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At our recent webinar, we were delighted to be joined by leading law firm Pinsent Masons’ Susannah Donaldson, Partner and Co-Lead in Global Equality Law and Lesley Finlayson, Employment Lawyer. Together we discussed how organisations are preparing for the new EU Pay Transparency Directive and similar legislative developments that are shaping the landscape of pay.

Designing robust pay structures

Increasingly, organisations are looking at how they design their pay structures, whilst balancing affordability and remaining competitive in the marketplace. Internal pay alignment is a key concern of many employers, as people want to know they are being paid fairly for similar work and responsibilities. Indeed, 46 per cent of respondents to our January Pay Award and Benefit Trends pulse survey said that their pay actions were being driven by internal relativities.

Current pay transparency requirements in the UK

In 2018, gender pay gap reporting came into effect for organisations with over 250 employees, under the Equality Act (Gender Pay Gap Information Regulations) 2016. The gender pay gap is the difference between the average wages of men and women, regardless of seniority. Equal pay is a different issue and illegal since the Equality Act 1970 – equal pay must be awarded for women and men doing ‘like’ or comparable work.

The current median pay gap in the UK is 14.3 per cent, according to the ONS in 2023. The 22 November is noted as when a woman stops earning relative to the average male, based on the national average pay gap. For every £1 earned by men, women earn an average of 85.7p, showing the disparity. This varies by sectors and by region, and Susannah talked through the multiple and complex drivers behind the gender pay gap.

Stereotypes can affect the subjects that are pursued by women, with fewer traditionally pursuing higher paid roles in STEM or finance. The glass ceiling still exists. Lack of equality, lack of opportunities and mentoring, and the fact that women take the brunt of childcare responsibilities hamper pay and career progression. Unconscious bias and unfair pay practices still prevail.

Gender pay gap reporting has provided scrutiny around pay and bonus practices, encouraging employers to hold themselves to account as they strive to follow a fairer, objective process and pursue initiatives to effect meaningful change. Information should be published on employers’ websites, and on the government’s dedicated website which plans to produce league tables to highlight compliant and non-compliant employers. It is hoped employers will take heed of the reputational risk, potential enforcement action by the Equality and Human Rights Commission and multi-party equal pay claims if they do not report.

Changing legislative demands internationally

The introduction of mandatory reporting across the EU will undoubtedly have an effect on UK businesses – placing mounting pressure on the UK government to mirror the EU’s approach.

There are two directives that will have a significant impact on pay transparency in the UK.

The EU Pay Transparency Directive

Coming into force in May 2023, member states have up to three years to implement the legislation by June 2026.

The directive provides:

  • A right to know the initial pay or pay range for the advertised job.
  • A right not to be asked about current pay or pay history during the application process.
  • A right for employees to know the criteria being used for determining pay and what comparable employees are paid on average, broken down by sex.
  • A right to disclose pay to colleagues to enforce equal pay rights.
  • A requirement to report on the gender pay gap across the company as a whole and within each category of worker who do the same work of equal value.
  • A requirement to remedy gender pay differences which cannot be justified by objective and gender-neutral factors.

These rights are supposed to counteract any concerns that previous pay history is holding pay progression back for women who may have taken career breaks or less demanding roles while balancing caring responsibilities. Greater transparency demands greater vigilance from employers that they are following best practice when organising pay structures.

Ensuring pay is equivalent across certain categorisations or structures are central to the directive. Each category is defined as workers who do the same work or work of equal value, to tie in with equal pay definitions already in effect. Robust classification systems are coming to the fore to enable employers to meaningfully compare pay.

If salary reporting shows a difference in average wage levels between female and male employees of at least five per cent in any category of employee; the employer is not able to justify this difference using objective and gender-neutral criteria; and they do not remedy this gap within six months after the submission of data, employers will have to do a joint pay assessment. This will outline measures to eliminate differences in remuneration, including approaches to pay following parental leave.  ‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍

Who is impacted and when?

From 2027, reporting on the 2026 calendar year of activity, employers with over 250 employees will be required to report gender pay gaps annually. For employers with 150 – 249 employees, they will be required to report every three years, and from 2031, this will extend to organisations with 100 – 149 employees. All employees will have to meet the other requirements in the directive, such as knowing the pay range for the advertised role.

The wider pressure of this level of transparency, especially if organisations operate multi-nationally, means this guidance will shape business’ response in the UK.

The Corporate Sustainability Reporting Directive (CSRD)

In addition, the CSRD came into force on 5 January 2023, with member states integrating its provisions into national laws by 6 July 2024. This complex directive aims to provide employers with a framework to drive forward diversity and inclusion data reporting at regular intervals, encouraging robust environmental and social management practices.

The European State Reporting Standards S1 requires businesses to report on:

  • Gender diversity at top management level and age distribution of employees.
  • Disability diversity disclosed by showing the percentage of persons with disabilities.
  • Family-related leave entitlement and uptake.
  • Gender Pay Gap (including those who have taken parental leave, so accounting for reduced pay for the year).
  • Annual total remuneration ratio of the highest paid individual to the median annual total remuneration for all employees (excluding the highest-paid individual to be more representative).

Bonuses, overtime, benefits in kind and shares are also taken into consideration, so a much wider definition of ‘remuneration’. More granular reporting is required to explain the results and provide greater context.

There is a similar regime in force for very large EU companies, so this will affect those already subject to the Non-Financial Reporting Directive (NFRD) and will come into force earlier than the EU Pay Transparency Directive.

The CSRD has an equivalence regime which is a grey area as some Member States will have a similar regime and will want to avoid double compliance regimes. Therefore, the extent to which the CSRD may be adopted will vary country by country. Intended to drive up reporting standards internationally, some companies may decide to voluntarily report using these standards.

The EU reporting regimes will demand greater scrutiny on the figures. With greater scope for employers to be questioned about their figures and proactively remedy gaps, the regimes are likely to be regarded as the gold standard.

What can you do to prepare?

  • Data collection must be robust and accurate. Consider undertaking a legally privileged equal pay audit which may help you identify whether current policies are effective, understand the drivers behind any misalignment, highlight risk areas in the business and identify potential corrective actions.
  • Examine how you categorise your employees into different groups. Consider whether a job evaluation exercise could help you achieve accurate groupings of employees throughout your organisation.
  • If you identify a gender pay gap of over five per cent in a category of worker, start gathering evidence to objectively justify any disparities.
  • Consider equality audits of contractual documentation, internal policies and procedures, grading and remuneration structures and recruitment processes to ensure they are in line with D&I best practice and are legally compliant.

Get in touch

Understanding your approach when it comes to your pay practices is fundamental to steering your organisation when it comes to achieving best practice. Action plans are crucial in closing the gap, which depend on whether an organisation understands the role it has to play in achieving fair pay practices for all employees, regardless of background or demographic. Identify how you can develop and implement meaningful action plans to support staff and make your organisation as inclusive as possible.

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