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The EU Pay Transparency Directive - a cultural shift towards transparency and accountability

Background
 

The days of simply relying on previous pay in decision making surrounding remuneration and keeping salary guidelines confidential will soon be a thing of the past. Transparency rules on how pay decisions are made, including accountability for pay equality, is to be introduced under the EU Pay Transparency Directive (the “Directive”).

The Directive, which must be transposed into Irish law by 7th June 2026, is aimed at promoting pay transparency and ensuring equal pay for equal work or work of equal value, regardless of gender. Except for gender pay gap reporting requirements, the Directive does not have any de-minimis workforce level exclusion.

Therefore, it is advisable that all companies use the next 18 - 24 months to prepare for the Directive on the assumption that it will be applicable to them from a pay transparency point of view.

Given the degree of change this will create, the Directive will force firms to conduct a review of their rewards, performance, diversity equity and inclusion (DE&I) and talent strategies, including all the associated frameworks, processes and policies. Additionally, it’s critical firms have job architecture to support the measurement of equal work or work of equal value.
 

Requirements under the Directive
 

The requirements of the Directive that companies will need to adhere to are:

  • Employees will need to be included in “work categories” of those who are performing work of equal value.  There is currently no specific guidance on how this is defined but companies will need to ensure they can break down job roles to those performing work of equal value.
  • Workers have the right to request and receive in writing information on their individual pay level and the average pay levels, broken down by sex, for categories of workers performing the same work as them or work of equal value to theirs. The employers must inform all workers on an annual basis of their right to receive this information and it needs to be provided in a manner that is accessible to them considering any disabilities.
  • Companies can no longer ban employees from disclosing their salary and must make clear the criteria used to determine pay levels and career progression.
  • The salary range should be posted in job vacancies or provided prior to interview. Employers can no longer ask candidates for their pay history.
  • The burden of proof shifts to the company to prove that there has been no direct or indirect discrimination in relation to pay and any worker with damage due to an infringement of this principle has the right to obtain full compensation or reparation.
  • While Ireland already has a gender pay gap reporting requirement under the Irish Gender Pay Gap Information Act 2021 and the associated 2022 regulations, the Directive goes further and will require companies with 150+ employees from 2027 to report their gender pay gap by category of worker and not just at an aggregate level, with companies of 100+ employees been required to report from 2031. The Directive requires companies to conduct a joint pay assessment with worker representatives if it has a gap of over 5% per category of worker that is not explainable on objective gender-neutral criteria and persist for 6 months.  

The table below shows some differences between Ireland’s current rules and those included in the Directive:

Cultural shift to greater transparency and rights for employees
 

There are a multitude of considerations for companies in anticipation of this cultural shift. Some areas that firms should consider from a remuneration perspective are:

Pay mix & budgeting - Companies should pay attention to the balance between fixed and variable compensation when making decisions, understanding the impact this will have on their gender pay gap. This would include when proposing to make changes to pay structures, such as through the introduction of a new variable pay scheme. Additionally, as companies set their fixed and variable budgets, they should consider the role DE&I plays in budgeting.  

Pay transparency - As salary bands will be disclosed, this will increase the availability of pay data internally and externally in the market. Companies will need to consider the impact of this on both internal and external communications.

Buyout awards - As executives leave organisations, often they are forfeiting deferred awards and expect the hiring firm to compensate them for their loss or replicate the benefit forgone. Employers can no longer ask for details on previous remuneration as the Directive is written, which includes these buyout awards. The Directive means that a new employer could find it challenging where supporting evidence for a package would usually be required from a governance and valuation perspective. This could be particularly relevant to the banking sector where 4 to 5 years’ vesting periods and additional retention periods on equity are often required for certain employees. While it might be expected that most candidates would voluntarily provide the information, the key point is that it cannot be asked for. Therefore, policy regarding how this will be managed needs to be decided.

Education - Discussing compensation can be complex but with increased transparency, the relevant pay decision makers will need to be equipped to have strong, defendable conversations. Therefore, preparation and accessibility to data should be a focus prior to the Directive going live. Having a performance management framework that is transparent, easy to understand and clearly connected to pay outcomes can enable decision makers to have informed conversations on this topic.
 

Next steps
 

As mentioned above, the Directive is to be transposed into Irish law by June 2026 with reporting commencing from 2027. Given the broad scope of the implications on how remuneration committees and HR teams set pay policy, companies should now design a plan to ensure their readiness. 

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