HR Strategist - Chapter five: Wage transparency

• Global

• Employment law
• ESG

31-05-2022

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.

Following on from the previous global briefings in this series of materials focusing on considerations for HR strategists on topical issues (Chapter one: Global workforce mental health protection, Chapter two: Global diversity data; Chapter three: Speaking up - the 2021 deadline for the EU Whistleblowing Directive; and Chapter four: business protection- the global use of restrictive covenants in employment), this briefing considers some of the key strategic considerations for multi-national employers in relation to pay transparency. We also consider the implications for employers of the proposed new 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 (“EU Directive”).

Minding the gap: the global picture

According to the latest United Nations data[1], globally the gender wage gap is an average of around 23%. The gap varies significantly by country. For example, country-comparative data[2] suggests that the pay gap is tracking for full-time employees at 7.6% in Italy, 13.9% in Germany, 16.1% in Canada, 17.7% in the US, 22.5% in Japan and 31.5% in South Korea.

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. See our at-a-glance comparison of some sample jurisdictions in this respect. In addition, significant new laws focused on gender representation in senior positions are being introduced. Recent examples include new legislation enacted in France that introduces gender representation quotas in management positions and legislation in the Netherlands that requires a more balanced ratio in the number of men and women on the Boards of Directors and Supervisory Boards of large companies.

However, the global landscape on pay and pay gap transparency obligations, including effective enforcement, varies significantly. Even within regions, there can be variance. For example, in the UK, there is anticipated legislation in Northern Ireland setting out provision for ethnicity and disability pay gap reporting that will move Northern Ireland ahead of requirements in the rest of the UK.

In the EU, the variance on gender pay gap transparency is set to change with the anticipated EU Directive that will seek to further strengthen equal pay between men and women by requiring certain minimum standards across the EU.

EU Directive: New pay transparency and enforcement mechanisms

The EU Directive is currently progressing through the EU legislative process, the EU Parliament having recently voted to move forward with the proposal by entering into negotiations with EU governments. Once agreed and formally adopted, Member States are likely to have two years to transpose the requirements of the EU Directive into local law. As such, the impact of the EU Directive is unlikely to be seen in most Member States before at least 2024.

Given the scope and content of the matters covered by the EU Directive, 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 EU Directive.  

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

• Right to information: With the aim of helping to eliminate information asymmetry for job applicants and to disrupt the perpetuation of any pay gap between female and male workers:
  • employers will need to inform candidates about the initial pay level or the initial pay range of the 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 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 categories of workers doing the same work or work of equal value. Employers will be obliged to inform all workers, on an annual basis, of the right to receive this information.

• Gender-neutral job evaluation and classification systems – To ensure transparency, employers must make available to workers (in an easily accessible manner) a description of the criteria used to determine pay levels and career progression. Employers must 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 criteria that include education, vocational and training requirements, skills, effort and responsibilities, work performed and the nature of the tasks involved.

• Pay reporting obligations: With the aim of ensuring greater pay transparency:
  • Each year, employers with at least 50 workers (instead of 250, as originally proposed) will be required to:
    • make publicly available (on their website or otherwise) pay gap data between female and male workers. The information from the previous four years must also be made available on request;
    • provide internally to workers and their representatives information on the pay gap between female and male workers by categories of workers broken down by ordinary basic salary and complementary or variable components.
  • The pay gap information shall consist of:
    • the pay gap and the median 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);
    • the proportion of female and male workers receiving complementary or variable components; and
    • the proportion of female and male workers in each quartile pay band.
  • If the pay information reveals a difference in the average pay level between female and male workers of at least 2.5% (instead of 5%, as originally proposed) and the employer has not justified that difference by objective and gender-neutral factors, employers with at least 50 workers will also be obliged to carry out a joint pay assessment with the workers’ representatives and develop a gender action plan.
  
  
• 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 any right or obligation related to the principle of equal pay between men and women for equal work or work of equal value has 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; and
  • that workers can claim full (uncapped) compensation or reparation for harm.

Although the implementation of the EU Directive is still some way off, many of the requirements will represent a significant step-change for employers. As a result, organizations are starting to consider now the implications of the proposed reform on future pay practices, identifying where policies, practices and strategies may need adjusting.

Pay transparency: challenges and opportunities for multi-national employers

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 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.

In addition, environmental, social and governance (ESG) issues and considerations play an ever-increasing role for businesses globally, with equality, diversity and inclusivity forming a key element of the social pillar. Striving for equality in pay practices is increasingly seen as a key factor in the assessment of sustainability, value and reputation by investors, customers and suppliers. Such aims however are accompanied by consequent heightened expectation, both from existing workforces and prospective workers, around fair pay practices and clear strategies, which need careful planning.

The right of employee representative bodies to receive pay information and the role of such bodies in setting pay structures and practices also varies by jurisdiction with individual collective bargaining arrangements adding a further element of complexity. This will gain greater consistency in the EU once the EU Directive is transposed, with obligations on employers to provide pay gap information to worker representatives and further explanation on request, together with the potential for an obligation to be triggered to cooperate with worker representatives to prepare a joint pay assessment and gender action plan. In many jurisdictions, this will represent a significant shift and is a key component that will need to be carefully accounted for in future people and employee engagement strategies.

