The biggest challenge for many organizations is to create a transparent and systematized pay policy and an appropriate position grading. This is particularly difficult for companies that have not operated with clearly defined salary ranges up to this point. These changes are in response to the European directive meant to reduce the gender pay gap between women and men in the EU. The current average pay gap for all EU member states is 14%. The directive also aims to combat pay discrimination by strengthening enforcement mechanisms already functioning in many countries.

EU companies that fail to adapt to the new regulations may face severe sanctions. There's no time to waste, but quickly and efficiently adapt to the pay transparency laws.

How to prepare? What should be done? Below, I describe all the facts and implications resulting from the directive and the details regarding gender pay gap reporting you should pay attention to as an employer.

The EU Pay Transparency Directive: Key Facts

The European Parliament Directive 2023/970 on pay transparency came into effect in June 2023. Even though many EU countries already have similar regulations, it is a groundbreaking step towards achieving pay equality between women and men in Europe.

Member states of the European Union must implement the directive's provisions into their national legal systems by no later than June 7, 2026.

What exactly needs to be done? 

According to the principle of equal pay, employers must introduce clear pay mechanisms. This requirement applies to companies regardless of the sector they operate in. The gender pay gap must be disclosed by both public and private organizations, as well as NGOs.

What are the main principles of the new EU directive?

##Definition of Pay:

Article 3 of the directive defines compensation as ordinary basic salary and all kinds of allowances, including fixed and variable pay, rewards, and bonuses in both monetary and non-monetary forms.

Pay Transparency:

The directive obliges employers to inform job applicants about the salary ranges applicable for the position offered. Moreover, every employee will have the right to information about the average pay level (divided by gender) of individuals working in equivalent positions or performing work of equal value to their pay level.

Gender-Neutral Pay Criteria:

The principle of equal pay for equal work obliges employers to establish and provide employees with gender-neutral criteria for making pay decisions, including raises and bonuses.

What is the purpose of the EU Pay Transparency Directive?

The goal of the EU directive is twofold.

First, through pay transparency mechanisms, it aims to reduce the pay differences between women and men performing work of equal value - so called equal pay for equal work. Essentially the goal is to close the gender pay gap.

Second, the directive seeks to introduce greater transparency and openness regarding salaries for all workers, regardless of gender. The fundamental premise is that individuals performing the same work or work of equal value should receive equal pay.

Does the pay transparency directive aim to standardize salaries?

No. It is important to understand that applying the principle of equal pay for equal work does not aim to create identical salaries for female and male workers in the same positions regardless of other factors, such as professional experience or skills. Instead, it's about ensuring any pay differences are justified by objective criteria independent of the employee's gender. Such an approach is intended to ensure that pay differences are fair and understandable to all parties involved.

Work of Equal Value

The directive often uses the concept of "work of equal value." This refers to work that is deemed equivalent to another job based on objective, gender-neutral criteria.

What are these criteria?

Skills,

Effort,

Level of responsibility,

Working conditions,

And other significant factors relevant to the job or position.

Employers are obligated to shape their pay structures in a way that ensures equal pay for work of equal value. They must also regularly monitor and assess whether their pay systems are free from pay discrimination.

The aim of the Pay Transparency Directive is not dedicated solely to fighting gender pay inequalities. It also promotes openness and fairness in pay within the workplace. It represents a step towards eliminating pay discrimination and building a labor market where pay equality is the norm, and salaries are determined based on clear and fair principles.

The Unadjusted Gender Pay Gap in Europe

The unadjusted gender pay gap for the EU states averages 12.7% with the largest discrepancy for Estonia (21.3%) followed by Austria (18.4%), the Czech Republic (17.9%), and Germany (17.7%). On the other side of the spectrum is Luxembourg (-0.7%) - the only state where women earn more than men, followed by Italy (4.3%), Romania (4.5%), and Belgium (5%) according to Eurostat. 

The unadjusted pay gap refers to the overall difference in the average gross salary of women and men in the economy, without considering factors such as employment sector, level of education, professional experience, or type of work performed. 

does the unadjusted pay gap tell us? 

Reflects Overall Economic Inequality

It highlights overall economic disparities between genders within a country's labor market, providing a broad picture of inequality in earnings.

