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The EU Pay Transparency Directive and gender pay gap reporting requirements

Table of contents:

  • What is the EU Pay Transparency Directive?
  • Which countries are affected by the EU Pay Transparency Directive?
  • New gender pay gap reporting requirements
  • Known unknowns and tricky areas from Ravio customers

What is the EU Pay Transparency Directive?

In a landmark move towards promoting equality and combating the gender pay gap, the European Union (EU) recently adopted the Pay Transparency Directive.

The directive is a comprehensive, and highly intersectional tool that takes a broad lens to the fight for equality in the workplace. It extends to reducing discrimination based on race, religion, sexual orientation, disability, and more. This directive is also facilitating something new and transformative for the industry: the burden of proof is now shifting from employees to the employer by explicitly articulating an employees’ rights for access to information. This shift serves as the impetus behind new company reporting requirements, and the primary motivation for many companies to start preparing as quickly as possible.

While the EU Pay Transparency Directive is groundbreaking in its breadth, it is also “the best known tool for closing the gender pay gap” according to its author. David Lorimer, a Legal Director at Lewis Silkin who is closely following the EU Pay Transparency Directive, commented that “this is probably the most significant change to employment law across the EU in decades, and it looks set to change the landscape for equal pay challenges, putting significant onus on employers to fix existing disparities or face challenges”. For this reason, we’re launching a blog series to deliver deep dives into each component and its implications for EU companies.

Today, we’re getting started by diving into one of the biggest areas of impact: closing the gender pay gap.

The directive aims to address disparities in salary and other elements of pay, and promote greater transparency in pay structures across member states. By enhancing pay transparency and reducing gender pay gaps, the directive aims to systematically improve equality and fairness in the workplace, and provide employees with the tools and information needed to ensure their salaries are commensurate with their skills and experience. The directive can foster a more diverse and inclusive workforce — encouraging organisations to recruit and promote based on merit rather than biassed assumptions. In other words, there’s an opportunity for a piece of regulatory compliance to play a transformative role in improving productivity, strengthening employee satisfaction, and accelerating organisational impact.

One key component of the Directive is that, if a pay gap between men and women in any particular category of workers is greater than 5% — and that cannot be explained by legitimate factors — employers must conduct a joint pay assessment with employees’ representatives and develop an action plan.

While this is a fantastic demonstration of government action in the fight against unfair pay disparity, it comes with a measure of grey areas, ambiguous uncertainty, and conditional adaptations that need to be made by every EU country that’s affected.

In this blog post, we delve into the key aspects of the directive — highlighting the countries it affects, the timeline for implementation, and tricky ‘known unknowns’ that come part and parcel with a directive designed for adaptation by each specific EU country.

Important: It’s worth noting that the EU Pay Transparency Directive is purposefully high-level, and its impact on EU member states continues to evolve. This is to ensure each EU country can align beyond a common framework while adapting the practicalities to fit the needs of their respective countries. For the most up to date information, we recommend monitoring the EU website as a source of truth.

We'll keep on top of the EU Pay Transparency Directive in detail and translate it into practical terms, so subscribe to the Ravio blog for the latest updates.

Which countries are affected by the EU Pay Transparency Directive?

The Pay Transparency Directive will impact all 27 member states of the European Union. It is a significant step towards harmonising pay practices and fostering gender equality across Europe. By implementing this directive, the EU seeks to ensure that individuals are paid fairly, regardless of their gender, and to eliminate any unjustifiable pay gaps.

Each EU member nation already has separate legislation (we can even name and date it and call out that it is likely to evolve in the face of the Directive).

Keep reading for a quick snapshot of EU countries paving the way in pay transparency to date – important to understand if you hire employees across Europe.

Please note: Many EU Member States already have separate legislation dealing with pay transparency, and these updates are likely to continue to evolve after this article is published.

Let’s dive in.

Employee thresholds for leading EU countries

EU countries leading the charge in pay transparency

🇩🇪  Germany

Germany, being one of the largest economies in the EU, plays a crucial role in implementing the Pay Transparency Directive. Their existing pay transparency law applies to all employers with more than 200 employees. Companies falling under this criterion will be required to disclose salary information and report gender pay gaps. Additionally, employers must provide job applicants with information about the expected salary range for the position they are applying for.

