The Pay Transparency Directive
A wolf in sheep’s clothing or an opportunity to enhance employee engagement and trust?
The EU Pay Transparency Directive has been finalised and it will open up a significant new area of focus for Employers, Employees and Trade Unions. Taken in combination with the EU Directive on Adequate Minimum wages and The LEEF Report on Collective Bargaining and Industrial Relations Reform, for some Employers this will represent the most fundamental shift in our employment relations (ER) system since the foundation of the State. While the overriding objective of the Directive on pay transparency is laudable some of its provisions will undoubtedly be used for other purposes in certain workplaces.
EU member states will have until 7 June 2026 to transpose its provisions into their national laws. It is likely that some, or all, of its provisions will be enacted earlier in Ireland owing to political pressure on the subject at present.
The Directive features a number of new provisions for Ireland’s employment relations system that go far beyond the current gender pay gap reporting obligations as provided for under the Gender Pay Gap Information Act 2021. The Directive will require the reporting of pay gaps by “categories of workers”, which are defined as “workers performing the same work or work of equal value”. The intention is to require employers to publish the gender pay gap between workers doing the same or similar jobs, to align with the comparison that can could be used for the purposes of pursuing an equal pay claim.
However, for most employers it will be seen as simply treating everyone like an adult and maintaining a culture of openness, along with instilling confidence that people are paid fairly, internally and competitively in the market for the work they do. If an organisation is willing to publish salaries it is more likely to be compensating people fairly and managing performance more consistently. It is also increasingly apparent that transparency is being delivered anyway through informal processes in the workplace where employees are more inclined to reveal pay details to colleagues.
Nevertheless, it will certainly force a more transparent conversation about the relative value of different roles, leading to some people challenging the rationale and managers having to justify wage differentials. It may also provide an opportunity to clarify the behaviours and outcomes that are rewarded in the organisation.
This EU development is part of an international trend towards greater pay transparency in developed economies. In the US a number of States have pay transparency laws (California, Colorado, Connecticut, Maryland, Nevada, Rhode Island, and Washington), with New York’s state wide law coming into effect in September 2023. Similar developments are taking place in Canada. In Australia, pay secrecy clauses are now banned and wider pay transparency legislation is on the horizon.
In this Article we review the Directive and identify a number of immediate actions for employers.
What is the Directive Trying to Address?
The Directive states that “The European Union gender pay gap persists, it stood at 13% in 2020, with significant variations across Member States, and has decreased only minimally over the last ten years.”
A general lack of transparency about pay levels within organisations maintains a situation where gender-based pay discrimination and bias can go undetected or, where suspected, can be difficult to prove.
It was the view of the Commission that binding measures were needed to:
improve pay transparency,
encourage organisations to review their pay structures to ensure equal pay for women and men performing the same work or work of equal value, and
to enable victims of discrimination to exercise their right to equal pay.
Importantly, this does not preclude employers from paying workers performing the same work, or work of equal value, differently on the basis of objective, gender-neutral and bias-free criteria, such as performance and competence.
The Scope is Very Broad
This Directive is to apply to “all workers, including part-time workers, workers on a fixed-term contract and persons with a contract of employment or employment relationship with a temporary agency” as defined by law, collective agreements and/or practice in force in each Member State, taking into account the case-law of the Court of Justice.
Furthermore and “provided that they fulfil relevant criteria, domestic workers, on-demand workers, intermittent workers, voucher based-workers, platform workers, workers in sheltered employment, trainees and apprentices” will fall within the scope of this Directive.
The Definition of Pay is all Encompassing
The concept of pay should comprise “not only salary, but also complementary or variable components of the pay. Under complementary or variable components, any benefits in addition to the ordinary basic or minimum wage or salary, which the worker receives directly or indirectly, whether in cash or in kind, should be taken into account. Such complementary or variable components may include, but are not limited to, bonuses, overtime compensation, travel facilities, housing and food allowances, compensation for attending training, payments in the case of dismissal, statutory sick pay, statutory required compensation and occupational pensions.”
In order to ensure a uniform presentation of the information required by this Directive, pay levels should be expressed as gross annual pay and the corresponding gross hourly pay. It should be possible to base the calculation of pay levels on the actual pay specified in regard to the worker, regardless of whether it is set annually, monthly, hourly or otherwise. The concept of pay should include all elements of remuneration due under law, collective agreements and/or practice in each Member State.
Employees are Entitled to Representation
In order to protect workers and to address their fear of victimisation in the application of the principle of equal pay, they should be able to be represented by a representative. This could be trade unions or other workers’ representatives. If there are no workers’ representatives, workers should be able to be represented by a representative of their choice. Member States should have a possibility to take into account their national circumstances and different roles concerning workers’ representation.
Job Evaluation will be Crucial
In order to respect the right to equal pay, employers must have pay structures in place ensuring that there are no gender-based pay differences between workers performing the same work, or work of equal value, that are not justified on the basis of objective, gender-neutral criteria.
Such pay structures should allow for the comparison of the value of different jobs within the same organisational structure. The value of work should be assessed and compared on the basis of objective criteria, including educational, professional and training requirements, skills, effort, responsibility and working conditions, irrespective of differences in working patterns. To facilitate the application of the concept of work of equal value, the objective criteria to be used should include four factors: skills, effort, responsibility and working conditions. As not all factors are equally relevant for a specific position, each of the four factors should be weighed by the employer depending on the relevance of those criteria for the specific job or position concerned. Additional criteria may also be taken into account, where they are relevant and justified.
