The European Union adopted the Pay Transparency Directive with the aim of harmonising member states with a common set of standards, improving efficiency, achieving the goals of the gender equality strategy and sustainability goals by reducing the gender pay gap and the related gender gap in pensions.
The directive was adopted by the Parliament on March 30, 2023, and by the Council of the European Union on April 24, 2023. It was published in the Official Journal of the EU (OJEU) on May 17, 2023 and entered into force twenty days later.
EU member states need to incorporate the Directive into national laws by June 2026 and companies need to prepare for new wage transparency requirements.
By 2026, every company in the EU member states will have to create the prerequisites for the introduction of a salary transparency system in accordance with the EU Directive on salary transparency.
Women in the EU have an average 13% lower gross hourly wage than men[1]. Through a series of researches and analyses, three main factors of the average lower salary of women were determined:
Although women in all countries of the European Union are more educated than men, there are fewer of them in higher management levels, in executive and supervisory boards, and in general in higher paid, executive functions.
In the long term, the difference in wages has a negative effect on the reduction of the quality of life of women as well as on the increased risk of poverty, especially in the third age when the gender gap in pensions amounts to 30%[2].
The Pay Transparency Directive was created to reinforce the principle of equal pay for work of equal value through greater transparency and better enforcement. The Wage Transparency Directive is linked to three other European Union Directives that lead to the realisation of the European Union’s gender equality strategy and the realisation of the sustainable development goals of the United Nations.
The Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose the percentage of the pay gap between women and men and to disclose the total ratio of the highest paid individual’s compensation to the average total compensation for all employees.
The directive on women in boards requires that companies listed on stock exchanges in EU member states ensure 40% of representatives of the underrepresented gender in supervisory boards, or 33% on average in supervisory and executive boards. In order to achieve the goals of gender balance in the boards, it is necessary to set up transparent systems of recruitment, talent management and promotion, with preference given to candidates of the represented gender.
EU member states should incorporate the Directive into national laws by June 2026 and set penalties for non-compliance, either financial or annulment of decisions on the appointment of board members. Companies that do not meet the targets of the Directive on women on boards will be required to submit a report detailing the reasons and attach an action plan to reduce gender inequality in management positions.
The aim of the Directive on the balance of private and professional life is to establish a more equal division of family responsibilities between men and women. To help achieve this goal, the Directive introduced paternity leave of 10 days in addition to the already existing division of parental leave between parents – four for mom and four for dad, two months of which are non-transferable. Through legal adjustments, additional days off for the care of family members were introduced, as well as the possibility of flexible work for working parents until the child is 8 years old. The intention of the Directive on the balance of private and work life is to change the law in addition to changing the culture so that men and women have the same opportunities in the working environment. The need for change is best illustrated by the data on 96% of fathers in Croatia who still do not use their right to parental leave, thereby losing children, fathers and families.
The implementation of the Wage Transparency Directive will be manifested on four levels.
Access to information
Employers will be required to provide information to interested parties about the starting salary or salary range for open positions and will not be allowed to ask candidates about their past salaries. Employers cannot prohibit employees from disclosing their salary details using confidentiality and salary non-disclosure clauses.
Employers will have to provide information on how pay is determined, promoted and managed and must disclose details of criteria for career progression which must be objective and gender-neutral. Any differences in pay will need to be linked to objective criteria such as performance or market conditions.
Tools for comparing and assessing salary levels will have to be based on gender-neutral criteria and include gender-neutral evaluation systems according to job classification.
The introduction of this Directive will represent significant changes for employers who do not have systematisation of jobs and the corresponding salary classification.
Employees will receive a new lever of insight into average salary levels with the additional right to inquire about the average salary level by gender for categories of employees doing the same job or work of equal value.
Mandatory report
Companies with more than 250 employees will have to submit a report on the gender pay gap in their organisation every year.
For smaller organisations, the reporting obligation will be implemented every three years, while according to the Directive, organisations with less than 100 employees will not have any reporting obligation. However, the effects of the Equal Pay Directive can also be expected on organisations with a smaller number of employees due to the sustainability reporting requirements of large corporations that, in addition to their management systems, must also take into account the responsibility of their suppliers. Small companies will therefore also have to adapt to the new equal pay regulation in order to be qualified suppliers to large systems.
If the report finds a wage difference of more than 5% that cannot be justified by objective, gender-neutral criteria, companies will have to take action through joint wage assessments carried out in cooperation with workers’ representatives.
Legal penalties
In the case of wage discrimination based on sex or gender, the employee will be entitled to compensation, including a full refund of back wages and related bonuses or similar payments.
The employer will have to prove that he has not violated the rules of the EU Directive on equal pay and salary transparency.
The Directive on salary transparency also provides for penalties that should be effective, proportionate and restrictive for employers in terms of violations of the Directive, which will be supported by fines.
A broader perspective of the Pay Transparency Directive
The directive also includes intersectional discrimination, which is defined as a combination of multiple forms of inequality or disadvantage, such as gender and ethnicity or sexuality, and consideration for the needs of employees with disabilities.
Using gender-neutral tools and criteria for comparing pay levels, including gender-neutral job evaluation and classification systems, means ensuring a clear understanding and identification of equal work across the business.
What are the important factors in salary determination and salary progression? How are final decisions about salaries and promotions made throughout the organisation?
Decision-making guidance for managers will need to be made available to employees to reduce the risk of line manager bias.
The EU requires a joint assessment of wages and the creation of an action plan if the wage gap between the sexes is greater than 5 percent.
Examine the current gender pay gap and consider current employment practices.
All pay differences must be linked to objective performance criteria. A difference in pay can only be justified if there is a permanent and demonstrable difference in performance between the two people.
Using this approach implies that you have taken the necessary steps to demonstrate consistent assessment of job performance with a documented process conducted by trained assessors (managers).
Employers often use the market conditions argument to justify different salaries for jobs of the same level. In these situations, the employer must prove the existence of such conditions through market data.
Check your data is up-to-date and give your experts confidence in the data and how they work with the data when making award decisions.
In order to avoid dissatisfaction and disengagement of existing employees due to higher salary levels for similar jobs they already perform, employers will have to set up a strong and transparent systematisation of work jobs with clear pay grades and reward strategies.
The good news is that a large number of companies already meet a significant number of the criteria from the list above. If you yourself want to establish your leadership position or be sure of your readiness for the new Pay Transparency Directive, join the certification process for INC.Q EQUAL PAY, the first Gender Pay Equality Certificate based on scientific methodology and data that has been analysed for more than 10 years.
Be prepared for the changes to come and take your business to the next level.
