What do the new EU pay equity regulations mean for your business?

Within the EU, the gender pay gap currently stands at 12.7%, and progress towards closing it has slowed over the past decade. Uneven pay follows women even beyond their careers — in 2019, women over 65 in the EU received a pension that was on average 29% lower than men’s.

Clearly, we need to do more to protect pay equity. The EU introduced new regulations earlier this year aiming to get to the root of the issue and guarantee equal pay for all.

Under the new EU directory, companies will be required to share information about their gender pay gap and follow measures to improve pay transparency. Failing to comply with the regulations will result in sanctions and fines.

The new regulations will impact any company that operates in the EU. Individual states have until 2026 to incorporate the new regulations into their own legislation, but some countries are already acting now. Overall, the regulations involve sweeping changes to employers’ responsibilities towards employees.

To make sure you’re compliant, start taking action now. Here’s how to prepare in advance and improve equal pay in your company while doing it.

Fair pay glossary

• Equal pay = paying the same salary for equal work of equal value. Equal pay has been protected under the UK Equality Act since 1970. Some EU states, such as Spain, Germany and France, also have regulations protecting equal pay.
• Gender pay gap (GPG) = the average difference in pay between men and women. Pay gaps don’t always mean that companies pay different salaries to people with the same job. Most of the time, gaps indicate that certain groups are more concentrated in higher-paying or more senior roles.
• Unadjusted GPG = the raw average difference in pay between men and women, without taking into account different factors. For example, if the average salary of is £50,000, and for women it’s £45,000. the unadjusted GPG is 10%.
• Adjusted GPG = the average “unexplained” difference in pay between men and women. To measure the adjusted GPG, it’s necessary to conduct a regression analysis to account for factors like education, job role and experience. Companies are left with a pay gap that can’t be explained by objective measures. To close this gap, companies should adjust salaries and bring lower paid employees in line with others.

What are the new regulations?

Under the new directory, companies operating in the EU will be obliged to share information about their gender pay gap (the average difference in pay between men and women) and equal pay (paying the same for equal work of equal value). The regulations apply to all companies that employ anyone within the EU, including contractors, part-time and temp workers.

Reporting on pay gaps and equal pay

The new regulations oblige companies to report on their gender pay gap. If companies fail to provide an explanation for gendered differences in pay, or if they fail to take action to remedy the problem, they will face penalties and fines (determined by individual countries).

If the report concludes that a company’s gender pay gap exceeds 5%, the employer will need to run a “pay assessment”, or equal pay audit. Equal pay audits measure whether or not companies pay equally for work of equal value. This isn’t always an intuitive process. Often, it’s necessary to create a job classification framework to compare salaries across roles of similar value. Even roles that seem completely different can be evaluated as equal, thus eligible for the same pay.

The regulations stipulate that employers should conduct the audit in collaboration with workers’ representatives, who will be able to scrutinise the process and ask for evidence of equal pay for equal work. If companies can’t provide objective, gender-neutral reasons for pay differences, they will face sanctions.

Improving pay transparency

Being open about pay improves employee perceptions of fairness. Research shows that pay transparency is linked to increased pay satisfaction, improved employee performance, and reduced pay discrepancies.

The new EU regulations include several measures to improve pay transparency. Here are some of the things employers will have to start doing:

• Providing information about starting salariesEmployers will be required to post information about the starting salary or salary range on job ads. Studies have shown that women are much less likely to negotiate their salaries than men, leaving them more likely to accept below-the-belt offers. Increased transparency can reduce discrepancies in pay and put everyone on equal footing.
• Never asking candidates about pay historyBasing salary decisions on previous earnings means that pay inequity can follow employees throughout their careers. This will no longer be permitted in the EU — pay decisions must be based on objective, consistent criteria.
• Defining transparent criteria to determine pay and progressionEmployers must show that the criteria they use to determine pay and progression are objective, gender-neutral, and available for employees to view.Employers must be able to justify pay differences based on objective criteria like performance or market value. Even when employers use these categories to differentiate pay, they must back up their decisions and provide evidence that they’re using criteria consistently.

What does it mean for employees?

The new regulations also come with several benefits for employees. They’re designed to protect employees against unfair pay procedures and give them much more power to challenge exploitative employers:

• Allowing workers to freely discuss compensation with each otherEmployers will no longer be permitted to prevent their employees from discussing salaries. That means waving goodbye to confidentiality clauses.
• Asking for information regarding equal pay in their companyEmployees will be able to ask their employer for information about pay equity and pay levels within their company, broken down by gender.
• Burden of proofPreviously, it has come down to employees to provide evidence that they experienced unequal pay in pay discrimination cases. Now, the burden of proof will fall to employers to show that they have not violated pay equity rules.
• Compensation for victims of pay discriminationIf a case determines that an employee has been paid unfairly, or paid less due to their gender, they will be entitled to unlimited compensation. That includes back pay for salary, bonuses, and payment in kind, plus interest accrued.

