EU Pay Directive Explained: What Payroll and HR Teams Need To Know

The EU Pay Directive is a new set of rules proposed and approved by the European Council. The goal of the directive is to reduce pay disparity and discrimination and improve access to solutions for employees across the European Union. 

The directive provides minimum requirements, objectives, and a consistent framework for EU countries and the companies therein to use in assessing and promoting pay transparency, ensuring workers receive equal pay for work of equal value, irrespective of their gender.

History and Context

Women in the EU receive 12.7% less pay than men on average, while female managers get paid 23% less than their male colleagues. Germany reports a gender pay gap of 18% with women earning less than men in 45 out of 46 sectors. In Estonia, gender stereotypes are the leading force behind a persistent pay gap of 20%.

To promote equal pay for equal work, the European Commission proposed the EU Pay Transparency Directive in March 2021. The main goals of the directive are to:

• Close the gender pay gap and eliminate direct or unconscious bias that results in unequal and discriminatory pay structures for women and men
• Strengthen access to justice for victims of pay discrimination
• Increase awareness around rights and protections relating to equal pay
• Make pay systems as transparent as possible for job seekers and employees
• Impose stricter sanctions for employers who violate the rules

After deliberations and revisions, the European Council formally adopted the directive and it entered into force on June 6, 2023. However, EU member states will have three years, up till June 7, 2026, to modify their national legislation to reflect the new rules and begin rolling out pay reporting requirements for companies.

Who does the EU Pay Directive apply to?

The EU Pay Directive applies to every private and public sector employer or company doing business in the European Union. It also covers all workers with an employment contract or relationship as defined by law. This includes part-time workers, agency workers, on-demand workers, trainees or apprentices, and fixed-term contract workers, whether working on-site or remotely.

But what if your company is registered in the UK or some other country outside of the EU? Well, as long as you have over 100 employees living in EU member states, you'll be expected to comply with the pay transparency regulations and reporting requirements for that location. 

Key Provisions of the EU Pay Directive

Let's take a look at the scope of the directive and the main rulings that employers should know.

Pay transparency 

To encourage fairness and give workers stronger negotiating power, the directive requires companies to:

• Develop precise, bias-free, gender-neutral standards for determining who gets paid what and how career progression decisions are made. They also have to make that information easily accessible to everyone
• Notify job seekers of the starting pay or salary range for open positions in the job posting or before interviews
• Ensure the titles and content of job descriptions are completely gender-neutral and recruitment processes are carried out in a non-discriminatory manner
• Desist from requesting information about candidates’ current earnings and salary history
• Give employees the freedom to discuss their pay. This means companies can no longer use non-disclosure agreements and confidentiality policies to stop employees from sharing and comparing how much they earn with others
• Provide workers with relevant information about pay levels and progression and the objective criteria used in setting them

Right to information

The directive gives employees the right to access pay information for their workplace. With this information, they can gauge whether they're being paid fairly compared to other workers performing the same duties or duties of equal value. It stipulates that:

• Employees have the right to request and receive in writing information about their pay and that of their colleagues doing the same work or work of equal value, broken down by gender
• Workers can request pay information by themselves or through representatives and equality bodies and demand further clarifications and information if the data they receive is incomplete or incorrect
• Once a request for information is made, employers must provide a detailed response within two months
• Companies must inform all employees of their rights to receive workforce pay information annually

Reporting obligations

In line with its objective of addressing pay injustices, the directive makes it compulsory for organizations to track and report pay disparities for all categories of workers doing the same work or work of equal, by gender, to the relevant authorities. Below are the necessary data to be included in the report:

• The average and median gender pay gap
• The average pay levels by categories of workers, distributed by gender 
• The ratio of female to male workers in each quartile pay band
• The ratio of female to male workers receiving complementary or variable components
• The mean and median gender pay gap in variable or complementary components such as bonuses and benefits 
• The pay gap between genders in each worker category, broken down by base salary, complementary, and variable components
• The percentage of workers who received a pay increase after returning from parental or carer's leave, distributed by gender

The reporting frequency for employers will be as follows, starting in June 2027 for the calendar year 2026:

• Organizations with 250 or more employers report annually
• Organizations with 150 - 249 employees report every three years
• Organizations with 100 - 149 employees report every three years starting in June 2031 for the year 2030
• Organizations with fewer than 100 employees have no obligation to report

Note: Overall reporting timelines and reporting mandates for companies with less than 150 employees may be subject to change at the discretion of individual EU states.

