From pay gaps to pay equity: What the EU Pay Transparency Directive means for your business

In the drive toward workplace equality, the EU has taken a landmark step with the Pay Transparency Directive, aiming to combat pay discrimination and help close the gender pay gap across EU countries.

Germany's considerable gender pay gap highlights the need for this Directive to take effect: In 2023, it remained among the EU countries with the widest gender pay gap, with women earning, on average, 18% less than men. In the EU, only three countries reported a larger or similarly high gender pay gap. Germany has until June 2026 to adopt the Directive to national law, giving organisations a clear timeframe to prepare for these new transparency standards.

Are you aware of the implications of this new legislation for your own organisation? Here’s what you need to know about the Directive and how to prepare for the changes:

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Pay Transparency Directive: Legal requirements and what they mean for employers

The main objective of the EU Pay Transparency Directive is “to combat pay discrimination and help close the gender pay gap in the EU.” It aims to empower employees to understand and enforce their rights to fair compensation and increase pay transparency through systematic gender pay reporting. It also requires employers to establish fair, unbiased pay practices that foster a culture of accountability.

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What legal changes should your company prepare for?

As an employer, you will face several new requirements under the Directive. These include:

• Salary information in job postings or during the assessment process: Employers are required to disclose the starting salary or its range to job applicants, either in the job advertisement or at the latest before the offer stage. This practice ensures candidates are informed about potential earnings.
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• Restrictions on pay history questions: To prevent past earnings from influencing salary offers, employers are prohibited from asking candidates about their current or previous pay.
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• Right to disclose pay information: Employers cannot restrict employees from discussing their pay, promoting transparency and preventing policies that might discourage such discussions.
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• Access to pay information: Employees can request information on their individual pay levels and the average pay levels, broken down by gender, for workers performing the same or equivalent work. If only a very small number of workers perform the same or equivalent work, this could raise concerns about data protection and confidentiality. In such cases, employers may need to further aggregate data to ensure compliance with GDPR. It is still open how the exact legislation on this will look like in Germany.
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• Reporting requirements for employers (to the respective national entity): 
  • Companies with 250 or more employees must report on gender pay gaps annually. 
  • Companies with 100-249 employees must report every three years.
  • Companies with fewer than 100 employees are generally exempt from these reporting obligations, though individual member states may impose stricter requirements.
• Pay assessments: If a gender pay gap exceeding 5% is identified and cannot be justified by objective, gender-neutral criteria, employers must conduct a pay assessment in collaboration with employee representatives.

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The cost of non-compliance: Penalties and risks for your business

Failure to comply with the EU Pay Transparency Directive can result in severe repercussions for your business:

• Sanctions for unjustified pay gaps: Member states will impose penalties on employers who cannot substantiate a gender pay gap of over 5% with objective, gender-neutral criteria.
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• Compensation for affected employees: Employees who experience pay discrimination are entitled to compensation, including full recovery of back pay and bonuses missed due to the disparity. 
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• Shift in the burden of proof: In cases of alleged pay discrimination, the burden of proof will shift to the employer. If an employee presents evidence suggesting unfair pay practices, it’s up to the employer to demonstrate that no direct or indirect discrimination has occurred.

With these requirements, it’s essential to proactively align your company’s hiring, pay and transparency practices with the Directive’s standards.

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Key steps to implement the Directive (if you have fewer than 100 employees)

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✅ Include salary information in the hiring process: Clearly state the starting salary or pay range in job advertisements or share it early in the interview process. This transparency ensures expectation alignment with candidates and fulfills the Directive’s requirements.

✅ Revise HR policies and contracts: Remove clauses that mandate confidentiality around earning and eliminate pay history questions from your recruitment process.

✅ Conduct regular pay audits: Periodically assess your company’s compensation practices to identify pay disparities. While not always mandatory for small companies, a pay audit ensures you can address gaps proactively and provides valuable data for employee transparency.

✅ Establish a structured compensation system: Develop a consistent salary structure and promotion processes. Tools like Figures (affiliate link) can help small businesses benchmark salaries and analyse pay data, making fair compensation easier to maintain.

✅ Foster a transparent compensation culture: Build a workplace culture that values open communication about pay practices. Encourage discussions, set clear policies and create opportunities for employees to ask questions about pay.

✅ Stay updated on national requirements: While companies with fewer than 100 employees are often exempt from mandatory gender pay reporting, some member states may impose stricter regulations. Be proactive in staying informed on any additional national requirements.

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By tackling these steps, your organisation will be well-prepared for the Directive’s implementation and can establish itself as a leader in fair and transparent pay practices.

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👉 Would you like support in getting ahead of the EU Pay Transparency Directive? Let’s talk!

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Bonus: The pros and cons of voluntary pay transparency

Legal requirements aside, how much transparency around pay is advisable depends on your organisation’s culture and goals. A leading example of full transparency is the company Buffer. Since 2013, Buffer has shared its financials and adopted a transparent salary policy, using a salary formula and openly publishing every employee's pay. This approach has positioned the company as a pioneer in workplace transparency, aiming to build trust and accountability internally and with the public.

Transparent pay practices (and “transparent” doesn’t mean you need to share them outside your company) help address persistent pay disparities, creating an environment where employees – especially women – feel valued and fairly compensated. They can contribute to a stronger brand reputation and make the company more attractive to modern talent, which values fairness and openness.
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But…

While internal pay transparency can strengthen trust and fairness, it also brings specific challenges that organisations must navigate carefully. Disclosing pay ranges can sometimes lead to tensions within the team if employees feel their compensation doesn’t align with their expectations or contributions. This issue may be particularly problematic for smaller businesses with limited budgets, where pay adjustments may be constrained. 

Additionally, publicly sharing salary information can expose a company’s compensation strategies, potentially giving competitors insights that could affect the company’s talent acquisition and retention efforts. There are also logistical hurdles: establishing and maintaining a transparent pay structure requires ongoing time and resources, which can strain smaller HR teams.

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Disclaimer

The contents of this article have been carefully researched, but do not constitute legal advice. Please contact a specialised lawyer if you have specific legal questions.