EU Pay Transparency Directive and the gender pay gap – will the UK see the ripple effect?

In 2023, women continue to earn, on average, significantly less than men in the labour market.

This differential is known as the gender pay gap and is driven by a variety of factors, including:

• Occupational segregation – women are more likely to work in lower paid sectors such as care, health and education.
• Lack of female representation in leadership roles due to “glass ceilings,” barriers in career progression, discriminatory policies, practices and unconscious bias.
• The unequal distribution of caring responsibilities. It is estimated that the systemic disadvantages that affect women once they become mothers known as the “motherhood penalty” account for a large part of the gap. This is borne out by the fact that the gender pay gap becomes more pronounced with age. It is no coincidence that it increases significantly between the ages of 30 and 40, when many women leave the workforce temporarily to have children, and then struggle to reach parity with their male colleagues.

 

The EU addresses the gender pay gap

Gender inequality is prevalent in workforces around the world, but fortunately the negative social and economic impact of leaving the issue unaddressed is widely recognised. There is a growing appetite for change in many countries. In a bold move, Europe is leading the way in tackling the gender pay gap through pay transparency regulation, with the aim of promoting fair pay practices and employer accountability. The Pay Transparency Directive “the Directive” which came into force this summer, creates new gender pay gap reporting obligations across all 27 members states throughout the EU. It strives to outlaw discriminatory practices, build on and strengthen existing regulation and reduce the threshold for mandatory reporting to incorporate smaller employers.

In recent years, the importance of gender equity has gained traction and there is already a plethora of gender equality legislation in place across member states, for example:

• In Ireland, gender pay gap reporting has been obligatory since the introduction of the Gender Pay Gap Information Act 2021 for employers with 250 or more employees. In the next two years, the employee threshold will reduce to 50.
• France requires employers with 50 or more employees to calculate a gender equality score.
• Germany requires companies employing over 500 people to produce a management report setting out measures taken to ensure pay equality.
• Spanish employers are required to keep registers of pay information and gender and include a statement explaining the reasons for pay differentials where the gender pay gap is 25% or more.

The new Directive strengthens the measures already in place and will provide consistency across member states. It initially applies to companies with an employee threshold of 150 or more employees which will reduce down to 100 plus employees, within the next four years.

 

Other key measures to promote pay transparency and equal pay

In addition to the introduction of gender pay gap reporting requirements, the Directive also provides for the following progressive measures:

• Job applicants will have the right to receive information on starting salary or pay range before interview;
• Employers are prohibited from asking candidates about their pay history and existing salary;
• Employees can ask for information about their pay level and average pay for employees doing the same role or work of equal value; and
• Employers are required to make information about pay, pay details and opportunities for promotion easily accessible.

Crucially, these measures will apply regardless of the size of the employer.

 

Pay Transparency Directive remedies and enforcement

Importantly, the Directive will impose punitive measures on employers with a gender pay gap of more than 5% if it cannot be objectively justified by gender-neutral criteria. The employer has six months to rectify the gap, and a failure to do so will trigger a joint pay assessment, and a comprehensive equal pay audit, which must be undertaken in consultation with employee representatives.

This is likely to include a detailed assessment of the relevant genders in each employee category and the reason for pay differences, including the effect family leave has on pay. The results must be published to all employees.

A joint pay assessment will not be a quick or easy process for employers and will involve unwelcome scrutiny and time and resources, which they will wish to avoid.

Following the joint pay assessment, an employer will have to address the gap within a “reasonable” period of time.

 

How employers can prepare for the new law

Due to the significant implications of the Directive, multi-national and global employers with subsidiaries in the EU should already have this issue firmly on the boardroom agenda. Whilst member states have until 2026 to implement the Directive, obtaining the data as early as possible ensures that companies have sufficient time to analyse and address any potential issues.

It is also important that companies with operations across member states ensure that they continue to comply with national laws that may be stricter than the Directive.

 

Pay Transparency Directive for UK employers

The UK is, of course, no longer part of the EU and, therefore, not governed by its new legislation.

UK employers are already required to report and publish gender pay gaps if they employ over 250 employees, but the existing legislation lacks the powerful enforcement mechanisms as set out in the Directive. Currently, there is no obligation to remedy pay gaps or increase pay transparency.

However, with the glacial pace of reduction in the UK’s gender pay gap, increased focus on diversity and equality and societal pressure, it is highly likely that the UK government will be heavily influenced by the more punitive measures introduced by the EU in any future legislative developments.

Of course, the sole driver for businesses should not be the risk of future litigation or legislation. Proactive employers will already be focused on promoting gender equality and transparency in accordance with their Environmental Social and Governance “ESG” strategy and reviewing their compensation, recruitment, and promotion policies to ensure they are unbiased and equitable for all.

Those employers who recognise the strategic advantage that comes as a result of fostering an inclusive and diverse workforce will reap the rewards of increased recruitment, retention, employee engagement and the beneficial effect on productivity and profitability.

 

Need advice and assistance?

We work with businesses to develop Diversity and Inclusion strategies, analyse and prepare gender pay gap and ethnicity pay gap reports, identify areas for improvement and support with implementation. Our team can review your policies and advise on employment law matters, relating to gender equality. Please contact Claire Taylor-Evans, Senior Associate on [email protected] for further information.