The implications of the new EU legislation on pay transparency

The Corporate Sustainability Reporting Directive (CSRD), which came into force in January 2023, introduced a comprehensive set of sustainability reporting requirements, including extensive social sustainability disclosures. Complementing this, the EU Pay Transparency Directive (EU PTD) adopted by the European Parliament in March 2023 strengthens the focus on pay equity, adding further depth to social reporting obligations.

This article marks the beginning of a seven-part series dedicated to delving into the EU PTD. In this first article, we explore what the European Parliament is likely aiming to achieve with the Directive and provide insights on how employers can navigate the topic to ensure positive outcomes for all stakeholders involved.

In March 2023, the European Parliament adopted the EU PTD, which mandates EU Member States to incorporate the Directive into their national laws with compliance starting in 2026 and reporting in 2027. This landmark legislation introduces stringent requirements for pay transparency to promote gender equity.

However, it’s important to note that the Directive didn’t come out of nowhere. Many European countries (e.g., France, Spain, Sweden, and non-EU members such as Switzerland and the UK) have existing legislation that already require employers to ensure pay transparency and address the gender pay gap. The issue is that, as it currently stands, these pieces of legislation are fragmented and inconsistent in approach. For instance, the method to calculate the gender pay gap differs from country to country, rendering it difficult to make meaningful comparisons. Another issue with the current status is the information imbalance between employers and candidates during the recruitment process. This imbalance tends to place candidates at a disadvantage, leading to potential pay discrimination and potentially perpetuating the gender pay gap. The EU PTD aims to build on some of the best practices of existing pay transparency legislation in Member States while addressing these issues.

It’s also worth noting that the objectives of EU PTD intersect with those of CSRD, which addresses environmental, social, and governance reporting. Under the Social ‘Own Workforce’ (S1) reporting category, the CSRD includes pay equity elements, though these are relatively simplistic compared to the EU PTD. The directives complement each other in their objective to promote greater transparency, accountability, and equality within organisations.

Building on the legislative context mentioned above, we’ll delve deeper into what the EU PTD requires employers to disclose and what it’s likely aiming to achieve in our view. The following are key provisions of the Directive. 

Based on years of experience supporting clients in bringing to life their commitment to equal pay and equal opportunities, our view is that treating the EU PTD solely as a compliance exercise is likely to lead to sub-optimal results. Following only the exact “letter of the law” can pose risks to employees’ perception of fairness and have lasting effects on their trust in the employer. In effect, it’s how organisations address the requirements that is crucial.

What further adds to the challenge is that when Member States transpose the EU PTD into local legislations, it’s likely that there will be room for interpretation in how employers should address each requirement. Organisations will therefore need to navigate this ambiguity while being conscious of the pitfalls mentioned below.

If minimum compliance isn’t enough, then how should organisations start thinking about and addressing the EU PTD? It can’t be ignored that pay and pay positioning is a highly sensitive topic to both individuals and organisations. As such, the narrative and method around bringing greater transparency can’t be taken lightly. For this reason, the approach adopted by an organisation must be thorough. When thinking about what employers need to achieve and address, we have developed a model outlining 5 key elements of pay transparency to focus on:

1. Pay transparency prior to employment;
2. Proactive vs. reactive pay transparency;
3. Pay gap reporting;
4. Fair/adequate wages;
5. Culture of pay transparency

Understanding what your organisation has in place already, what to change and the consequences such transparency can lead to are clearly fundamental for minimum compliance. However, by evaluating and building your compliance structure through the lens of these 5 elements of pay transparency, the organisation will be set up for success from a broader perspective. These 5 elements will be discussed in further details throughout the article series.