The EU pay transparency directive brings risks and opportunities for employers as the first pay reports will be required by the second half of 2027, according to a new guide to the directive from Aon.
Employers with more than 100 employees in any EU member state will need to comply with the directive, which also applies to businesses based outside the EU including the UK.
Companies with more than 250 employees will be required to report their gender pay gap every year to the relevant national authority. Smaller organisations with 100 or more employees will need to report on their pay gap every three years, while organisations with less than 100 employees are currently exempt from reporting.
If the report reveals a pay gap of more than 5 percent that cannot be justified by objective, gender-neutral criteria, employers will be required to take action in the form of a joint pay assessment conducted with workers’ representatives.
This has clear implications for employers in the UK even though the UK is no longer an EU member.
And it could affect employers with less than 100 people in an EU member state as recent research revealed that more than half (51.9 percent) of employers operating in the EU are looking to roll out equal pay arrangements across their whole organisation, which will include their operations in non-EU countries.
However, despite the incoming requirements and need for early planning, the Aon study found that only 6 percent of employers had a well structured plan in place, while another 6 percent had a clear plan, which they are executing. The study, with 200 companies inside and outside the EU, showed that more than two-fifths (41 percent) said they are working through the planning, while 45 percent reported a general awareness but they have no set plans, and 2 percent had no awareness of the rule changes.
Risks for employers
In its guide, Aon said that the financial risks of gender pay inequality are “significant and uncapped” because employees can claim compensation and full back pay, including bonuses and payment in kind if they are found to have been under paid.
National governments can impose uncapped fines on businesses with a pay gap of over five percent. The burden of proof to show that decisions have been made without gender bias lies with the employer, not the employee.
Under the directive, employers with an unjustified pay gap of more than 5 percent must commit to taking action to close the gap, but Aon warned that significant gaps and/or a failure to take immediate and decisive action “risks long-term reputational damage”, with a negative knock on effect for share price. Aon added that reputational damage from non-compliance with the rules could also make it difficult to attract new business or meet ESG criteria as a supplier.
The guide said: “Pay gaps and inequalities hit employee morale, undermine trust, disengage employees and damage the employee value proposition. Workforce attrition increases and employers will struggle to recruit key talent and skills. Employees want to work for a fair, inclusive organisation — pay gaps count against that.”
Opportunities
The stakes might be high for getting it wrong, but there are opportunities for employers that embrace this huge change, according to the guide.
Aon emphasised that the EU pay transparency directive is “not an isolated initiative”. There is an increasing focus on workplace equity and fairness across salary, bonuses, benefits and quality of experiences around the globe.
“Frameworks and processes in place for EU requirements may meet and exceed legislative requirements in other jurisdictions,” the guide said. “[And complying with the directive means] data and job architectures will be in place for future legislation around the world.”
Boost for career planning
Greater pay transparency across an organisation can help HR, line managers and employees with career planning, the guide said. “Employees can see how their careers will develop and progress in the future [and they will] have a clear understanding of the roles and responsibilities at each level.
“[The directive means] managers and HR leaders have a robust framework and toolkit to guide decision-making and objectivity.”
Complying with the incoming rules will also support wider data and reporting requirements as the data required for the directive reports needs to be good quality and up-to-date.
“This will help organisations comply with other legislation as well as both internal and external reporting requirements,” the guide said.
It is also worth noting that the directive is aligned with the EU corporate sustainability reporting directive. This requires companies to disclose the percentage gap in pay between men and women, so pay transparency reporting will support wider corporate ESG strategies.
HR policy changes
Of course complying with the incoming rules will force many employers to reconsider their HR processes and policies so that they can explain and justify pay decisions.
“Practices such as performance management as a basis for pay differences need to be well documented and consistent,” Aon said. “Gender-neutral job evaluation and classification systems make it easier to understand and model equal work across an entire business.”
The Aon ‘In-Depth Guide to the EU Pay Transparency Directive’ looks at what businesses need to do to prepare for pay transparency, from compliance to realising the wider business advantages that pay equity and transparency can bring.
Adithi Jagannathan, partner and head of UK Talent and Rewards Advisory at Aon, said: “The EU pay transparency directive is a significant step towards ensuring equal pay for equal work and addressing gender pay gaps. By the second half of 2027, employers with over 100 employees in any EU member state must submit their first report on pay transparency. Complying with the directive offers employers the opportunity to create fairer and more transparent reward policies, enhance diversity, equity, and inclusion strategies, and to align these to their broader employer value proposition and people strategy.
“This will be a significant step forward for most employers, so in this guide Aon has aimed to provide a way for them to understand the implications of the directive and their roadmap to achieve compliance, while focusing on pay equity in their organisation.”