Companies with more than 500 employees must produce a management report detailing any efforts made to promote equality and to ensure equal pay. And calling back to the shift of burden from employees to employers we mentioned at the start, employees now have the right to ask for information on what comparable colleagues earn.

🇫🇷  France

In France, pay transparency legislation has been enshrined in French employment law in the form of a gender equality index score that companies with 50 or more employees must submit to.

The gender equality index score is calculated using gender pay gap statistics, salary increase & promotion discrepancies, and gender diversity in the ten highest paid roles. Employers falling within this category are required to conduct a comprehensive pay equity analysis annually to identify gender pay gaps and develop corrective measures.

🇮🇹  Italy

In Italy, legislation has already existed since 2021 that requires public and private organisations with 50 or more employees to publish a report, every two years, about employment and compensation disparities between genders and propose plans for rectifying the gaps. These companies are obligated to disclose pay scales and salary ranges — ensuring transparency during recruitment and promotion processes.

🇪🇸  Spain

In 2021, Spain introduced new laws requiring all employers to keep salary records annually — categorised by profession and gender. Spain, like many ot her EU countries, also requires companies with 50 or more employees to comply with the Pay Transparency Directive. Employers falling under this threshold will need to establish objective criter ia for determining salaries and promotions, ensuring transparency in the workplace.

From our customers in Spain, we know that the salary record, or "registro salarial" is a requirement for companies of all sizes. All salaries, positions, and genders must be included in this. A full equality plan (plan de igualdad) is only a legal requirement for companies over 50 employees, and must include an "auditoria retributiva", which is a study of all the salaries, an explanation of any differences, and the corrective actions to be taken if necessary.

🇬🇧  United Kingdom

Although the United Kingdom is no longer a member of the EU, it actually introduced its own regulations to address pay transparency and gender pay gaps back in 2017. Today, UK companies with 250 or more employees are required to report their gender pay gaps annually. This reporting includes data on the mean and median gender pay gaps, as well as information on bonus payments and the proportion of men and women in different pay quartiles.

🇳🇱  Netherlands

In the Netherlands, the Pay Transparency Directive applies to companies with 250 or more employees. They are required to report annually on the previous calendar year, starting four years after the Directive is enforced. For companies with 100-249 employees, a report must be published every three years on the previous calendar year). These companies are required to conduct pay audits to analyse any potential gender pay gaps. Employers will also need to provide information to employees about the criteria and processes for determining salaries, and designate an internal contact point to address questions and concerns related to pay transparency.

✈️  Applicability to Remote Employees

The EU Pay Transparency Directive primarily focuses on promoting transparency and pay equality within organisations. However, as remote work continues to grow in popularity, member states may need to address specific guidelines and methodologies for reporting pay gaps and ensuring fairness in compensation for remote employees. We’ll be covering this in more depth as new developments are published, so subscribe to the blog to stay on top of it!

The directive covers all workers, including part-time workers, fixed-term contract workers and persons with a contract of employment or employment relationship with a temporary agency. It applies to companies based on the number of employees they have, regardless of whether they are working remotely or on-site. So if a company meets the employee threshold set by the directive, it will be required to comply with the reporting and transparency requirements — regardless of the location or working arrangements of its employees.

Heads up:

The country that your company is incorporated in determines the rules that the company must abide by. For example, if you have employees in Spain, but are headquartered in France - you must follow the French rules. If you have subsidiaries - they all must follow the rules based on local jurisdiction.

New gender pay gap reporting requirements

The EU Pay Transparency Directive articulates clear, explicit requirements for reporting on gender pay gap metrics.

According to Article 9 of the directive, affected companies must provide employees with information on the pay gap between male and female workers.

What this means:

Relevant companies will need to disclose a list of statistics showing average pay and variable pay gaps, together with the proportion of men and women receiving variable pay (e.g. bonuses) and within each 'pay quartile'. Most significantly, companies have to report on a per-category basis, that is the pay gap between men and women who do the same work or work of an equal value.

Relevant companies must disclose

  1. Mean and median pay gaps.
  2. Mean and median gaps calculated from “complementary and variable” components of pay (e.g. bonuses).
  3. The proportion of men and women receiving complementary or variable components of pay.
  4. The proportion of men and women within each quartile pay band.

