Everything you need to know about the new EU Pay Transparency directive
The buzz about the new EU pay transparency laws isn't going anywhere. In the first article of our newest series, we are covering the who, what, where, when, why, and how of the incoming EU pay transparency regulations.
Recently across Europe and North America, there has been a huge push and awareness around the gender pay gap. Transparency has become a popular word coming out of the mouth of anyone working in HR and compensation.
With demands of transparency from workers in the tech talent war, to pay transparency legislation taking effect in California, New York, and gender pay gap reporting in the UK, and a recent EU law that requires certain companies to advance towards a 40% representation of women in non-executive board seats by mid-2026. It’s safe to say, that the EU has finally decided to act in favor of ending the pay gap.
This article will be broken down into the following sections:
- What is the new EU Pay transparency directive?
- Where will the new EU Pay transparency take effect?
- Who is involved with the changes from the EU Pay transparency directive?
- When will the EU Pay transparency directive come into play & how often do you need to report?
What is the new EU Pay transparency directive?
Understanding Key Terms Related to the Directive
When preparing for the EU Pay Transparency Directive, it is important for employers to understand some of the key terms related to the directive.
- “Equal pay”: This refers to workers being paid the same wage for doing the same work, regardless of their gender, race, or other protected characteristics.
- “Gender pay gap”: This is the relative difference in global compensation for men and women. This can be calculated as both median and average compensations.
- “Non-adjusted gender pay gap”: this compares the salaries of men and women regardless of their roles and location. These criteria can be representative of many gender equality issues that aren’t necessarily directly due to salary discrimination, like the glass ceiling effect that contributes to the lower representation of women in higher-paying roles.
- “Adjusted gender pay gap”: Adjusted gender pay gap: comparing the salaries of men and women who hold the same role in the same location. On average, there should be no gap between wages.
- “Pay transparency”: This refers to the practice of providing workers with access to pay information, including salary and bonus information.
- “Pay discrimination”: This refers to employers using pay information to discriminate against workers based on their gender, race, or other protected characteristics.
- “Workers”: Defined by the directive, which includes gig economy and agency employees as well as employees and others.
- “Pay”: Defined by the directive covers more than just basic salary. It will also include numerous other elements such as bonus and overtime, allowances, sick pay, and occupational pensions.
Now, what is this directive?
Originally put forth in 2021 by the European Commission with the goal of reducing gender pay gaps in the European Union, the EU Pay Transparency Directive built up some buzz again this past December 2022.
With some further specifications and visibility for implementation, the European Parliament, Council & Commission all reached an agreement, signifying it’s GO TIME for companies to educate themselves and begin preparations…
There are two key elements to this directive:
1. Pay transparency measures for BOTH workers & employers
- Pay transparency for job-seekers: employers must provide information about pay level or range in the job description or before the interview. Employers will NOT be allowed to ask candidates about pay history.
- Right to information for workers: irrespective of the size of the company, workers will have the right to request specific information on their pay and average pay levels (or workers doing the same work of equal value).
- Reporting on the gender pay gap: Employers with 100+ employees will have to publish information on the pay gap between women and men workers.
- Joint pay assessment: after the reporting, if there is a 5% or more non-justified gender pay gap, a pay assessment must be carried out. Then the employer must remedy the pay gap differences within a “reasonable” period of time.
2. Better access to justice for victims of pay discrimination:
- Compensation for workers: workers who have been a victim of gender pay discrimination can receive compensation (ex. Bonuses, payments in kind, or full recovery of backpay)
- The burden of proof on the employer: if an employer does not fulfill their transparency obligations, the employer (not the worker) must prove that there was no discrimination in relation to pay.
- Sanctions that may include fines: each state will determine specific penalties for infringements of the rules (with a financial cost).
Where will the new EU Pay transparency directive take effect?
As it stands now in January 2023, each country has its own stance and regulations around pay transparency. The goal of this directive is to set a standard across the European Union however member states will have some flexibility in the enforcement of the directive.
What about companies in the US & UK who have workers in Europe?
“Although many jurisdictions will already have pay equality mechanisms in place, they will have to check that they meet the terms of the directive. For those without adequate protections, this will be a significant change” - Pinsent Masons
This will become a difficult space to navigate as there are many different terms such as “worker” and “employment relationship”, different formulas, and multiple deadlines.
Who is involved with the changes from the EU Pay transparency directive?
Concerns were raised in conversations about the directive on the financial and administrative burden for employers.
“Correcting the pay gap is going to be expensive, but companies need to do it anyway because the right to equal pay is in the EU treaties.” - co-rapporteur Kira Marie Peter-Hansen
In light of the conversations around cost and time, the directive will impact different size companies at different times with different reporting frequencies as well. As of January 2023, is it planned that by 2026, all large employers in the EU will have to report gender pay gaps and then in 2031, all smaller employers with 100 or more employees will also have to report.
How the EU Pay Transparency Directive impacts employers:
The EU Pay Transparency Directive imposes significant obligations on employers. Employers must ensure that their pay information is accurate, up-to-date, and easily accessible to workers. Additionally, employers must provide workers with an explanation of the pay information they receive and must ensure that their pay information is regularly updated.
How the EU Pay Transparency Directive impacts workers:
Workers will have much more access to transparency both before and during employment, completely changing the way that workers search for & negotiate for positions.
"The legislation will strengthen both workers, union representatives and trade unions in highlighting and raising equal pay issues. At the same time, we will put an end to secrecy clauses and ensure that workers are not prevented from talking about their pay.” - Kira Marie Peter-Hansen, Greens/EFA MEP and European Parliament rapporteur for the Pay Transparency directive in the Committee on Employment and Social Affairs
When will the EU Pay transparency directive come into play?
The short answer is most likely 2024 (approximately 2 years after it has been adopted).
How often will companies have to report?
Employers with 250 or more workers must report their gender pay gaps every year, and employers with 150-249 workers will have to report every three years.
The Directive also provides that the threshold will be lowered to just 100 workers within five years of the Directive coming into force, and these smaller employers will also have to report gender pay gaps every three years.
“These are only the minimum requirements of the Directive. Member States could go further and set the headcount at a lower level, require more regular reporting, or include a wider category of workers.” - Lewis Silkin
To conclude...
If you’re an employer in the EU, now is the time to start getting ready for the directive. Start by reviewing your existing pay structure, ensuring that pay information is accurate and up-to-date, and providing workers with resources to help them understand the directive.
Don’t wait until the last minute - use Figures to get ready now!
What else is in the EU Pay Transparency Series?
- Does transparency really end the gender pay gap?
- Pay Transparency Movement: EU v. US
- (COMING SOON) Ask Figures: how can I best prepare for the pay transparency directive?
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