay gap is influenced by a number of factors, many of which may not be attributed to discriminatory practices. However, where pay bias exists, a failure to review pay practices and detect such divergence can have a much wider impact beyond immediate inequality of wages, including significant latent liability and gender pension gaps.

According to the latest United Nations data, the gender wage gap is an average of around 23% globally. On average in the EU, the gender pay gap stands at 13%, having decreased only minimally over the last ten years, with significant variations across Member States.

Many countries now have legislation requiring equality of pay between men and women. Some jurisdictions have also legislated for diversity monitoring and/or reporting, including gender pay gap reporting. However, that global landscape on pay and pay gap transparency obligations, including enforcement, varies significantly.

In the EU, the variance on gender pay gap transparency is set to change as a result of the Pay Transparency Directive, which will seek to further strengthen equal pay between men and women by requiring certain minimum standards across the EU. Member States may legislate to go over and above the requirements of the Directive, including increasing the frequency of reporting requirements, but the minimum requirements must be maintained. It is likely that, even where Member States have existing equal pay and pay gap reporting legislation, national laws will still need changing to reflect the additional or different requirements set by the Pay Transparency Directive.

Pay Transparency Directive: New requirements and enhanced enforcement

In summary, the Directive lays down certain minimum requirements, including:

• Right to information: With the aim of helping to eliminate information asymmetry: 
  • employers will need to inform candidates about the initial pay level or pay range of any role in the job vacancy notice or otherwise before the job interview;
  • employers will be prohibited from asking questions about a candidate’s pay history with their current and former employers;
  • workers will have a right to information during employment on their individual pay level and on the average pay levels, broken down by sex, for the category of workers doing the same work or work of equal value. Employers must inform all workers, on an annual basis, of the right to receive this information, as well as the steps to be taken to exercise the right.

The rights to information apply irrespective of the number of employees of the legal entity in question and will therefore apply equally to small employers within the EU.

• Gender-neutral job evaluation and classification systems: Employers must make available to workers, in an easily accessible manner and within two months of the request, a description of the criteria used to determine pay levels and career progression (i.e. how a worker moves to a higher pay level).

Employers must also ensure that such tools or methods used to assess and compare the value of work (such as job evaluation and classification systems) do so in line with objective and gender-neutral criteria. Objective criteria used to assess work of equal value should include factors such as skills, effort, responsibilities and working conditions.

These obligations apply irrespective of the number of employees of the legal entity in question and will therefore apply equally to small employers within the EU, with the exception that Member States may exempt employers with fewer than 50 workers from the obligation related to pay progression.

• Pay reporting obligations: A framework of obligations is introduced, including requiring employers with 100 or more workers who have an employment contract or employment relationship (as defined by the local law of the Member State) to prepare and publish gender pay gap reports. The accuracy of the report must be confirmed by management. Companies must provide the pay gap information to the national authorities designated for that purpose and may also publish it themselves on their website or otherwise make it publicly available.

The deadline to comply with the pay reporting requirement and the frequency of reporting will depend on the number of workers. Our interpretation is that the worker threshold will apply by entity in each Member State, although further clarification will be seen at the point of national transposition, including whether Member States will decide to require employers with fewer than 100 workers to provide information on pay.

Number of workers	Deadline for complying with the reporting obligation	Frequency of reporting
>250	Four years after date of entry into force of the Directive	Annually
150-249	Four years after date of entry into force of the Directive	Every three years
100 - 149	Eight years after date of entry into force of the Directive	Every three years
<100	N/A, unless mandated by national law	N/A, unless mandated by national law

The pay gap information must consist of:

- the gender pay gap and the median gender pay gap between all female and male workers in relation to both pay and other consideration which workers receive directly or indirectly (complementary or variable components such as car allowances, bonuses, benefits in kind and pension contributions);
- the proportion of female and male workers receiving complementary or variable components;
- the proportion of female and male workers in each quartile pay band; and
- the gender pay gap between workers by categories of workers broken down by ordinary basic salary and complementary or variable components.

Where:

- the pay information reveals a difference in the average pay level between female and male workers of at least 5% in any category of workers;
- the employer cannot justify that difference by objective and gender-neutral criteria, or the worker representatives do not agree that it can; and
- the employer has not remedied such difference in pay within six months of submitting the pay report

employers must carry out a joint pay assessment with the workers’ representatives, which should trigger the review and revision of pay structures and should lead, within a reasonable time, to the elimination of gender pay discrimination through the adoption of remedial measures.  

• Equality and monitoring bodies: Equality bodies must be established with functions including tracking compliance and enabling the aggregation of data to allow comparisons to be made of the data across different employers, sectors and regions.

• Access to justice: Member States will be required to ensure that any worker who has suffered harm as a result of any infringement of the requirements to have effective access to justice. In particular: 
  • That the burden of proof rests with the employer to demonstrate that there has been no infringement;
  • that the limitation period for bringing any claim is at least three years from knowledge of the infringement;
  • that courts are able to assess whether a losing claimant had reasonable grounds to bring a claim and order that they do not bear the costs of the proceedings; and
  • that workers can claim full (uncapped) compensation or reparation for harm.

Global pay transparency: key action points

Equality of pay can be a strategically-challenging issue for multi-national employers to address, not only due to the different legal obligations across jurisdictions. The factors influencing compensation and benefits in different regions, the differences in employee representative body involvement, the varying expectations around pay transparency and the risks that can often arise through historical practices, can all add to that challenge. Where pay gap reporting obligations arise, the challenge is further perpetuated by legal risks of non-compliance and reputational risks through publicly reporting an organization’s information and progress.

Although the practical impact for employers of the Pay Transparency Directive may still be some way off, many of the requirements will represent a significant step-change for employers. Further, some companies falling under the scope of the separate Corporate Sustainability Reporting Directive may need to report earlier on their gender pay gap than the EU Pay Transparency Directive will require. This is due to the requirement to report on pay equity being a key element for companies preparing sustainability reports.

Organizations should start to plan and take action now. Key strategic steps and considerations should include:

• Developing a strategy to properly understand pay practices and identify any pay differentials
• Establishing the causes of any significant gender pay differences and assessing their justification.
• Reviewing current practices to identify any gaps in compliance with laws on equality of pay or pay reporting obligations, including future minimum requirements under the Pay Transparency Directive and the Corporate Sustainability Reporting Directive.
• Developing an equal pay action plan to seek to close any gaps which may need to be addressed and consider whether to extend that strategy to other areas beyond gender.
• Formulating a communication plan to ensure that strategy and information is effectively and appropriately communicated, both internally and externally.

Our extensive global footprint means that we are well placed to support global employers in their current and future HR plans, wherever they have a presence. Our lawyers are not only experts in the complexities of different laws, but also in the management of projects spanning jurisdictions and driving those projects to maximize the strategic aims and benefits. Please contact any of our global team should you require advice or assistance.

Further reading: Navigating the global challenges of diversity data; Significant changes in companies’ workforce and human rights reporting: new EU legislation; Diversity in the workplace: strategies for success

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