Known unknowns and tricky areas from Ravio customers

1. Handling of diversity & inclusion data beyond gender

The EU Pay Transparency Directive explicitly addresses gender metrics, which is great for rectifying the gender pay gap. However, the directive only implicitly addresses other critical categories which inform the overall pay equality picture, such as ethnic origin, religion, disability, sexual orientation.

Where this gets tricky: There is a higher threshold required for collecting so-called 'special category' data (e.g. ethnicity, religion, sexual orientation) under the GDPR, which is why lots of companies choose not to collect it. After speaking with Ravio customers, HR leaders are hoping that EU member states will use this as a catalyst for encouraging companies to report on other diversity metrics beyond gender, but this paves the way for a whole new set of challenges. For example, it’s a common assumption that storing ethnicity data is implicitly unethical, and in some countries, it’s even illegal.

However, HR/People communities are increasingly rejecting this notion as a myth. In a post published by Morrison Foerster, Lokke Moerel discusses how historically across EU Member States, the collection of racial and ethnicity data has been considered highly sensitive — implying an underlying assumption that collecting and processing such data increases the risk of discrimination. In turn, this means that GDPR should prohibit organisations from collecting this information in order to prevent further discrimination.

However, Moerel shows that it is actually the other way around:

"Where racial or ethnic backgrounds are ‘visible’―as a matter of fact or perception―to recruiters and managers alike, individuals from minority groups may be discriminated against without recording any data. It is therefore only by recording the data that potential existing discrimination may be revealed, and bias can be eliminated from existing practices."

- Lokke Moerel, Morrison Foerster, February 2023

So we anticipate clear tension, in legal expectations, between the need for stronger transparency around discrimination in the workplace and data privacy.

2. GDPR particularities in member states

Article 88 of the GDPR affords member states the opportunity to supplement GDPR with additional rules and provisions for each respective member state. For example, within Germany, the Bundesdatenschutzgestz (BDSG) has enacted specific rulings on the processing of personal data of employees and applicants, including in respect of special category data such as ethnicity, religion and sexual orientation. As a result, there have, and will continue to be, “clashes” so to speak, in legal expectations and interpretations, requiring authorities to make adjustments.

To this effect, a new German Employee Data Protection Act is under discussion, which will help to clarify and resolve some of the issues in this area. As it stands today, the issue remains quite complex — with lots of dialogue and tension on what can and can't be done in Germany. This is also often exacerbated because significant numbers of German companies have work councils that must be involved in internal employee decisions and that there can also be nuanced differences in requirements and interpretations within each of the Länder.

While this Heuking article contains the latest update on the new German Employee Data Protection Act available at the time of publishing, we believe this is something that will evolve dramatically over the next 6-12 months.

3. Handling multi-national pay transparency in public communications

One Ravio customer told us recently of their concern around correctly messaging pay transparency when salary ranges are adjusted by country. They are currently hiring remotely in Europe, so they anticipate difficulty — and a strong need for pay transparency education — in including salary ranges on job ads because there might be different salaries depending on the location. From talking to hundreds of HR professionals at Ravio, we find that HR leaders in multinational countries typically default to the strictest requirements in order to save overhead.

These are all new, uncharted challenges that face the HR/People industry. And yet, despite the grey areas and ambiguities, lots of HR leaders are excited about what becomes possible when the EU Pay Transparency Directive fully comes to life.

In summary

The EU Pay Transparency Directive is a significant step forward in promoting pay equality and transparency across member states. By introducing measures to address pay disparities, enhancing reporting requirements, and encouraging fair negotiation practices, the directive aims to create a more equitable workplace for all. As member states work towards implementing the directive, it is hoped that these efforts will lead to lasting change, narrowing the gender pay gap and setting a precedent for fairness in compensation practices within the European Union.

This is great progress, but what can HR leaders do?

David Lorimer had this to say on immediate steps:

“It’s natural for a large and high-impact change in the law to seem overwhelming. The trick is to break it down into manageable steps.

A sensible place to start would be to recognise that this will need input from many stakeholders, including in HR / people, payroll, benefits, finance and legal. So we recommend assembling a cross-functional working group as a starting point. After that, it will be important to try to understand what your existing pay gaps look like — especially in reference to the EU Pay Transparency Directive principles outlined above. That will help you to take tangible steps to address significant gaps, and mitigate the risk of having to disclose bad news and carry out joint pay assessments.”

📖 Further reading

Looking for other information on the EU Pay Transparency Directive?

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