A political agreement has been reached on the EU Pay Transparency Directive, paving the way for gender pay gap reporting to become compulsory for many employers across Europe.
In this article, we set out the background to the proposed Directive, explain its impact, and discuss the implications for employers in the UK, Ireland, and across the EU.
Background to the Pay Transparency Directive
The intention behind the Pay Transparency Directive ("the Directive") is to promote greater transparency and fairness in the workplace, and to help reduce the gender pay gap within the EU. According to data from the European Commission, the EU gender pay gap currently stands at around 16% - meaning that, on average, women in the EU earn 84 cents for every euro earned by men.
The European Commission tabled its proposal on pay transparency on 4 March 2021. The initiative was an important element of the political guidelines of President von der Leyen and part of the Commission's Gender Equality Strategy 2020-2025.
A political agreement on the Pay Transparency Directive was reached on 14 December 2021. This means that the European Parliament and the Council of the EU have agreed the content of the forthcoming legislation, and it will now be formally approved.
The Pay Transparency Directive and gender pay gap reporting
As currently drafted, the Directive will require member states to establish gender pay gap reporting regimes that will look very similar to the existing UK regime. Employers will have to report:
- 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 Directive goes further though and will require the reporting of pay gaps by "categories of workers", covering basic salary and complementary/variable pay. "Categories" of workers are defined as "workers performing the same work or work of equal value". The intention is to require employers to publish the gender pay gap between workers doing the same or similar jobs, to tie-in with the comparison that can be used for the purposes of an equal pay claim. Categorising employees in this way could potentially be a complex task. It remains to be seen whether there will be guidance to assist employers in this process.
Workers and their representatives, labour inspectorates and equality bodies will be able to ask the employer for additional clarifications and details, and the employer must respond within a reasonable time. Where gender pay differences are not justified by objective and gender-neutral factors, the employer shall also be required to remedy the situation within a "reasonable" period of time, taking their obligations significantly further than simply reporting on a pay gap.
EU employers may also be concerned about the Directive's introduction of a type of compulsory equal pay audit that is triggered by an unjustified pay gap, by requiring a "joint pay assessment" in certain circumstances. This applies where pay reporting reveals a gender pay gap of at least 5% in any category of workers, the employer cannot justify the gap based objective gender-neutral factors, and the unjustified difference has not been rectified within six months. A joint pay assessment requires the employer to cooperate with worker representatives to analyse the pay differences, the reasons behind them, and the effectiveness of measures to address the differences. The employer must also remedy the differences within a "reasonable" period of time.
Scope of Pay Transparency Directive
The Directive provides that EU member states must create gender pay gap reporting legislation within three years of the Directive coming into force. 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.
Although the Directive uses the term "worker" throughout, this is limited to those in an employment relationship as defined by each Member State. This means the obligations are limited to the equivalent of "employees" under UK law, rather than the wider definition of worker which includes many self-employed contractors - although the exact scope in each country will depend on how local law defines an employment relationship.
This means that, by 2026, all large employers in the EU will have to report gender pay gaps. By 2031, all smaller employers with 100 or more employees) will have to report.
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.
Gender pay gap reporting in Europe
Many EU member states already have gender pay gap reporting regimes, but there is a lot of difference between them.
For example, last year Ireland introduced reporting requirements, with Irish employers publishing their first set of gender pay gap reports in December last. The Irish regime for the most part very closely mirrors the existing UK regime.
Other regimes are more complex. For example, in France employers must calculate a "gender equality index" score. This is obtained from the gender pay gap statistics, differences in salary increases, promotion data, and the degree of gender diversity in the ten highest paid roles - and a low score can result in a financial penalty. Spain's new laws introduced in 2021 require all employers to keep a salary records broken down by professional category and gender. And in Germany, companies employing over 500 people must produce a management report setting out measures taken to promote equality and to ensure equal pay, and in some circumstances employees have the right to ask for information on what comparable colleagues earn.
There are currently variations across the EU in methodology, scope and frequency of pay gap reporting. The new Directive will introduce some consistency. However, some countries already go further than required by the Directive. For example, in both France and Italy the threshold for reporting is 50 rather than 100 employees.
One practical issue with implementation of the Directive for international employers is that it is likely that the timescales will differ between jurisdictions. Rather than having to complete gender pay gap reporting in all jurisdictions by the same date, employers operating in a number of EU countries could face multiple deadlines spread across the year, making management of reporting obligations difficult. Different countries may also choose to implement the Directive in different ways, either by using flexibility within the scope of the rules, or by going further than is required - particularly if they already have an existing regime in place.
Impact of Pay Transparency Directive for employers in Ireland
As mentioned above, Irish employers had to report their gender pay gaps for the first time very recently.
The Irish legislation, which came into effect in May 2022 by way of the Gender Pay Gap Information Act Regulations 2022, already complies with the basic pay reporting requirements in the Directive and goes beyond these requirements in some respects. Currently in Ireland, only employers with 250 or more employees have to publish gender pay gap reports - but by 2025, this threshold will drop to just 50 employees. The Irish Regulations will therefore comply with the Directive's ultimate threshold of 100 employees long before the latter takes effect.