Misinformation is a further challenge that can result from the publication of gender pay gap information. Many pay differentials will be justifiable on gender-neutral grounds. However, it is often assumed that a gender pay gap automatically means that an organization is operating discriminatory practices. If the results are not carefully communicated, this can often result in an increase in equal pay grievances and/or claims being progressed.

In addition, there is the risk of commercial and reputational damage, which could impact on an organization’s business dealings and its ability to recruit and retain staff. Penalties for failure to ensure compliance with the principle of equal pay in the performance of contracts can often go beyond compensation and can include exclusion from participation in future procurement exercises. Indeed, such a penalty is specifically included as a measure in relation to public contracts and concessions in the EU Directive.

Despite the additional challenges that ensuring equal pay practices and transparency requirements inevitably bring for employers, it presents opportunities too. At a time when organizations are focusing on ESG strategy, developing pay practices that robustly protect against gender bias is a natural extension of ensuring accountability and fair workplace practices. Further, aside from being the right thing to do from a social responsibility and accountability perspective, working to achieve equality in pay and closing the pay gap can have a positive impact on economic growth.

Measures to address equality of pay: grasping the nettle

The starting point for addressing many of the current and impending new challenges around equality of pay will be understanding an organization’s current pay practices and any differentials across various levels in the organization. This is important not just in relation to those carrying out the same or similar work but also in relation to different jobs if they are regarded as being of equal value.

Detailed auditing will be key to gathering the required information, which can be a complex exercise. A number of organizations with US operations are now implementing pay equity studies to assist this audit process. Many organizations will arrange for equal pay audits to be completed by their legal teams subject to legal professional privilege. This has the advantage of avoiding the information becoming disclosable until the organization knows what, if anything, it would wish to publish and how it proposes to deal with such information. However, again this can be challenging across different jurisdictions as legal privilege is not available in every jurisdiction.

Once the base information is established, including an understanding of those areas that may pose a risk from a pay equality perspective, a meaningful strategy can be created. Many pay differentials will be justifiable. Identifying those areas where justifiable differences exist and ensuring that there is robust evidence supporting the absence of bias will be crucial, not only in the event of any challenge but also for the communication of pay gap and equality results.  Auditing and pinpointing issues will be crucial for moulding effective equal pay action plans that aim to close any unjustified gaps.

With the relevant information in hand, the development of an action plan including any remediation strategies (if relevant) can be more effectively addressed. Commitment by senior management to achieving equal pay will be critical to any effective strategy. Potential measures will often include undertaking regular equal pay reviews or audits and addressing any issues identified, monitoring starting salaries for new staff, providing training and guidance for those involved in determining pay and ensuring robust mechanisms to address any concerns about potential inequality of pay issues. Increasingly, action plans will also seek to address pay inequalities not only in relation to gender, but also in relation to areas such as ethnicity and disability.

The publication of pay gap information and pay inequality action plans inevitably raises awareness of pay conditions and equality issues, regardless of the existence of any bias. Ensuring an effective communications strategy will therefore be key to avoiding potential reputational issues, grievances and/or proceedings.

Global pay transparency: summary and key strategic considerations checklist

The legislative framework for pay transparency has, to date, seen slow and varied progress across jurisdictions. In the EU, that is proposed to change with the implementation of the EU Directive. Organizations operating in the EU will therefore need to familiarize themselves and ensure compliance with the new requirements. However, other influences beyond the legislative framework are also gaining momentum globally, including demands for action from workforces, investors, customers and suppliers. Those influences are likely to further propel the need for greater pay transparency and accountability.

Effective due diligence and planning, local engagement and a clear understanding of legal requirements and other influences, will all be critical. Key strategic steps and considerations should include:

• Developing a strategy to properly understand pay practices and identifying any pay differentials. Consider what information is already available and the scope of any audit to gain additional information. If an audit is undertaken, can and should it be completed subject to legal professional privilege?
• Establishing the causes of any significant gender pay differences and assessing their justification. There may be many reasons for pay differentials between men and women, including experience, length of service, protected terms and conditions, market forces and recruitment and retention issues. A deep-dive analysis is likely to be required to establish the extent to which any gender bias exists.
• Reviewing current practices to identify any gaps in compliance with laws (including the impending EU Directive) on equality of pay or pay reporting obligations. Consider in particular:
  • Which parts of the workforce are impacted by current pay policies? Do they cover both employees and workers?
  • What information is currently disclosed about pay and when? Is information about pay-levels provided at job interview stage? Are candidates asked about their previous pay history? Is information on average pay levels or any pay gap provided to workers during employment?
  • The involvement of employee representative bodies. What information is currently provided to such bodies regarding pay? Do they currently have any input in relation to pay? Does that involvement extend to undertaking joint pay assessments?
  • Pay gap reporting. Is there any legal obligation to publicly report a pay gap? If so, what information is currently reported and when?

• Developing an equal pay action plan to seek to close any gaps which may need to be addressed and ensuring that robust internal mechanisms are in place to address concerns. 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.

[1]                 UN (2017) The State of World Population 2017

[2]                 OECD (2022), Gender wage gap (indicator)