The unadjusted pay gaps can indicate how gender affects earnings on a societal level, suggesting that, on average, women tend to earn less than men. For example, women tend to populate lower-paying jobs or work more often for part-time positions. 

Influence of Occupational Segregation

The unadjusted pay gap sheds light on occupational segregation, where women and men are concentrated in different professions, often with women in lower-paying sectors such as hospitality or caretaking.

Unadjusted gender pay gaps also reflect the impact of part-time work, which is more common among women and typically offers lower hourly wages than full-time positions.

Social and Cultural Factors

Work-Life Balance: The gender pay gap can reflect societal norms and policies affecting work-life balance, including maternity leave, childcare support, and flexible working arrangements, which influence career progression and earnings.

Educational Choices: It may also illustrate differences in educational and career choices between genders, influenced by social and cultural norms.

It’s important to monitor the unadjusted pay gap as it serves as a basis for discussion and awareness about the inequalities in the workplace and the need for systemic changes. It motivates companies and governments to institute policies aimed at providing equal access to job opportunities regardless of gender. 

The Adjusted Gender Pay Gap in Europe

The adjusted pay gap takes into account earnings of male and female workers with similar characteristics and qualifications, such as experience, education, occupation, industry, and working hours. This gap aims to isolate the effect of gender on earnings by holding constant these key factors that influence pay. 

Typically we expect that the adjusted pay gap is lower than the unadjusted. That is the case for Germany, where the adjusted pay gap stands at 6% and has been systematically decreasing since 2006.

However, there are countries where the adjusted pay gap is actually larger than the unadjusted. The case in point is Poland, where the adjusted pay gap increases to 12% from 7% unadjusted. 

What causes the adjusted gender pay gap?

Discrimination

Direct Discrimination: Even with similar qualifications and roles, women may be paid less than men for the same job or for work of equal value, a clear case of gender discrimination.

Indirect Discrimination: Employment practices or policies that appear neutral but disproportionately disadvantage one gender over another, such as performance evaluation methods or promotion criteria that inadvertently favor men.

Gender Bias in Job Evaluations

Jobs traditionally or predominantly filled by women may be undervalued in job evaluations, leading to lower pay scales for these positions compared to male-dominated jobs with equivalent skill levels.

Negotiation and Promotion Dynamics

Negotiation: Recent studies indicate that contrary to popular belief, women actually often negotiate raises. However, the amounts they negotiate for are typically lower than those men aim for. Moreover, women are much more likely to face rejection, or receive raises smaller than their male colleagues

Promotion dynamics: It is also possible that reward systems and employee evaluation mechanisms may be unconsciously biased, favoring a style of work and competencies more often associated with men. Research by scientists from George Mason University and Stanford showed that women with masculine traits are perceived as more competent than other women on one hand, thus having a better chance at a raise, but on the other hand, they are less liked, paying a social price for it affecting their promotional opportunities.

Work-Life Balance and Career Interruptions

Childbearing and Caregiving: Women are more likely to take career breaks for childbearing and caregiving, affecting their work experience and opportunities for advancement.

Part-Time Work: They are also more likely to work part-time since women typically manage family responsibilities. But part-time work offers lower hourly pay and fewer advancement opportunities.

Unconscious Bias

Employers and managers may have unconscious biases that influence hiring, promotion, and pay decisions, even when they aim to be fair and equitable. These biases can affect judgments about competence, potential, and worth.

Understanding and eliminating the pay difference and stereotypical perceptions requires further research and action from enterprises and policymakers. Undoubtedly, the most important goal will be to strive for equality in the evaluation of work and skills, regardless of gender. Therefore, pay transparency and the rights of employees that arise from it are crucial.

Employee Rights after the Implementation of the EU Pay Transparency Directive

The EU Directive on gender pay transparency significantly expands employee rights regarding access to pay information, including:

• Right to Pay Information: Employees gain the right to obtain information about their pay level and the average pay levels, considering gender division, for persons doing the same work or work of equal value.

• Written Reporting Obligation: In case an employee inquires about pay, the employer is obligated to respond in written form. This ensures an official and verifiable record of the information provided.

• Right to Representation: Employees can seek assistance from their representatives, such as trade unions or equality institutions. Workers representatives may help with information as well as with additional explanations or justifications if they receive incomplete or inaccurate data. And their representatives have the same rights to information as the employee requesting representation.

