Breaking the Silence: EU Directive Requires Companies to Reveal Pay Data

UPDATE:

The EU Directive on pay transparency was adopted by the EU Parliament on March 30, 2023, and the EU Council April 24, 2023. On May 17, 2023, it was published on the EU’s Official Journal and will come into force 20 days later, on June 6, 2023. EU member states will have until June 7, 2026, to transpose the provisions of the EU Directive into local law.

The overview set out in our previous Insight has not changed. That said, we just wanted to highlight some additional provisions in the new EU Directive:

• Right to Information: Employers would be required to inform their employees - on an annual basis - of their right to receive the information from their employer on their pay level and on the average pay levels, broken down by sex, for categories of employees performing the same work or work of equal value, and of the steps that they would need to take to exercise that right.
• Pay Gap Reporting: While the EU Directive provides headcount thresholds for employers to publish information on the pay gap between men and women, member states may, as a matter of national law, require employers with less than 100 employees to publish information on pay. Therefore, as member states transpose this directive into local law, it will be important to track any deviations on these thresholds.
• Right to Compensation: The EU Directive provides member states with discretion to determine the appropriate compensation, or reparation, for employees who were impacted by the pay gap. This includes full recovery of back pay and related bonuses or payments in kind, compensation for lost opportunities, non-material damage, etc.
• Burden of Proof: While a claimant generally has the burden of proving a claim against a defendant, under the new directive, if an employee were to bring a claim alleging that they have been wronged due to the principle of equal pay, the EU Directive provides that the employer would bear the burden of proving has been no direct or indirect discrimination in relation to pay. While this may appear to give employees an incentive to bring an equal pay claim without having to provide evidence, if the employer prevails and the court determines that the employee did not have reasonable grounds for bringing a claim, the employee may be required to pay the employer’s legal costs.

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March.07.2023

In an effort to increase pay equity and close the gender pay gap across all levels within a company, there is a growing trend among lawmakers across Europe to require employers to disclose compensation data. These efforts go beyond already existing laws that prohibit discrimination and guarantee equal pay. While such legislation puts an onus on companies to meet additional and varying compliance requirements, the goal is to drive the workforce toward general pay equity and elimination of bias, as well as assist companies in attracting and retaining talent.

The United Kingdom was one of the pioneers in this landscape—introducing a comprehensive gender pay gap reporting requirement in 2017. Under the UK’s gender pay gap laws, employers with 250 or more employees must publish gender pay gap data based on a “snapshot” of pay data as of the previous year. In a similar fashion, Ireland’s Gender Pay Gap reporting legislation, which became effective in 2021, required reporting for the first time in December of 2022 for employers with 250 or more employees and will become applicable to employers with 150 or more employees in 2023.

Additionally, a number of European countries such as France and Belgium have their own gender pay gap reporting mechanisms, while other countries, such as Spain and Sweden, do not have outward reporting requirements but instead mandate ongoing compliance to monitor equal pay and treatment. By way of example, Swedish law requires all companies with at least 10 employees to conduct annual salary reviews every year to identify any gender pay gaps and create a written action plan for achieving equal pay.

While legislative developments continue to arise across Europe, each jurisdiction has taken their own approach, therefore making overall compliance difficult for employers. Further, it is currently not feasible to adopt one “global” approach to compliance, as each jurisdiction’s laws contains variations on: (i) what headcount triggers a reporting obligation, (ii) what compensation elements need to be considered, (iii) what data must be disclosed, and (iv) what corrective measures must an employer take, if any, to work towards closing that gap and the extent of ongoing compliance requirements to monitor equal pay and treatment.

Notably, on March 2021 the European Commission proposed a directive to strengthen the application of the principle of equal pay for equal work or work of equal value between men and women through pay transparency and enforcement mechanisms (the EU Directive on Pay Transparency). While the EU Directive has yet to be finalized, in December of 2022, the EU Council and the EU Parliament reached a political agreement, and therefore it should be a matter of time before the two bodies formally approve.

If approved as currently agreed, one of the key measures would require employers to publish information on the pay gap between men and women—initially this would apply to employers with only 250 employees, but this would eventually apply to employers with at least 100 employees. Further, where pay reporting reveals a gender pay gap of at least 5 percent, employers may be required to carry out a pay assessment, in cooperation with workers’ representatives.

Some other key measures include:

• Employees’ right to request information from their employer on their pay level and on the average pay levels, broken down by sex, for categories of employees performing the same work or work of equal value.
• The requirement for employers to provide information about the initial pay level or its range in the job vacancy notice or before the job interview.

Once approved, each member state has three years from its entry into force to transpose the directive into national law. In the meantime, there have been some anticipatory proposals from EU member states to adopt legislation similar to that of the EU Directive, as seen in Poland and the Netherlands (both of which are currently still pending).

Ultimately, since not all member states will adopt these measures at the same time and there is some flexibility for each member state to adopt variations to these measures, it is important to monitor the adopted law by each member state. It also remains to be seen whether member states with existing reporting requirements will alter or modify them to harmonize with the EU Directive or whether the new measures will be made in addition to already existing requirements.

In any case, while the EU Directive leaves room for interpretation of approach among the member states, the directive will likely drive consistency across the region including to those countries who are not EU member states.

On a further move towards achieving gender equality in the workplace, the EU Parliament formally adopted a new EU directive on gender balance on corporate boards in November 2022. Under this directive, large (note: small and medium-sized enterprises are currently excluded) listed EU companies will need to have at least 40 percent of nonexecutive directors or 33 percent of all board of directors (executive and nonexecutive directors) be of the underrepresented sex—by June 30, 2026.

Once the directive enters into force, member states will have two years to implement its provisions into national law. For member states that already have similar measures in place, they will have an extension of time before having to adopt the measures under this new directive. As each member state adopts these provisions into local law, it will be important to track and see if they include any additional parameters, including what type of dissuasive penalties may be imposed for non-compliance.

These two directives as well as the flurry of new legislation across the region can help drive companies towards furthering their diversity initiatives and closing the pay gap between men and women. However, they can also pose compliance challenges for companies that have employees across multiple jurisdictions.  Orrick’s Global Employment team can help your company stay ahead of the curve and play an active role to assess the applicability of pay equity and transparency requirements relevant to your company and establish consistency in approach to best achieve compliance.