If a report shows a gender pay gap of 5% or higher between categories of workers that is not backed by objective, gender-neutral considerations, the organization has two options:

• Balance the pay scales within six months, or
• Conduct a joint pay assessment in conjunction with employee representatives to formulate a gender action plan to correct the situation in a reasonable time frame

Redress mechanisms

Under the directive, employees who face direct or indirect pay discrimination can seek legal recourse against their employer. The onus will be on the company to prove that pay differences between employees of equal status and value are non-discriminatory or objectively supported by factors like effort, responsibility, education, skills, and working conditions.

The directive states that:

• Employees are entitled to receive compensation for damages as a result of the infringement of their right to equal pay including full back pay, bonuses, and reimbursements for lost opportunities, non-material damages, and interest on delayed payments
• No one can set an upper limit on the amount of compensation owed to the employee should their rights be breached
• Workers and their representatives shall not face retaliation for exercising their equal pay rights or supporting another in their quest to exercise that right
• Member States must impose stringent and proportionate penalties, including fines on companies that fail to comply with the rules

What are the implications of the EU Pay Directive for payroll teams?

Here are some of the ways the EU Pay Directive will impact your payroll operations:

Data collection and management

The EU Pay Directive will impact how you collect, track, and store employee data. To determine your risk of non-compliance, gather the necessary information relating to employee compensation.

This includes the credentials, roles, and responsibilities of all employees, their starting salaries, pay levels, any bonuses, benefits, or pay increases they’ve received, and salary benchmarking data.

You will need to invest in the right technologies to help you shorten task completion time, minimize errors, organize collected information, and visualize historical data to track pay trends and distribution over time.

See also: Streamline Enterprise Payroll Reporting with Deel

Compliance with reporting requirements

Making a cultural shift towards transparency and equal remuneration for equal work requires an audit of your workforce and a clear plan forward. There's a lot you'll need to do to ensure you're ready to comply with new reporting obligations once implementation begins.

This includes:

• Confirming employee headcount to determine which reporting deadline and frequency applies to your organization 
• Creating a timeline for completing the initiative
• Making a note of the key stakeholders that'll be involved in the process, e.g, team leaders, heads of departments, human resources, information technology, and legal
• Reviewing your records to identify the pay-related documents you already have and the ones you'll have to gather

Adjusting payroll systems

If your current payroll processes are not already compliant with directive requirements for fairness and transparency, you'll have to make necessary updates to achieve readiness. 

This means setting up a system that allows you to quickly detect salary discrepancies and alert appropriate parties. It can be a dashboard displaying the salary ranges for each role and how pay is distributed in each range, allowing you to easily see when the gender pay gap for a role rises above 5% or an employee's wage sits below or beyond the established range.

Finally, you will need to develop a standard payroll reporting procedure for everyone to follow. By establishing a standardized approach, you'll streamline reporting processes, avoid unnecessary work during peak reporting periods, and easily adapt to the specific requirements of different jurisdictions.

What are the implications of the EU Pay Directive for HR teams?

The directive will no doubt shake up your existing HR systems, but the biggest changes will be around:

Policy updates

It's time to take a hard look at your existing pay policies and start making revisions where necessary to bring your company culture up to date.

Consider your current compensation packages and how you calculate how much each role is worth, or decide who is deserving of promotions, bonuses, and perks. If you’re not ready to share that information with your employees right now, create a compensation philosophy that outlines how roles, skills, value, education, and other factors will inform pay decisions.

Break down the responsibilities of each role and the requirements employees will need to meet to qualify for career advancement or pay progression. Establish a procedure for managing performance evaluations and rewards allocation.

Screen your hiring processes for discriminatory patterns and ensure everything from your job descriptions to interviews is gender neutral and aligned with the directive. 