The Use of a Hypothetical Comparator is Permitted
The use of a hypothetical comparator will be permitted, to enable workers to show that they have not been treated in the same way as a hypothetical comparator of another sex would have been treated. This will be important in highly gender-segregated employment markets where a requirement of finding a comparator of the opposite sex makes it almost impossible to bring an equal pay claim.
Transparency Required on Criteria to Determine Pay Levels and Pay Progression
Employers should make accessible to workers the criteria that are used to determine pay levels and pay progression. Pay progression refers to the process of how a worker moves to a higher pay level. Criteria related to pay progression can include, inter alia, individual performance, skills development and seniority.
Right to Request Information Conferred on All Workers
All workers are to have the right to obtain information, upon their request, on their individual pay level and on the average pay levels, broken down by sex, for the category of workers performing the same work as them or work of equal value to theirs. They should also have the possibility to receive the information through workers’ representatives or through an equality body. Employers are to be required to inform workers of that right on an annual basis, as well as of the steps to be undertaken in order to exercise the right. Importantly employers may also, on their own initiative, opt to provide such information without workers needing to request it.
Joint Pay Assessments can be Triggered
Joint pay assessments should trigger the review and revision of pay structures in organisations with at least 100 workers that show pay inequalities. The joint pay assessment should be carried out if employers and the workers’ representatives concerned do not agree that the difference in average pay level between female and male workers of at least 5% in a given category of workers can be justified on the basis of objective, gender-neutral criteria, if such a justification is not provided by the employer, or if the employer has not remedied such a difference in pay level within six months of the date of submission of the pay reporting. The joint pay assessment should be carried out by employers in cooperation with workers’ representatives. If there are no workers’ representatives, they should be designated by workers for the purpose of the joint pay assessment. For those employers with direct engagement models, they will need to consider how they will meet this compliance requirement. Joint pay assessments should lead, within a reasonable period of time, to the elimination of gender-based pay discrimination through the adoption of remedial measures.
Job Applicants are also Covered
This Directive also applies to applicants for employment who should receive information about the initial pay or its range to ensure an informed and transparent negotiation on pay, (such as in a published job vacancy notice, prior to the job interview, or otherwise) prior to the conclusion of any employment contract. Employers will need to ensure that job vacancy notices and job titles are gender neutral and that recruitment processes are led in a non-discriminatory manner, so as not to undermine the right to equal pay. Employers will not be allowed to enquire or proactively try to obtain information about the current pay or prior pay history of an applicant for employment.
No Upper Limit on Compensation – Significant Awards Likely for Breaches
Where an employer does not fulfil its transparency obligations and the employer cannot show that any infringement was manifestly unintentional and minor, the burden of proof will shift to the employer. In such circumstances, it will be for the employer, not the employee, to prove that there was no discrimination in relation to pay.
Compensation is expected to cover in full the loss and damage sustained and should include full recovery of back pay and related bonuses or payments in kind, as well as compensation for lost opportunities, such as access to certain benefits depending on pay level, and for non-material damage, such as distress because of the undervaluation of work performed.
Member States are advised they should not fix a prior upper limit for such compensation. However, Member States should provide for “effective, proportionate and dissuasive penalties” and such penalties should include fines which could be based on the employer’s gross annual turnover or on the employer’s total payroll.
Actions
This Directive has multiple ER and legal implications for employers and it is important to get ahead of the statutory obligations by 2026 and take proactive measures including:
Review the criteria used to evaluate roles to ensure they are fit for purpose.
If there is no mechanism in place consider introducing a robust Job Evaluation Framework. The factors (and any associated weightings) may include skills, effort, responsibility and working conditions or such additional criteria, where relevant and justified.
Document the criteria that are currently used to determine pay levels and pay progression. (Pay progression refers to the process of how a worker moves to a higher pay level.)
Take a random sample of workers and review “the average pay levels, broken down by sex, for the category of workers performing the same work as them or work of equal value to theirs.” Evaluate any exposure arising from this review.
Given the current reported Gender Pay Gap (GPG), it is likely that requests for joint pay assessments will be widespread. Ensure that in any given category of workers where the GPG is at least 5% that this can be justified on the basis of objective, gender-neutral criteria.
Review HR information currently provided to prospective Job Applicants (prepare to provide information on initial pay/range, ensure job vacancy notices and job titles are gender neutral do not enquire or proactively try to obtain information about the current pay or prior pay history of an applicant for employment.)
If you are using gender-neutral and bias-free criteria, such as performance and competence, to determine pay then ensure you have a full history of the decisions that underpin any such assessments.
In the event of circumstances arising where there is a request for a joint pay assessment, for those employers with direct engagement models, they will need to consider how they will meet this compliance requirement, within their preferred engagement model.
Finally, given that legislation is on the horizon, consider whether you should develop a ‘Pay Transparency Policy’ encompassing the above and start to provide such information directly and pro-actively prior to this legislation taking effect and without employees needing to request it either directly or via representatives.
Liam Doherty PhD | Senior Partner
Stratis Consulting
‘Strategic Employment Relations’
T: +353 (0) 1 2936748
M: +353 (0) 87 2236476
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Disclaimer: The information in this article is for general guidance only and does not constitute legal or specific case advice. The answers to specific situations will vary depending on the circumstances of each case. This is not a substitute for specific professional advice relevant to individual circumstances facing your business.
