Pay Transparency: How are changes in the EU likely to impact UK employers now and in the future?

The EU Pay Transparency Directive came into force on 7 June 2023, introducing new obligations on employers to disclose salaries at the point of recruitment, comply with employee requests for pay data, publish gender pay gap statistics and face compulsory audits and penalties where unjustified discrepancies come to light. EU Member States have until 7 June 2026 to implement the Directive into their own law.

Whilst the Directive will only directly apply to EU Member States, and non-EU employers who employ people in the EU, the Directive will undoubtedly raise expectations of pay transparency, both across Europe and into the UK, and could increase pressure on the UK Government to legislate to match the new standards of pay transparency set by the EU.  

Regardless of if or when there are legislative changes in the UK, the Directive is expected to be a catalyst for increasing obligations on UK employers. With this in mind, forward thinking UK employers should now be assessing how these changes might impact their organisation and begin planning their approach to meeting new standards of pay transparency.

Obligations on affected employers

When the current UK regulations on gender pay gap reporting were introduced in 2017, the UK was considered a legislative trailblazer, innovative and at the forefront of advancements in pay transparency. 

The EU has now taken a significant leap forward, introducing more onerous requirements on employers when compared with the current UK regime.

Pre-employment, the Directive requires salary transparency at the point of recruitment and introduces a ban on asking candidates about pay history. 

The obligations during employment may be briefly summarised as follows:

• The criteria employers use to determine pay levels and progression must be easily accessible to employees; 
• Employers must comply with employee requests for data on their individual pay level and average pay levels, broken down by sex, for workers doing the same work (or work of equal value) as them; and
• Employers with a workforce of over 100 employees will be required to publish detailed gender pay gap statistics.

Enforcement and consequences

• In certain circumstances (for example where the average pay gap is at least 5% in any category of workers) the employer will be required to conduct a compulsory joint pay assessment encompassing the whole workforce; 
• Member states must grant national courts enhanced enforcement powers which include the ability to impose recurring penalty payments on employers, order injunctions and to award uncapped damages in favour of claimants; and 
• In pay discrimination cases, the Directive shifts the burden of proof from employee to employer. 

Whilst gender pay gap reporting is no longer a novel concept to UK employers, the pre-employment obligations, rights granted to employees to request pay data and the extent of gender pay gap reporting go beyond the scope of current UK legislation, as do the enforcement mechanisms.

The key differences in relation to gender pay gap reporting are that:

• The pay gap between male and female workers by category of worker, broken down by ordinary basic salary and bonus and other variable pay, must be reported; and 
• As of 2031, this reporting obligation will apply to employers with 100 or more workers, whereas the UK reporting requirements apply to employers with 250 or more employees only.

Background to the Directive and moving beyond gender 

The principle of equal pay for equal work, which we are well used to in the UK (first brought in in the 1970s!), is the key driver behind the Directive which aims to combat pay discrimination and help close the gender pay gap in the EU. Pay discrimination has been identified as one of the key obstacles to achieving gender pay equality but is often thought to go undetected due to a lack of pay transparency. 

Nevertheless, the concept of equal pay for equal work can naturally extend beyond the differences in pay associated with gender. In recent times, we have also seen employers voluntarily adopting greater pay transparency with reference to ethnicity, disability, sexual orientation and socio-economic background. The UK Government has published guidance on voluntary ethnicity pay reporting. 

In the same spirit, the Labour Party Conference and Labour National Annual Women's Conference (7-11 October 2023) this year saw the Labour Party set out various proposed changes to workers’ rights that it would seek to introduce if elected to power, encompassing steps towards pay transparency beyond just gender pay gap awareness and reporting. Although not going so far as the steps taken by the EU, the Labour Party’s intentions include:

• The introduction of mandatory disability pay gap reporting for larger businesses;
• The introduction of a new Race Equality Act to tackle structural racism, including the issue of low pay for ethnic minorities, with fines for organisations not taking appropriate action on pay data;
• Taking action to make faster and more meaningful progress on the gender pay gap; and 
• The implementation of provisions in the Equality Act requiring political parties to publish anonymised candidate diversity data, and the socio-economic duty on certain public bodies.

What this means in practice 

The EU Pay Transparency Directive establishes a new benchmark for pay transparency. The war for talent and employee expectations will inevitably be impacted as will the expectations of shareholders and clients, who are increasingly choosing to work for/do business with companies according to their Environmental Social and Governance (ESG) strategy, which will include increasingly higher expectations on pay transparency going beyond the present mandatory reporting requirements.

Member states will be required to implement the provisions of the Directive by 7 June 2026, meanwhile, employers with operations across Europe, but not exclusively the EU, may choose to adopt the provisions of the Directive across all European operations in order to maintain consistency. 

UK employers who may consider themselves unaffected by the EU legislative change would be well advised to view this as an international trend towards transparency, that is likely to impact their ability to remain attractive to the best talent, as well as clients and investors (where applicable).

The commercial advantages of pay transparency are already being observed, for instance, job posts that include salary information tend to attract more applicants. The UK Government’s pay transparency pilot scheme, as announced on 8 March 2022, encourages organisations to include salaries in all job advertisements; recognising that a lack of transparency at the point of recruitment is a key concern and contributor to pay inequality. Moreover, workplaces that take an equitable approach to pay are associated with better employee engagement and retention, translating into improved productivity, and with that, improved profitability. 

Nevertheless, taking steps towards pay transparency initially requires employers to recognise their own shortcomings and, particularly in the context of the Directive, prepare to be scrutinised on the basis of the findings. Inevitably, unjustifiable pay discrepancies risk damaging workplace morale and increasing employee turnover. Employers preparing for the provisions of the Directive will also need to address certain logistical challenges, such as finding the best way to categorise staff in an appropriate manner to run the data required to be disclosed.

Looking ahead, the strengthening of the right to equal pay through pay transparency will likely be accompanied by other challenges, for instance, we may see salary stagnation if employers become reluctant to award pay increases out of concern for their pay gap statistics. Recently, in Germany, the Federal Labour Court indicated that a negotiated increase in salary by one employee can be the basis for an unequal pay claim. On the facts, a female employee was held to be entitled to the same fixed remuneration as her male colleague, who had negotiated his better salary. The concept of salary stagnation can be seen to interplay with the German Federal Labour Court’s decision, in that the decision may potentially disincentivise employers from engaging in salary negotiations, which may in turn have a detrimental effect on employee retention. This serves to illustrate the types of challenges that may accompany the move towards greater pay transparency in the EU, and internationally. 

Consequently, employers are urged to keep an eye on this changing landscape and encouraged to self-evaluate their practices ahead of the changes we may see in the UK in coming years, with due regard to the benefits that transparency can bring, as well as the challenges. 

And finally, as we saw in relation to the gender pay regulations being brought in the UK, employers should not wait to take steps to deal with these issues until the law forces them too.  If employers start taking steps now, in relation to issues which can take years to resolve (or to reduce pay gaps), they will be far better set for when the law does (inevitably) become more demanding.

A copy of the EU Pay Transparency Directive can be accessed here.