European Pay Transparency Directive: new developments and employer obligations in employment law
The principle of equal pay has become one of the areas of employment law with the greatest practical impact on businesses in recent years. Far from being a novel issue, our legal system already includes obligations such as pay registers, pay audits, equality plans and job evaluation systems, all of which are essentially aimed at advancing greater equality and transparency in remuneration matters.
It is within this context that Directive (EU) 2023/970 of 10 May 2023 was enacted, strengthening the application of the principle of equal pay for women and men for equal work or work of equal value through pay transparency measures and mechanisms designed to ensure compliance.
Although the European Pay Transparency Directive was adopted in 2023 and the draft legislation for its transposition has not yet been published, its implementation is already an imminent reality. The deadline for transposition expires on 7 June 2026, establishing a near-term timeframe for reviewing pay policies, recruitment processes, professional classification systems and internal promotion and salary progression criteria.
Employers’ obligations will no longer be limited to maintaining certain internal documentation. Companies will also be required to explain, justify and evidence the criteria determining remuneration, pay progression and differences between comparable positions from the perspective of transparency and pay equality.
Effective transparency in pay registers
Until now, remuneration-related obligations have essentially been documentary in nature. Maintaining a pay register, carrying out a pay audit where required or implementing a job evaluation system were, in many cases, considered the core of compliance.
However, the European Pay Transparency Directive intensifies these obligations and shifts the focus towards genuine transparency of the remuneration system vis-à-vis the workforce.
In practice, companies will need to be in a position to demonstrate which criteria determine remuneration, how salary levels are structured, how pay progression operates and why differences may exist between workers performing the same work or work of equal value.
It is important to emphasise a relevant point: a pay difference is not, in itself, unlawful. Pay differentials may exist between equal positions or positions of equal value provided that they are based on genuine, objective and gender-neutral criteria, previously defined and verifiable, such as experience, responsibility, functions effectively performed, performance, working conditions or qualifications, among others.
Employees’ right to pay information
In the same vein, the European Pay Transparency Directive recognises new information rights for employees, directly affecting the manner in which companies must structure and communicate their remuneration policies.
Employees will be entitled to request information regarding their individual pay level and the average pay levels, broken down by sex, of workers performing the same work or work of equal value.
In addition, employers must make available to the workforce, in an easily accessible manner, the criteria used to determine remuneration, salary levels and pay progression. Those criteria must be objective and gender-neutral.
To this end, employers must inform the workforce annually of this right, as well as of the steps or procedure required to exercise it, ensuring that employees are aware both of the existence of the right and how to make use of it.
Once a request has been submitted, the employer must respond in writing within a reasonable period and, in any event, within two months of the request.
In this respect, it is crucial to establish clearly defined internal procedures for receiving, processing and responding to such requests. It will also be necessary to review whether professional categories, job descriptions and classification systems properly identify which roles constitute the same work or work of equal value.
Pay transparency in recruitment processes
One of the most significant changes arises at the pre-employment stage, with the aim of promoting more transparent negotiations and preventing previous salary history from generating inequalities in a new employment relationship.
In this regard, the European Pay Transparency Directive establishes the obligation to inform job applicants of the initial remuneration or salary range applicable to the position.
Furthermore, employers are expressly prohibited from asking candidates about their remuneration history in current or previous employment relationships.
In addition, an obligation already increasingly incorporated into equality plans is reinforced: job advertisements, job titles and recruitment processes must be gender-neutral.
Gender pay gap and the 5% threshold
The European Pay Transparency Directive also introduces periodic gender pay gap reporting obligations for companies employing 100 or more workers. Nevertheless, it leaves open the possibility for smaller companies to provide this information voluntarily, or for national legislation to extend certain obligations to employers with smaller workforces.
The reporting must include, among other matters, data relating to the gender pay gap between women and men, differences in variable or supplementary remuneration components, distribution by quartiles and differences across categories of workers.
The reporting frequency will depend on workforce size. Companies with 250 or more employees must report annually from 2027 onwards; companies with between 150 and 249 employees must report every three years from 2027; and companies with between 100 and 149 employees must report every three years from 2031 onwards.
