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Navigating the EU Commission’s proposed pay transparency directive
14/04/2021
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Gender pay equality
Authors
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Louise Skinner
Louise Skinner is a partner at Morgan, Lewis & Bockius 
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Will Malin
Will Mallin is an associate at Morgan, Lewis & Bockius

On 4 March 2021, the European Commission presented a proposal for a new directive on pay transparency to ensure that women and men in the EU receive equal pay for equal work or work of equal value. The directive aims to strengthen pay transparency and enforcement mechanisms across the EU.

Some EU member states already have certain gender pay transparency measures in place. For example, Austria, Belgium, France, Germany, Italy, Portugal, Spain, Switzerland, Denmark, Finland, Norway, and Sweden – as well as the UK in the post-Brexit landscape – all have gender pay reporting obligations of varying stringency and content, while other jurisdictions, such as Ireland and the Netherlands, are consulting on the introduction of similar measures.

Most EU member states, however, have not introduced legislation aimed at improving pay transparency and even those jurisdictions which do have certain measures in place do not have in force the full range of measures envisaged by the directive.

The proposal, therefore, represents a potentially significant shift in efforts to achieve pay parity between women and men by introducing a harmonised set of measures to be applied universally by all EU member states. If implemented, it will have important implications for employers operating in the EU.

Why the directive is needed

The effective implementation of the fundamental right to equal pay between women and men for equal work or work of equal value remains a major challenge across the EU despite being enshrined in law. At the EU level, the gender pay gap remains at 14% and even above 20% in certain jurisdictions, such as Austria and Germany. Furthermore, gender-based pay discrimination represents a breach of an individual’s fundamental rights and social rights protected under EU law.

The European Commission also considers that pay discrimination reveals inefficiencies in the way the EU labour market operates, and risks losses in productivity by giving women the perception of a lower income, and thereby distorting women’s choice of jobs and career patterns. The covid-19 pandemic has also, in the Commission’s view, exacerbated the issue given women’s overrepresentation in lower-paid jobs that have been most negatively affected during the crisis, for example in the hospitality, retail, and care industries.

Directive’s key elements

The following summarises the directive’s key measures:

  • Equal work and work of equal value – Member states shall take necessary measures to ensure that employers are required to have pay structures ensuring that women and men are paid equally for the same work or work of equal value;
  • Pay transparency for jobseekers – A requirement for employers to proactively indicate the initial salary or salary range before any interview; and a prohibition on employers asking prospective workers about their pay history;
  • Pay transparency and career progression – A requirement to make accessible to workers a description of the gender-neutral criteria used to define their pay and career progression;
  • Right to information – Workers shall have the right to receive information on their individual pay level and average pay levels, broken down by sex, for categories of workers doing the same work or work of equal value. This requirement will include an annual obligation for employers to inform workers of this right;
  • Gender pay gap reporting – Employers with at least 250 workers will be required to publish certain information relating to gender pay disparities; and
  • Joint pay assessment – A requirement for employers to carry out a pay assessment where pay reporting reveals a difference in average pay between female and male workers of at least 5% in any category of workers doing the same work, or work of equal value that has not been justified.

The directive would also require member states to provide effective judicial procedures, including the right to uncapped compensation reflecting the full recovery of back pay, bonuses or payments in kind, lost opportunities and moral prejudice.

Member states will be expected to introduce rules prescribing penalties for infringements at levels ensuring real deterrent effect with additional penalties for repeated infringements.

Potential impacts and next steps for employers

The directive will likely create challenges for employers operating in the EU, including:

  • Compliance costs and increased administrative burden – Many employers will have to consider whether existing systems can 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;
  • The meaning of “work of equal value”Employers will need to assess what constitutes “work of equal value” in different jurisdictions. Member states will be required to develop tools or methodologies to allow employers to assess and compare the value of work. However, this term is not defined in the directive, nor is it defined uniformly across national legislations. Uncertainties of interpretation and application may remain; and
  • LitigationEmployers should note that there have been several high-profile equal pay cases in Belgium, France, and the UK, 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.

Although the directive is unlikely to come into force before late 2024, companies that begin considering 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.

The first step employers should consider in this context is ensuring that their payroll systems and job descriptions are sufficiently granular to allow responsible personnel to more easily comply with pay transparency obligations.