One significant difference, which should go some way further towards identifying pay inequality, is that the Directive will require the publication of pay gaps by "categories of worker". Currently, employers in Ireland must publish pay gaps calculated for its entire workforce, and then separate calculations for part time and temporary (fixed-term) employee groups. However, the rules do not require publication by job functions or grades of worker, rather than simply their employment status. As discussed above, the Directive will require reporting based on those carrying out the same work or work of equal value. If so, the Irish regime will need to be amended and employers will have a more onerous task to identify and publish even more gender pay gap information and information about job structures in their organisations.
Another implication of the Directive relates to action organisations may need to take in light of gender pay gap reports. Unlike the UK, the Irish Regulations require organisations, as part of their reporting obligations, to provide a written statement explaining the reasons for any pay gaps, and to set out measures (if any) being taken, or being proposed to be taken, to eliminate or reduce any differences in pay. The Directive takes this further again by effectively imposing a positive obligation on employers to take action where such pay differences cannot be justified by objective and gender-neutral means.
The Directive will also require the accuracy of pay gaps to be confirmed by an employer's management, with employee representatives being given an opportunity to interrogate the methodology used. The Irish regulations do not contain a requirement for anyone senior within the employer to vouch for the accuracy of the statistics. This is also something that will have to change, and will present an additional practical step for employers to overcome in order to meet their gender pay gap reporting obligations in Ireland.
Impact of Pay Transparency Directive for employers in the UK
The UK was something of a legislative trailblazer when gender pay gap reporting obligations were introduced in 2017, requiring all companies with 250 or more employees to report their statistics. Yet with the new Directive eventually applying to employers with just 100 employees, the UK's regime no longer looks so innovative.
The UK's gender pay gap reporting regulations are currently being reviewed and the government has told us that its response will be published "in due course". Could this review conclude that the headcount threshold be reduced to be in line with the Pay Transparency Directive? Maybe, but in our view it's unlikely.
During her brief tenure as PM, Liz Truss said that her government would exempt employers with fewer than 500 employees from the existing reporting requirements. Although this hasn't been expressly repeated by Rishi Sunak's government, it's hard to imagine the current pro-Brexit and deregulatory PM changing this position and widening the scope of gender pay gap reporting at this time (although there is a general election set for little over a year's time, so anything could happen.).
The Pay Transparency Directive is the first major piece of European employment law legislation since Brexit. It marks the start of the UK's divergence from European employment law. As well as the lower threshold, the Directive will introduce other elements that are not currently mirrored in the UK - including reporting based on categories of workers, the ability for employers to be questioned about their statistics and required to remedy ongoing pay gaps, and the requirement to conduct joint pay assessments. Taken together, this introduces a more proactive approach towards addressing pay gaps, as compared to the current UK obligation to simply report the data.
Comparing gender pay gap statistics between different countries
With gender pay gap reporting, the devil is in the detail.
Who is included and what is the definition of a "worker" with an "employment relationship"? What elements of pay and bonus should be included? What is the formula for actually working out the gaps? Changes in these sorts of definitions could have a big impact.
If the forthcoming Directive leaves this level of detail to individual Member States, it means that figures may not be comparable between different jurisdictions. For example, if one jurisdiction requires the inclusion of self-employed contractors and RSUs/share awards, this would be likely to skew average pay for men and so push up the gaps compared with another jurisdiction whose legislation omits these elements. Even if otherwise employee pay and workforce gender demographics were identical, the difference in what falls within scope means that pay gaps would differ.
International employers with operations in multiple EU member states may want to consider developing a way of ensuring figures are comparable between different countries. For example, applying the methodology of one or more jurisdictions across all countries in which it has operations. In order to ensure this complies with each country's laws, it would mean adopting the rules from the jurisdictions with the highest level of reporting requirements.
What else is in the Pay Transparency Directive?
This article focusses on pay gap reporting, but the Directive contains various other pay transparency measures designed to help ensure equal pay between men and women. The focus is on allowing employees to have more information about pay within an employer both before and during employment. The key provisions are set out below:
Pay transparency for job-seekers
In job vacancy notices or before job interviews, employers will have to disclose the initial pay level or range for the position.
Ban on asking about pay history
Employers will be prohibited from asking job candidates about their pay history, including their existing salary (something which is currently banned in over half of the states in the United States).
Right to pay information for employees
Workers will have the right to request information from their employer on their individual pay level and on the average pay levels, broken down by gender, for categories of workers doing the same work or work of equal value. This right will exist for all workers, irrespective of the size of the company. This is directly aimed at one of the major obstacles to enforcing equal pay between men and women: the lack of knowledge about what others doing comparable jobs are paid. As noted above, this reflects the approach already taken in Germany if certain criteria are met.
No ban on pay disclosures
Workers should not be prevented from disclosing their pay to others for the purpose of enforcing the principle of equal pay, and contractual terms to this effect must be prohibited.
Comment
The EU's proposals on gender pay gap reporting are similar to the existing UK regime, but go significantly further in relation to what may need to be done if an ongoing pay gap is identified by the process. Gender pay gap reporting is also just one aspect of this Directive, which contains a variety of measures addressing gender pay disparity at work from different angles. The Directive draws from ideas on how to tackle unequal pay from across the EU and more widely, and once implemented is likely to contribute to new global standards on equal pay. Having been at the forefront, the UK may now fall behind in this area if the current obligation to report is not enhanced by an obligation to take action.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
