April 18, 2023

EU Pay Transparency Directive Marches Toward Implementation

Morgan Lewis

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Morgan Lewis

The European Parliament voted in favour of adopting the new “EU Pay Transparency Directive” (the Directive) on 30 March. The legislators still need to grant the Directive final approval, although this is a matter of administrative formality. The Directive will take effect 20 days after its publication in the Official Journal. Once it formally enters into force (likely this year or next year), EU member states will have three years to transpose the Directive, and its wide-ranging pay transparency measures, into domestic law.

The Directive’s consequences are significant. The Directive will introduce extensive pay transparency obligations in many EU countries that currently have no or few pay transparency requirements. Further, other member states that have already introduced various pay transparency requirements on employers will likely need to further legislate to consider the additional obligations the Directive introduces and any existing domestic legislation that conflicts with the Directive’s provisions.

This LawFlash summarises the Directive’s key requirements (as have been amended since the proposed wording of the Directive was originally published). It also sets out some of the impacts the Directive is expected to have on employers and suggested next steps for consideration.

KEY ELEMENTS OF THE DIRECTIVE

A summary of the Directive’s key measures is as follows:

MEASURE	DETAILS
EQUAL WORK AND WORK OF EQUAL VALUE	Member states will be required to take the necessary measures to ensure that employers have pay structures ensuring equal pay for equal work or work of equal value. Analytical tools or methodologies will be made available to employers and will be accessible to support and guide the assessment and comparison of the value of work. These tools or methodologies will be designed to allow employers to easily establish and use gender-neutral job evaluation and classification systems that exclude any pay discrimination on the grounds of sex. Pay structures should be such as to enable the assessment of whether workers are in a comparable situation in regard to the value of work on the basis of objective, gender-neutral criteria agreed with workers’ representatives where such representatives exist. These criteria should not be based directly or indirectly on workers’ sex.
JOB APPLICANTS	Job applicants will have the right to receive information about initial pay or the job’s pay range, which shall be based on objective, gender-neutral criteria attributable to the relevant position. Employers will need to ensure that such information is provided in a manner such as to ensure an informed and transparent negotiation on pay, such as in a published job vacancy notice.
PAY LEVELS AND CAREER PROGRESSION	Employers should make easily accessible to their workers the criteria that are used to determine workers’ pay, pay levels, and pay progression. The criteria will need to be objective and gender neutral. Member states may exempt employers with fewer than 50 workers from the obligation related to the pay progression.
RIGHTS TO INFORMATION	Workers will have the right to request and receive written information on their individual pay level and on the average pay levels, broken down by sex, for categories of workers performing the same work as them or work of equal value to theirs. If the information received is inaccurate or incomplete, workers should have the right to request reasonable additional details and clarification and to receive a substantiated response. Employers will need to inform all workers annually of their right to receive such information and of the steps the workers are to undertake to exercise that right. Employers will need to provide the information on request within a reasonable period of time and in any event within two months from the date the request is made. This right will apply to workers at all employers, irrespective of their size.
PAY SECRECY CLAUSES	Contractual terms that restrict workers from disclosing their pay, or from seeking information about the same or other categories of workers’ pay, will be prohibited. However, employers may require workers who have obtained such pay information, other than their own pay or pay level, not to use that information for any purpose other than to exercise their own right to equal pay.
GENDER PAY REPORTING	What information needs to be reported? Mean and median pay gaps Mean and median gaps calculated from “complementary and variable” components of pay (e.g., bonuses) The proportion of men and women receiving complementary or variable components of pay The proportion of men and women within each quartile pay band The gender pay gap between workers by categories of workers broken down by ordinary basic wage or salary and complementary or variable components Accuracy and publication of report Management must confirm the accuracy of the information following consultation with workers’ representatives. Workers’ representatives will need to have access to the methodologies applied by the employer. The report will need to be made publicly available (e.g., via publication on the organisation’s website) as well as communicated to the applicable national monitoring body. If requested, the results will also need to be provided to the applicable labour inspectorate and the equality body, and this shall apply to the results from the previous four years. In-scope employers The timing and frequency of publication depends on the employer’s size: Employers with 250 or more employees: Publish the report four years after the Directive enters into force and annually thereafter. Employers with between 150 and 249 employees: Publish the report four years after the Directive enters into force and every three years thereafter. Employers with between 100 and 149 employees: Publish the report eight years after the Directive enters into force and every three years thereafter.
JOINT PAY ASSESSMENTS	Employers that are subject to the reporting obligation will need to carry out a joint pay assessment where all of the following circumstances apply: The pay reporting demonstrates a difference in the average pay level between female and male workers of at least 5% in any category of workers. The employer has not justified such a difference in the average pay level on the basis of objective, gender-neutral criteria. The employer has not remedied such an unjustified difference in the average pay level within six months of the date of submission of the pay reporting. The assessment will need to include certain prescribed analysis and information, as set out in the Directive. The joint pay assessment will need to be made available to workers and workers’ representatives and shall be communicated to the applicable monitoring body. Employers will also need to make it available to the labour inspectorate and the equality body upon request. The Directive also requires that when implementing measures arising from the assessment, the employer shall be required to remedy the unjustified differences in pay within a reasonable time and in close cooperation with the workers’ representatives, and the labour inspectorate and/or the equality body may be asked to participate in the process.
REMEDIES AND ENFORCEMENT	Member states will be required to ensure that court proceedings for the enforcement of pay equity rights and obligations are available to all workers. Workers will have the right to claim compensation if they have sustained damage as a result of an infringement of an equal pay right or obligation. Compensation shall include full recovery of back pay and related bonuses or payments in kind, compensation for lost opportunities, non-material damage, any damage caused by other relevant factors (including intersectional discrimination), as well as interest on arrears. There will be no cap on compensation. Authorities or courts will also be able to issue orders to stop employers infringing equal pay rights and obligations, and issue orders for employers to take measures to ensure those rights and obligations are applied. The burden of proof will be on the employer to prove that there has been no discrimination in relation to pay should a worker feel that the principle of equal pay has not been applied and takes the case to court.
SANCTIONS	Member states must establish penalties applicable to infringements of equal pay rights and obligations. Specific penalties will apply in cases of repeat infringements.