Employee training and awareness

Since it will no longer be business as usual, providing HR staff with adequate training regarding updated processes is a top priority. Make sure they're familiar with the rules of the EU Pay Directive and the role they will play in championing diversity, inclusion, pay equity, and salary transparency. 

Instruct HR personnel on how to handle pay discussions, answer employee questions, and resolve potential workplace disputes tactfully. Next, come up with an effective communication plan to inform employees of policy and procedural changes, so they can take full advantage of their rights. Let them know how to go about raising concerns, submitting complaints, or seeking redress for pay discrimination and other unfair workplace conducts.

The directive requires you to inform employees annually of their right to request career progression and pay-related information. Your department must determine the best time and method for communicating this to staff.

Addressing pay discrepancies

Carrying out pay equity reviews annually will help to identify and rectify pay inconsistencies before it breeds discontent among employees or incurs serious legal repercussions.

Combine statistical tools with your people analytics technology to marry your pay transparency obligations with overarching people enablement and culture objectives. This will enable you to better diagnose hidden biases and obstacles to progress.

You can get a read on what employees think of your current pay structures and policies by conducting surveys or encouraging them to send in anonymous reports. Use the insights you garner to determine the most pressing priorities or risk areas and begin implementing changes.

Steps to ensure compliance with the EU Pay Directive

Follow these steps to future-proof your business and prepare to navigate pay transparency and employee rights and expectations under the new legislation.

1. Conduct a pay audit

With pay audits, you can unearth potential issues and shine a light on the attitudes and approaches that underpin your compensation strategy. 

Get key players on board: After getting buy-in from company leadership, you'll need to decide who's going to be involved in your payroll audit. Depending on the size of your company, it could be a task for one or two people. Or it could require you to enlist the skills and knowledge of various roles and departments, such as:

• HR for access to policy documents, employee demographic information, and performance records
• Finance and payroll for access to payslips and relevant financial data
• Legal to explain complex pay structures and identify possible areas of complaints 

You can also elect to bring in worker representatives or hire external consultants specializing in job and equal pay evaluations.

Collect and log essential employee data: The more information you have, the better the quality of insights you will generate and the more accurate your conclusions will be.

If your company has simple, unified HR and payroll databases or keeps meticulous records, pulling the information you need should be easy. But if your system is more complex or broken into silos, you will need to gather and vet the data beforehand. Some necessary data to include in your audit are:

• Demographic information like gender, race, age, etc.
• Job titles and descriptions
• Job levels, departments, roles and responsibilities
• Level of experience, education, and other qualifications 
• Pay ranges and structures
• Individual offer letters, current base salaries, overtime wages, bonuses, and benefits
• Promotions, rate and frequency of pay increases
• Hours worked
• Length of service

Analyze your findings: The methodology you use in analyzing your data will depend on your company size and the quantity of information you're working with. Smaller organizations with only a few dozen employees can probably enter all the data into a spreadsheet and examine it directly to look for pay differences between employees doing the same or comparable work.

For a larger organization with hundreds of employees and more complex data sets, you can run a regression analysis to determine the factors that are influencing salaries and pay gaps. Then check to see if those factors are reasonable and legitimate or skewed based on gender, race, or disability

2. Implement transparent pay structures

Once you identify existing pay gaps and their root causes, the next step is to remedy any pay differences—particularly those higher than 5%—that cannot be objectively explained away. One way to do this is through process interventions and structural policy reforms to prevent the operational flaws or discriminatory practices that led to the pay gaps from continuing.

You'll also need to raise the salaries and provide other compensatory benefits to employees who have been affected by unfair pay policies to match that of their equals going forward. 

If your pay audit doesn't uncover any disparities, pat yourself on the back, and prepare your report for submission in line with the EU directive.

3. Monitor and report regularly

Pay auditing is not a one-and-done exercise. Discrepancies and bias can creep back in as employees churn, responsibilities shift, and structures get reorganized.

Whatever the outcome of your initial evaluation, you have to establish an ongoing practice of surveying and reporting on your hiring, compensation, and talent management processes. Doing so will enable you to maintain compliance and spot issues before they become systemic or standard practice. 

Regular reviews can also help you measure how much progress you're making toward your broader DEI and culture goals.

