The EU Pay Transparency Directive Is a Gamechanger
This article was co-authored by Helena Almeida, Vice President and Managing Counsel, ADP.
The EU Pay Transparency Directive requires detailed pay transparency for all EU employees and compensation and pay gap reporting by EU employers with at least 100 employees. Organizations with EU employees should start now to understand their pay practices and develop the information about compensation required by the Directive.
The EU Pay Transparency Directive takes a comprehensive approach to pay equity, requiring detailed pay transparency for all EU employees as well as compensation and pay gap reporting by EU employers with at least 100 employees.
Background
The EU Universal Declaration of Human Rights (quoted in the Directive) includes "the right to equal pay for equal work, to free choice of employment, to just and favourable conditions of work, and to just remuneration ensuring an existence worthy of human dignity." According to 2021 Eurostat data, on average, women in the EU earn 87 percent of what men earn. Because pay disparities can add up over time, the value of women's pensions is just 70 percent of men's.
In 2023, to address these issues, the EU issued its Pay Transparency Directive, which requires each member state to pass, implement and report upon pay consistent transparency laws by June 7, 2026. In doing so, member states are free to establish additional requirements for pay transparency if they align with the goals of the Directive.
While the Pay Transparency Directive specifically focuses on gender-based pay equity, it acknowledges its additional direct or indirect intersections with forms of pay discrimination based on other protected factors. In developing their own laws, member states may, but are not required to, establish pay gap reporting for factors besides gender, such as race, ethnic origin, religion, disability, age or sexual orientation.
Pay transparency requirements
These requirements apply to all EU employees and job applicants. Employers must be prepared to explain to employees the criteria they use to determine pay, job levels, salary bands, raises and career progression, using objective and gender-neutral criteria.
For job applicants, employers must provide the initial pay or pay range for the role in a way that allows "informed and transparent" pay negotiations, through a published job posting or prior to the job interview. The Directive also imposes a salary history ban, meaning employers also can't ask applicants about their past or current salary.
Employees are also entitled to ask for and receive additional data about the employer's compensation practices, including average pay levels by gender, for all jobs producing work of the same type or of equal value. Finally, the Directive prohibits pay secrecy, forbidding the inclusion of pay confidentiality clauses in employment contracts and establishing the legal right of employees to discuss pay among themselves.
Pay reporting requirements
To satisfy the Pay Transparency Directive's comprehensive requirements, certain employers must report gender pay gaps along with detailed data on pay and demographics.
This means EU employers must perform pay equity audits and show regulators the results. Employers must report 1) the mean and median gender pay gaps for both base salary and variable pay, 2) demographic data on the percentage of men and women receiving variable pay and 3) a gender breakdown across four pay bands, from lower to upper.
The employer must investigate the reasons behind any pay gap of 5 percent or more, and remediate if the gap cannot be justified on an objective, nondiscriminatory basis. If, after six months, the employer has not justified, adjusted or corrected the pay gap, they must also conduct a pay assessment alongside employee representatives, either explaining the gap based on nondiscriminatory factors or developing and implementing a plan to close it.
The pay reporting requirements apply to employers with at least 100 EU employees, and deadlines are staggered based on size. Employers with 250+ employees must begin reporting 2026 data in 2027. Employers with 150-249 employees start up with annual reporting in 2027 and must report every three years. Employers with 100-149 employees will begin reporting 2030 data in 2031 and then report every three years. Reporting is optional for employers with less than 100 employees.
What it means for employers
Though your deadline may not be imminent, organizations with EU employees should start studying their pay practices and developing and organizing the compensation information required by the Pay Transparency Directive. Be prepared to explain 1) why people earn what they do, 2) your objective criteria for raises and promotions and 3) career paths within the organization. These requirements apply to all employers with any number of EU employees.
Organizations with at least 100 EU employees should also start preparing for pay data reporting. Ready yourself to compare work based on skills, effort, responsibility and working conditions and objectively explain any pay gaps related to gender.
The EU Pay Transparency Directive is a gamechanger. Employers will need to not only recognize and understand differentiations in pay equity in their organization, but also explain and justify their practices to both employees and regulators.
