EU Directive Is Imperfect; Be Compliant But Sensible in Your Response

The European Union (EU) Pay Transparency Directive takes effect in 2026, with required reporting commencing in 2027. While the new law has good intent — specifically, improving gender pay equity through greater transparency — the reporting itself can be associated with needlessly complex work (if taken literally) and inaccuracy (if implemented without appropriate care). Such is often the case with new regulations.

After the June 7, 2026, implementation date, there will be much practical learning for employers striving to comply and for EU government auditors. In the meantime, those looking to get ahead of thorny issues can benefit from a few key lessons from the frontlines.

On Common-Sense Evaluation

The directive defines the gender pay gap as the difference in average pay between women and men divided by the average pay for men — and notably requires organizations to address “large” gaps against either women or men. A serious issue with the calculation is that it is asymmetric: It will show a larger difference for men than for women in otherwise equivalent circumstances. Why? Because when women are underpaid, the pay difference is looked at relative to the pay rate of higher-paid men, and when men are underpaid, the pay difference is looked at relative to lower-paid men.

Obviously, for reporting purposes, organizations must calculate pay gaps as required by the law. But adjusted pay gaps, upon which actions are ultimately based, should be symmetrical. An appropriate alternative denominator for the calculation, which is neutral under the “null hypothesis” of no gap, is average pay across the genders.

On Defining ‘Worker Categories’

The directive requires action if adjusted pay gaps within worker categories (gaps adjusted to account for differences in legitimate drivers of pay) are larger than 5%. This standard plays out differently than the long-established pay equity standard of statistical significance. It is critical to keep this in mind when defining worker categories, a decision upon which an employer has reasonable latitude.

Under the old standard, small groups would be unlikely to show statistically significant differences due to large potential variance. Because of this, employers felt comfortable relying on jobs as the “worker categories” for pay equity review. Indeed, jobs also were sensible choices given the comparable skills, responsibilities and working conditions.

Under the EU guideline of absolute difference, small groups can be linked frequently to large gaps driven by odd cases. Job-level review will often see “false positives,” which are as likely to be found against men as against women. Spending money to address pay issues in such circumstances will not address real underlying issues and may well create new misalignments.

To find and address real issues, define worker categories to be broad groups with low variance in pay, leveraging pay grades in lieu of more narrowly defined jobs. If your grades are not well-defined or pay is not consistently managed within your grades, now is the time to clean up your infrastructure.

On Defining Compensation

Some early interpretations of the directive focus on compensation “flows” over “rates” (e.g., actual annual earnings over salary). While there are some concepts that require an examination of payments over time (e.g., bonuses and commissions), it is far better to look at base pay rates or salaries than earnings. Salaries are easily adjusted, as compared to earnings corrections. Further, an analysis of earnings generally relies on complex and tough-to-collect controls, such as the percentage of the year active. The ultimate result of an earnings analysis, once such controls are considered, is no better than an analysis of salary. Similarly, to account for overtime only to account for hours worked is of minimal value.

On valued benefits, the directive ignores considerable complexity. Notably, employees self-select to receive certain benefits that are eligible to all others in comparable circumstances; the differential selection of benefits does not represent a true inequity.

The bottom-line lesson is to act in the spirit of the directive but to implement related activities in a way that:

• Identifies real issues;
• Clearly delineates actions that should be taken; and,
• Makes practical sense for your organization.

In the U.S., courts have always favorably viewed good-faith efforts to drive equity. In this instance, too, good faith and reasonable analysis that supports meaningful action should rule the day, pending regulators communicating clear requirements for the work.

Pursuing Compliance and Practicality

The EU Pay Transparency Directive has created considerable new obligations for employers in terms of proactive review, remediation activity and reporting. In the absence of perfectly clear requirements, organizations should strive to adhere to the requirements while ensuring accuracy in measurement and being practical in various aspects of implementation. The objective for all should be the identification of real issues and, from that, the achievement of more equitable outcomes for our highly valued workforces.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Equitable and Diverse Workplaces
• Employee Compensation
• Organizational Performance
• People Analytics