• The Employer has to Respond: When employees or their representatives request additional explanations, the employer must provide a detailed response within two months of receiving the inquiry.

• Gender-Neutral Pay Criteria: Employers must define and make available to employees gender-neutral pay criteria to ensure fairness and transparency in the decision-making process for raises and pay determination.

• Freedom to disclose pay: Employers cannot prevent employees from sharing their salary information to enforce equal pay. Additionally, the directive removes confidentiality agreements related to pay, giving employees the freedom to discuss their earnings.

Employer Obligations Following from the EU Pay Transparency Directive

Transparent Pay Policy

Under Article 6 of the Pay Transparency Directive, employers are required to establish a transparent pay policy. This policy should provide employees with access to objective and gender-neutral criteria used to determine pay levels and progression. The directive allows member states to exempt employers with fewer than 50 employees from this obligation to protect smaller businesses from excessive burdens.

What does pay transparency mean in practice? 

For many companies, significant changes. Large discrepancies in the salaries of employees in the same positions are a common phenomenon, unfortunately. To comply with the new regulations, you will have to either try to gradually equalize them or create a precise system explaining the reasons for such differences.

Report gender pay gaps

In line with the principle of equal pay, gender pay gap reporting becomes obligatory. Employers must report average and median gender pay gaps for each grade to the designated authority. These regulations aim to facilitate the identification of any pay injustices and cover not only full-time employees but also interns, trainees, part-time workers, fixed-term employees, or those employed through temporary work agencies.

National law determines where and how exactly the reporting will take place and which governmental bodies will be responsible for reporting gender pay gap statistics.

Disclosure of Information

Employees can request information from their employer about their earnings and the average earnings (divided by gender) in relation to employees performing the same work or work of comparable value. If they receive incomplete or inaccurate information, they have the right to further investigate the matter. Moreover, employers are required to annually inform employees about the possibility of exercising this right.

What if there are no employees of a certain gender for comparison?

The authors of the pay transparency directive also addressed these specific situations when there are no employees of a certain gender in a given position. If a company lacks women or men in a particular position, employers should use statistics and available data to create a model employee of another gender. This model is intended to serve as a reference point in assessing whether pay practices are fair and do not discriminate based on gender.

The pay equity directive also introduces the concept of a so-called hypothetical comparator of the opposite gender, used when a direct comparison between employees is not possible. This tool assesses whether an employee is treated less favorably in terms of pay compared to a theoretical employee of the opposite gender with similar qualifications performing the same work or work of equal value.

Will the salaries of your colleagues go public?

Although the directive increases transparency regarding salaries, it does not automatically introduce full pay transparency of all employee salaries within a company. The disclosure of a specific employee's salary will not be possible. Instead, it focuses on providing access to information for those who have legitimate reasons to learn more about the pay policy and check if they are victims of pay discrimination.

Possible Cases of Personal Data Disclosure

That said, there is a situation in which providing information under the directive could inadvertently reveal the salary of a specific employee. This could happen when few people work in a given position, making it easy to identify their earnings. Article 12 of the directive treats such cases, stating that any information disclosed, related to the processing of personal data, must comply with the General Data Protection Regulation (GDPR). According to this provision, personal data processed to promote the principle of pay equity cannot be used for other purposes.

Role of Employee Representatives and Supervisory Bodies

The directive leaves it to national law to decide whether, in cases of potential disclosure of an employee's personal data, access to information should be limited to employee representatives, labor inspectorates, or equality bodies. These entities can act as advisors for employees, assisting them in potentially pursuing claims under the directive's provisions without disclosing the actual salary levels of individuals.

The EU Pay Transparency Directive increases information about earnings while balancing the need for pay equality and transparency with protecting employees' personal data. Clear legal frameworks for processing this information ensure that actions taken to implement equal pay are consistent with privacy and personal data protection principles.

Prohibition of Confidentiality Clauses

According to the directive, employers cannot include confidentiality clauses regarding salary in contracts. This means that employees can freely disclose information about their earnings to enforce the principle of equal pay. Employers may only require that information about other employees' salaries, obtained in the course of exercising the right to equal pay, be used solely for that purpose.