What can employers do to improve pay equity?

States are already taking the first measures towards incorporating the new legislation. To make sure you’re not left scrambling, here’s what you can do now to prepare.

Develop a salary and progression framework

To compare equal pay across your company, you need a bird’s eye view of every role. Then, you can compare roles, create salary bands, and develop a progression framework. This shows employees exactly what they need to do to grow their careers and their salaries.

• Identify every role and level in your company. Even if you’re a small company, we recommend identifying what the next level above each role will be when you’re ready to hire.
• Define the daily responsibilities, capabilities and requirements for each role and level of seniority.
• Identify the salary range for each role and level. If people within the same role have varying responsibilities, then account for this with a broader salary range. Make sure you benchmark against market data to pay competitively.
• If you find that people are paid outside of the salary range for their role, you’ll need to take corrective measures. That might mean giving some people a pay bump while holding others at the same pay grade next time you go through a salary review.
• Publish the salary bands alongside your role framework to show employees exactly what requirements they need to fulfil to move up a level.

Improve pay transparency

When decisions are made in the dark, inequity can fester. Here’s how to boost pay transparency for everyone:

• Publish the salary range on all your job ads. There’s no reason to wait until this becomes law — it’s a powerful measure to increase pay equity and is highly attractive to job seekers.
• Publish your salary bands. You’ll give employees more insight into pay levels while protecting people’s individual privacy.
• Create a pay policy. This should outline your entire pay cycle, including when pay reviews happen, who’s involved in the process, and what criteria determine pay.
• If managers have discretion over promotion and pay decisions, create a committee to review decisions for fairness and check that criteria are followed consistently.

Build fair processes for determining pay, progression and performance

Performance, promotion and pay are inseparable. Each process feeds into the other.

If biased criteria prevent people from reaching gold-star performance reviews, then they’re less likely to land a promotion. If promotion decisions come down to manager discretion, less visible employees can be held back in their careers. And if pay decisions are ad-hoc, you might end up with two people in the same role with vastly different salaries.

To guarantee that everyone has an equal opportunity to progress, it’s important to develop objective and consistent criteria for each of these processes:

• Identify the measurable, technical skills that are essential for success in each role.
• Make sure criteria describe behaviour that a “camera can capture” to give managers clear guidance when making assessments.
• Create criteria that are related to the everyday responsibilities, qualifications and capabilities employees will need to perform well in the role.
• Develop a rating scale for progression and performance criteria, along with examples, to help guide manager assessments.
• Schedule pay reviews and promotion cycles shortly after performance reviews so that managers make decisions based on fresh evidence.

Focus on DEI

Pay transparency and pay equity can’t be improved in isolation. It’s all part of a bigger picture to improve diversity, equity and inclusion for everyone.

To identify where you can make the biggest impact within your business, you need an objective tool to analyse your processes, measure the outcomes and gather employee insights. Fair HQ does all this and more. Our platform identifies bias in pay processes, measures the gender pay gap and gives you step-by-step actions to improve pay equity, all backed by behavioural science.

Backing it up

Abbott Watkins, T. (2018). ‘The ghost of salary past: Why salary history inquiries perpetuate the gender pay gap and should be ousted as a factor other than sex.’ Minn. L. Rev., 103, 1041.

The Behavioural Insights Team (2021) ‘How to increase transparency of progression pay and reward‘ How to improve gender equality toolkit

Bohnet, I. (2016) ‘What Works’ Harvard University Press

Castilla, E. (2015) ‘Accounting for the Gap: A Firm Study Manipulating Organizational Accountability and Transparency in Pay Decisions’ Organization Science 26:2

Council of the EU Press Release (2023) Gender pay gap: Council adopts new rules on pay transparency. Council of the European Union.

Scheller, E. M., & Harrison, W. (2018). Ignorance is bliss, or is it? The effects of pay transparency, informational justice and distributive justice on pay satisfaction and affective commitment. Compensation & Benefits Review, 50(2), 65-81.

Scott, D. (2018). Pay communications and fairness: an employee perspective. Compensation & benefits review, 50(1), 5-20.

Leibbrandt, A., & List, J. A. (2015). Do women avoid salary negotiations? Evidence from a large-scale natural field experiment. Management Science, 61(9), 2016-2024.