Challenges and best practices for pay transparency implementation

Although pay transparency will usher in positive benefits for both your organization and its workers, you will come up against obstacles on the road to implementation. Here are some potential challenges you might encounter and strategies you can adopt to mitigate them and ensure successful, lasting, and equitable pay infrastructures.

Common challenges to implementing the EU Pay Directive

Data privacy concerns

Historically, the collection of special categories of employee information such as race, sexuality, religion, ethnicity, and disability has been seen as insensitive and unethical. Some countries have even imposed outright bans on requesting this information because it could potentially be used to discriminate against employees.
However, recording this data is necessary to get a comprehensive view of businesses’ pay equality metrics beyond gender.

The EU pay directive instructs that the processing of personal information for the fulfillment of gender pay gap reporting obligations or employees’ right to pay transparency information must meet GDPR compliance standards, and not be used for any other purpose.

Still, there's some tension to be expected in reconciling the demands of pay transparency with existing data privacy protections and practices.

Resistance to change

If your company treats compensation as a matter of confidentiality, higher-ups and managers may be uncomfortable with making the information public.

As an HR or payroll professional, you may find yourself in the position of having to make a business case for embracing transparency and fair compensation practices and reiterating the ramifications of non-compliance with the legislation.

Multinational compliance and communications

The EU directive is not one size fits all. Each member state can interpret the legislation in unique ways with different timelines, expectations, rules for reporting, definitions of who counts as a worker, and more.

So if you maintain offices in multiple EU countries, you'll potentially be dealing with different obligations. You may have to create separate structures, processes, and communication roadmaps for workers in respective regions.

Increased administrative workload

Complying with the directive and revising current pay processes and policies will require considerable time and resource allocations, especially for the first year of reporting.

This means more tasks and responsibilities for key stakeholders to juggle, but there's simply no getting around it. The law will go into effect soon, so the earlier you start preparing, the more time you will have to plan and adjust, so you don't end up overwhelmed or struggling to meet up with the deadline.

Employee dissatisfaction

When you start making pay levels for job roles or open positions and the criteria used for pay and career decisions public, some of your employees may realize they're being paid less than their counterparts, which can spark conflicts or disputes. The good news is that with the right assurances and visible commitments to change, you can quell discontent and create a work environment where everyone feels valued.

Best practices for implementing the EU Pay Directive

Cross-functional collaboration

Pay equity should not be left to the domain of your legal, HR, or payroll team alone. To mitigate risks on all fronts from compliance to brand reputation, it is crucial to bring stakeholders from all these backgrounds and others like people analytics, communications, and L&D into the conversation.

This will help improve efficiency and avoid duplication of efforts while harmonizing goals, priorities, and approaches.

Leverage technology

Use HR and payroll management software, performance evaluation tools, and pay equity analytics software to automate workflows, standardize processes, and flag illegitimate pay practices that may lead to pay discrepancies. They can also help reduce errors, save time and resources, and avoid costly litigation and penalties down the road.

Institute checks and balances

Anticipate possible issues that may arise or ways your pay transparency and equity initiatives will be challenged. Then,plan your response to limit situations where managers go rogue or are forced to rely solely on their judgment.

For example, who will review and approve offer letters to ensure your pay policies are being followed consistently? What will you do if an employee requests a pay raise above the authorized salary band?

Get ready for compliance with Deel

Improved employee retention, morale, productivity, and a stronger employer brand are just some of the transformative effects that fair compensation practices and openness about pay decisions can have on your business. 

The Pay Transparency Directive puts all employers based in or hiring in the EU on notice. You can no longer afford to move at your own pace when it comes to closing your organization's gender pay gap and creating fair policies and structures to ground your wage and career progression decisions.

It's time to get proactive about identifying, preventing, and remedying pay inequities, so you don't get caught in a compromising position. Deel's all-in-one platform can help you:

• Seamlessly handle payroll for your domestic and international teams and integrate all your payroll records and tools to create a singular source of truth
• Stay abreast of existing and upcoming regulatory changes across 150 countries to ensure continuous compliance
• Fully manage your employee engagement, training, and performance evaluation processes
• Consolidate and automate your entire HR workflow from hiring to exit for hassle-free workforce management 

Book a demo today to learn more.