These changes require employers to adjust their pay policies and management practices to ensure greater transparency and fairness. This includes reviewing existing salary structures and how salary matters are communicated to employees.

Will Employers Have to Specify Salary Ranges?

The introduction of the EU Pay Transparency Directive will impact the recruitment process and how job offers are presented by employers. A key element is the pay range, i.e., the range of remuneration anticipated for a given position.

Here's what you need to know:

Transparency During Recruitment:

Providing salary information at the initial stage of recruitment builds trust between candidates and employers and allows for more effective application screening. This way, applicants have clarity about financial conditions and can assess whether the offer is attractive.

Salary Ranges and the Application Process:

Including pay ranges in a job advertisement streamlines the recruitment process, increasing the number of applications from candidates whose financial expectations match the employer's offer. This approach saves time for both parties and allows for more conscious decision-making about applying.

That said, the pay transparency directive itself does not require the publication of salary ranges in the ad - it states that the employer has to inform about the salary before the interview. This information can be provided in various ways, such as during a phone call or in an email, regardless of whether the candidate asks about earnings or not.

Nonetheless, publishing salary ranges can significantly attract potential candidates and is seen as a practice that builds a positive employer image.

If Publishing, Then What Ranges?

It is good practice to maintain no more than a 20% difference between the lower and upper limits of salary ranges. Such practice ensures transparency and facilitates salary negotiations, giving both parties clear frameworks for discussion and fostering trust.

Information for Recruiters

The EU Pay Transparency Directive introduces changes to the recruitment process.

Ensure your recruiters:

• Do Not Ask About Previous Salary: The most important change is that recruiters are not allowed to ask candidates about their pay history. This provision aims to prevent the perpetuation of pay discrimination and ensure that salary negotiations are based on qualifications and responsibilities associated with the position, not previous earnings.

• Inform About Salary Amounts: Ensure that candidates are informed about the salary ranges offered for the position before signing the contract. This can be done while posting the offer or before the first interview. This ensures transparency and allows candidates to make an informed decision about applying.

• Negotiate Fairly: According to the directive, candidates gain the right to fair salary negotiations, even beyond the ranges indicated by the employer. The goal is to allow candidates to negotiate salaries based on their qualifications and the value they will bring to the position, regardless of their previous earnings.

Provide Information in Accessible Formats for People with Disabilities: All information provided to candidates must be in a format accessible to people with disabilities.

These are significant changes requiring a new approach and adaptation from both employers and recruiters. Discussing salary at the stage of first contact is a novelty. Usually, such negotiations took place at the final stages and were often conducted by different people. As a result, many recruiters lack experience in discussing pay and will require clear instructions and specialized training

##What Penalties can you expect for non-compliance with the Directive?

In the face of the new Pay EU Transparency Directive, companies that fail to adapt to its requirements may face severe consequences.

For failing to justify differences in pay between genders for individuals performing work of equal value using objective criteria, or not taking corrective action in case of identified unjustified disparities, you risk:

• Joint Pay Assessment: The employer, along with employee representatives, must identify pay differences between female and male employees that are not justified by criteria other than gender and jointly take actions aimed at reducing pay inequalities.

• Financial Sanctions: These can include not only monetary fines but also exclusion from receiving public grants or benefiting from financial or credit incentives.

• Compensation and Legal Action: Employees experiencing pay discrimination based on gender have the right to seek compensation in court, and the burden of proof lies with the employer. Compensation is to cover not only the recovery of lost wages but also related bonuses, in-kind benefits, lost opportunities, and compensation for non-material losses. The amount of compensation is intended not only to reimburse losses but also to deter future violations.

Pay Transparency: No Time to Waste

33% - that is the size of the pension gap in the EU. Do we want such discrepancies in pay between genders to affect us and future generations? Certainly not.

Therefore, as the deadline for implementing the directive approaches, companies face the inevitable necessity of making profound changes in their pay policies to ensure gender equality and pay transparency in wages for women and men. Act now, as many steps to compliance need time and a thought-out pay policy. It's a challenge for companies that have so far lacked a clear job structure and those grappling with large discrepancies. They will have to create it from scratch and as quickly as possible eliminate the differences.

If you don't know where to start and would like to consult your situation, we encourage you to contact our company. We will answer your questions and help you prepare for the implementation of the directive's principles in your organization.