Will pay remain a confidential conversation?

Will pay remain a confidential conversation?

The Gender Pay Gap reporting obligations, introduced in the UK in 2017 served to bring pay disparity between men and women firmly into the spotlight. Large organisations are now required to analyse their data and report publicly annually. Whilst this requires more pay data to be made public than ever previously, power sits firmly in the hands of employers to control the publication of information and the narrative around this. The EU Pay Transparency Directive, which was approved by the Council of the EU on 24 April 2023 and published in June 2023, has a much greater focus on empowering employees. Although not directly applicable in the UK, changes across Europe in this area are likely to drive employee expectations more broadly. The passing of this Directive begs the question as to whether pay in the private sector will soon bear a much greater resemblance to the pay banding of the public sector, and what organisations should be thinking about now in advance of the Directive’s implementation.

What are the key provisions of the Directive?

The Directive’s stated aims are to: (i) empower employees to enforce rights; (ii) strengthen transparency; (iii) improve public understandings; and (iv) enhance enforcement.

Employers will not be precluded from paying employees 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. However, they will be required to have analytical tools / methodologies for supporting the assessment of the value of work and establishing pay structures.

Access to information

“Can you send me a breakdown of average pay for Directors in Sales covering Europe?”

“I’d like to see how my pay compares to the other VPs in my group.”

“Before I consider applying for this job, I’d like to be provided with the pay scale.”

The Directive will give employees the right to request information on pay levels (both individual & average) for employees performing the same/equal value work to them. Employers will have to provide this information within 2 months. Not only will this right be introduced but employers will be required to communicate the fact that this right exists to employees annually. Although employees will be prohibited from using any information provided to them for any other purpose other than exercising their right to equal pay, they cannot be prevented from disclosing their pay (i.e. to other employees).

Reporting

The Directive introduces staggered reporting requirements for organisations depending on their size. Employers with 250 or more employees will be required to report annually from June 2027 on their: gender pay gap; bonus pay gap; median gender pay gap; median bonus pay gap; proportion of men & women receiving bonuses; proportion of men and women in each quartile pay band and gender pay gap between employees by category (this info only has to be reported to employees and employee' representatives).

Employers with 150-249 employees must also report in June 2027, but the obligations will then be for reporting every three years thereafter. Employers with 100-149 employees must first report in June 2031, and then every three years thereafter. Employers with fewer than 100 employees will have no obligation to report, but may report voluntarily.

It is worth noting that some EU countries, such as France, already have reporting obligations applying to companies with 50 or more employees.

Joint Pay Assessment

Where an organisation identifies a 5% pay gap which is not justified on the basis of objective, gender-neutral criteria and which is not remedied within 6 months a joint pay assessment must be prepared. This assessment must consider the reasons for differences in pay and measures which could be introduced to address those differences. The Directive requires employers to remedy unjustified differences in pay within a reasonable period of time, although this is not defined.

Again, some EU countries, such as France, already apply scrutiny to companies with poor results from the reporting exercise, by imposing a mandatory action plan and remedial measures, and sanctions in case of failure to improve after several years.

Access to justice

Member states must ensure that employees have the ability to enforce their rights to equal pay through legal proceedings, with the potential for support from associations, equality bodies, and employee' representatives. Employees will have the right to uncapped compensation for loss and damage sustained (which may include full recovery of back pay, related bonuses and compensation for lost opportunities, plus interest) and three years in which to bring their claims. Courts will also have the ability to make orders to stop infringements or take measure to ensure that rights / obligations are applied. On top of that member states may introduce penalties (fines) for non-compliance with the Directive which should act as a deterrent to employers.

As is the case under section 136 of the Equality Act 2010 the reverse burden of proof will apply to cases brought. Employees will be required to demonstrate a prima facie case, after which the burden of proof will be on the employer to prove that no discrimination took place.

Scope

The protection offered by the Directive extends to prospective employees, who will have the right to receive initial pay ranges for roles at the application stage. At the same time, employers will be prohibited from asking an applicant about their own pay history.

The Directive is intended to have broad application. When it comes to assessing equal work or work of equal value employers will be required to consider this across multiple group entitles where a pay levels are dictated by a single source in the group.

What happens next?

Now that the Directive has been adopted, member states will have three years to implement it in national legislation. In practice, this means that we are likely to see measures implemented in 2026, although some member states could implement measures earlier.

The impact of the Directive will depend to a large extent on employee engagement with its provisions. Set against the backdrop of focus on ESG and increased employee activism more generally we anticipate seeing a significant increase in worker involvement in addressing pay disparities, and following on from that an increase in equal pay litigation. We also anticipate that pay, not just at senior levels, but throughout organisations will become an increasing focus of senior management.

Practical tips - what should we be doing now?

Employers with a footprint across Europe would be advised to start engaging meaningfully with the upcoming requirements of the new Directive now. Employers might consider:

• carrying out a comprehensive audit of existing pay practices throughout the employment lifecycle, covering recruitment, pay progression and promotion.
• establishing whether there are existing pay gaps, particularly any at the level of 5% or greater. Evaluate whether these differences can be justified, and if so, on what basis.
• considering the underlying causes of any existing pay gaps, and the steps which could be taken to address these.
• formulating a plan/policy for future pay strategies and decision-making.
• means of handling a likely rise in employee relations issues about pay. Consider approach to this and appropriate communication strategy.

Whether you just want help keeping up to date with the progress of implementation of the Directive, or would like specific advice on a deep-dive into your current pay practices, our team can ensure that you stay ahead of the curve.