One of the most impactful aspects will be the so-called 5% threshold. Until now, within the framework of pay registers, the reference threshold had been 25%, in the sense that differences exceeding that percentage had to be justified. Under the European Pay Transparency Directive, where the information submitted reveals an average pay gap of at least 5% between women and men in any category of workers, and such difference cannot be justified on the basis of objective and gender-neutral criteria or remedied within six months from the reporting date, a joint pay assessment with workers’ representatives must be carried out.
The purpose of this assessment will be to identify, correct and prevent unjustified pay differences, requiring companies to maintain reliable remuneration data, sufficiently precise classification criteria and documented justification of the factors affecting remuneration.
Remedies and consequences of non-compliance
The European Pay Transparency Directive is not limited to imposing pay transparency obligations. It also strengthens the consequences arising from non-compliance and the avenues of redress available to employees.
Accordingly, the Directive provides for the possibility that workers who consider themselves harmed may bring legal proceedings in this area.
In relation to these remedies, the position of employees is reinforced through mechanisms such as the reversal of the burden of proof. In other words, where there are indications of pay discrimination, or where the employer has failed to comply with certain transparency obligations, it will be for the employer to demonstrate that the principle of equal pay has not been breached.
Moreover, compensation must be full and effective. This means that it will not be sufficient merely to correct the pay difference going forward; compensation may also include back pay, variable remuneration, benefits in kind, moral damages and interest.
In addition, the European Pay Transparency Directive establishes limitation periods of at least three years and requires Member States to introduce penalties that are effective, proportionate and dissuasive.
Accordingly, from the employer’s perspective, the existence of objective, gender-neutral and properly documented remuneration criteria will be decisive in reducing risk and defending the employer’s position regarding remuneration decisions in the event of challenge or litigation.
How should companies prepare for the European Pay Transparency Directive?
Against this background, a preventive approach requires reviewing whether remuneration policies make it possible to explain and justify existing pay differences on the basis of objective, gender-neutral and verifiable criteria.
In particular, it will be necessary to analyse professional classification systems, job descriptions, salary supplements, variable remuneration, promotion criteria, salary review systems, recruitment processes and the preparation of procedures for responding to pay information requests.
Directive (EU) 2023/970 on pay transparency represents a significant development in the area of equal pay and, in practice, entails moving towards a model in which remuneration decisions must be highly justified, properly documented and fully prepared.
What is the European Pay Transparency Directive (EU) 2023/970 and who does it affect?
It is the European legislation reinforcing the principle of equal pay between women and men. It applies to all employers with workers in the EU, although the most demanding obligations -such as gender pay gap reporting- apply progressively depending on workforce size, starting from employers with at least 100 workers.
When does it come into force in Spain?
The Directive was adopted in May 2023 and the deadline for transposition into Spanish law expires on 7 June 2026. By that date, companies must have adapted their remuneration policies, recruitment processes and internal information systems.
What is the difference between this European Pay Transparency Directive and the obligations that already existed?
Previous obligations -such as pay registers, pay audits and equality plans- were primarily documentary in nature. The European Pay Transparency Directive goes further: it requires companies to be capable of actively explaining and justifying their remuneration decisions to employees themselves, not merely to labour inspectorates or courts.
Does this mean that everyone performing the same role must receive the same pay?
No. The European Pay Transparency Directive does not prohibit pay differences between individuals performing the same work or work of equal value. What it requires is that such differences be based on objective, gender-neutral and properly documented criteria, such as experience, performance, responsibility or qualifications.
What is the 5% threshold and what are its consequences?
If reporting data reveals an average pay gap of at least 5% between women and men in any category, and that difference cannot be justified by objective criteria, the employer must carry out a joint pay assessment with workers’ representatives within six months. It is therefore an active corrective mechanism rather than merely a reporting obligation.
What happens if a company fails to comply with the new obligations?
The consequences are more severe than under the current framework. The European Pay Transparency Directive provides for reversal of the burden of proof -meaning the employer must demonstrate that discrimination has not occurred- as well as full compensation that may include back pay, variable remuneration, moral damages and interest, limitation periods of at least three years and penalties which Member States must establish as effective, proportionate and dissuasive.
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