The 27 Countries of the European Union have until June 2026 to adapt a major piece of pay equity legislation—the EU Pay Transparency Directive—into their own laws. So what does this mean for global organizations that do business in the EU? In this blog post, Affirmity Principal Business Consultant, Patrick McNiel, PhD, takes a look at the key provisions of the directive and the potential sticking points your organization may encounter.
An Introduction to the Directive
The EU Pay Transparency Directive, aims to close the gender wage gap by increasing organizational pay transparency and making it easier for employees to enforce their rights to equal pay. The EU adopted the directive on 24 April 2023 and gave member states until June 2026 to implement them into their own national legislation. Member states will transpose the directive to fit with or augment their current laws and may choose to impose more stringent requirements, which may result in differences from country to country.
The directive has reporting requirements that differ based on the size of your organization, and the directive applies to organizations regardless of where they are headquartered: if you have employees working within an EU member state, you will need to comply with the directive. This includes employees working in Northern Ireland (though part of the UK and no longer an EU member state) due to obligations under the Windsor Framework.
The directive outlines the following thresholds for reporting:
- Companies with 250 or more employees will be required to report annually to the relevant national authority on the gender pay gap in their organization
- Organizations with between 100 and 250 employees must report every three years.
- Organizations with fewer than 100 employees won’t have any reporting obligation.
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6 Key Provisions of the Directive
Employers must proactively prepare to change policies and procedures in anticipation of the directive being implemented by the EU’s member states (and to a certain extent, its neighbors and trading partners). The key attributes of the directive are as follows:
1. Pay Transparency for Job Applicants
Going forward, organizations must provide initial pay ranges to job applicants that are based on objective and gender neutral criteria, and have systems and processes in place to provide that information.
2. Employee Rights to Pay Information
Employers will need to provide answers to employee requests about how pay is set up and structured. This may include providing average information about people in the same worker category as the employee (and not just other individuals in their specific job role). Such averages may need to be broken down by sex.
3. Gender Pay Gap Reporting
Above a certain organizational size, employers will need to develop statistics and report these to employees. External governing bodies will also collect this information from employers, and may additionally publish reports based on the statistics provided.
4. Joint Pay Assessments
Organizations found to have categories of workers with a gender pay gap greater than 5% will be required to enter into a joint pay assessment, unless such gaps are corrected within six months or can be shown to be due to objective gender-neutral criteria. This assessment is essentially a deeper dive into the underlying causes of those differences, resulting in an obligation to make corrections or adjustments if the causes are not justifiable.
5. Employer Burden of Proof
The burden of proof for a pay discrimination claim depends on whether the employer fulfills its transparency obligations. If the employer does not fulfill its obligations, it will be required to prove that there was no discrimination in relation to pay.
6. Remedies and Penalties for Victims of Pay Discrimination
Finally, of course, the directive details the remedies and penalties for non-compliance. This is expected to be the full amount of what an individual would have been paid to someone if they were not discriminated against, plus interest. There is essentially no limit to the amount of liability companies may be exposed to.
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Potential Sticking Points
Complying with the full detail of the directive is no small task, and there are several potential sticking points for employers to consider.
Determining the Value of Any Given Job
The directive will require companies to make a large number of statistical comparisons, and a key input into these will be the value that each organization assigns to individual jobs. How will this be achieved? What process is your organization going to need to go through to make that determination? How does this process align with existing processes, pay scales, and pay systems?
In truth, the countries charged with transposing the directives into their laws have largely not yet worked through this aspect, so we’re not really sure what different countries will settle upon. The directive requires them to create tools for doing this, so we may have a situation where different methodologies or parameters are required depending on which countries you are operating in. Nonetheless, organizations should have some methodology for determining this internally, allowing them to assign some value to a job.
Note that this “value” isn’t one based on economics. It’s based on intrinsic aspects of the job, specifically four main factors, which are:
- Skills required
- Effort required
- Responsibility level
- Working conditions
Organizations can do this by forming committees and creating scales together that consider these factors and generate a systematic, structured way of valuing jobs. Another thing to do is to look at your existing pay structures and make sure that they’re already well-aligned to the core aspects of job value. Another potential avenue is to look to similar laws already implemented in Canada—as they consider similar factors.
Regardless of how your organization chooses to prepare for this exercise, this is one of a number of complex areas that organizations would do well to tackle early—there’s nothing stopping employers from assembling committees and beginning to create the necessary structures right now.
Using Job Value to Determine Worker Categories
Worker categorization is a key part of how the pay transparency directive functions. Worker categories encompass individuals in job roles that can be totally different from one another—for example, truck drivers and reception personnel could be in the same group. Though individual roles may involve totally different tasks, if they’re valued around the same using the parameters mentioned above, they’re considered part of the same category of workers for the purpose of the directive.
So, how do you figure out what your categories are? A lot of companies may be considering using Radford scales or similar schemes, but we would actually caution against this: the Affirmity team have performed exploratory analyses and found that the intrinsic values of individual jobs aren’t aligning as well as you may expect with Radford scales. This is primarily because jobs are assigned to levels, in part, based on market values. Organizations will instead have to gather a range of values and determine how those values will create a category—there’s a lot of logistics involved.
Forming Committees and Seeking Analytical Expertise for Further Pay Gap Analysis
If you have to do further analysis because you discover a 5% pay gap, you must do that in conjunction with employee representatives. This requires your organization to have a process for this eventuality—another thing to tackle sooner rather than later. Furthermore, you will need to ensure you have access to sufficient analytical expertise in order to perform further analysis—something that, of course, Affirmity can assist you with.
Sharing Pay Information With Employees and Understanding Your Gaps
Your obligation to share pay information is also an opportunity to help employees understand your approach and the legitimate factors that might explain differences. In turn, organizations will need to collect sufficient data to run analyses and fully understand how to address the gaps they discover.
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Continue Exploring the EU Pay Transparency Directive
This article is a section lifted from our ebook, ‘Preparing for the EU Pay Transparency Directive: A Guide for Global Businesses.’ In the full ebook, we’ve teamed up with PeopleFluent to help you understand the key strategies, recommended technologies, and analytical processes you’ll need to identify and address pay gaps.
The guide covers:
- Pay equity definitions and an explanation of the current state of pay globally
- How compensation planning software can help you comply
- The key pay analytics needed in order to tackle the provisions of the directive
Make sure your business is prepared for the incoming directive: download the full ebook. And for assistance with complying with this and other pay-related laws, contact Affirmity today.
About the Author
Patrick McNiel, PhD is a Principal Business Consultant for Affirmity. Dr. McNiel specializes in workforce analytics using both qualitative and quantitative methods to analyze employment practices and inform employment decisions. Dr. McNiel holds a PhD in Industrial and Organizational Psychology, and is licensed to practice psychology by the State of Texas. Connect with him on LinkedIn.