IMPACT ON EMPLOYERS AND NEXT STEPS

Our view is that the Directive is likely to create challenges for employers operating in the European Union, including the following:

Compliance costs and increased administrative burden: Many employers will have to consider whether existing systems are able to collect the necessary data that the Directive requires and potentially adapt existing pay databases. Employers may also need to offer certain training to staff, for example on preparing gender pay reports and responding to requests for information.
Litigation: Employers should note that there have been several high-profile equal pay cases in Belgium, France, and the United Kingdom, in which female claimants were successful only because they had the necessary information on the average pay levels of their male colleagues. Increased transparency will likely increase the risk of pay equity litigation and employers should ensure they are ready and prepared to defend such claims.

Fortunately, employers have time to prepare. The requirements will not be transposed into domestic law until 2026/2027 (with the obligation to publish any required gender pay report for employers with 150 or more employees in 2027/2028). That said, companies that begin considering at an early stage how they will record pay data across their organisation and identifying and addressing areas of potential risk will be better placed to take steps to comply with any deadlines as and when they become enforceable.

In this context, employers should consider

reviewing the requirements of the Directive so that relevant team members are well informed of the requirements and can advise the business more generally;
conducting pay audits to identify and proactively address any pay inequalities andbetter understand their existing pay practices;
reviewing internal pay policies, job evaluation systems, job descriptions, and job adverts to check that they are gender neutral and based on objective criteria;
reviewing template employment contracts to remove any pay secrecy type clauses;
developing policies to govern how they will respond to employees exercising their pay transparency rights; and
verifying whether their payroll systems and job descriptions are sufficiently granular to allow responsible personnel to more easily comply with pay transparency obligations.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.