US firms must comply with EU pay transparency regulations or face costly penalties

Stuart Hyland, Partner said:

The EU pay transparency regulations come into force in less than two years, June 2026 at the latest. At that point numerous new regulations will apply to US firms with employees in the EU. For example, employers will need to share details on pay levels, won’t be able to ask applicants about current or recent salaries, and will have to share details of their gender pay gap. At the same time, US states are evolving their regulations. This means US firms have the challenge of keeping up with multiple sets of requirements as well as adopting this new regulation.

US firms can’t take the easy way out of this complex administrative burden and assume that complying with US states equal pay regulations will automatically cover them. The EU regulations are much more significant and far-reaching, despite a few overlaps.

If a firm doesn’t comply with the EU pay transparency regulations, countries are expected to put in place ‘effective, proportionate and dissuasive’ penalties, including fines. The EU Directive suggests that these penalties are expressed as a percentage of company turnover or total payroll.

The onus is also on the employer to prove they did not discriminate against an employee, not the employee to show that they were discriminated against. The compensation available to an employee who is found to be a victim of pay discrimination is to be ‘uncapped’, meaning there is no limit to the compensation they can receive for a successful discrimination case.

One key feature of the EU Pay Transparency Directive are transparency regulations, which apply to all employers:

• Employers will need to share details on initial pay levels/ pay range for any advertised position (including bonus and benefits entitlement)
• Employers will not be able to ask any job applicants for information on their current or previous salary
• Employers need to ensure that they have assessed and understand work of equal value in their business through the use of a gender-neutral job evaluation/ classification scheme
• Pay differences between roles rated as ‘equal work’ can exist but they must be linked to objective criteria (e.g. market premia, individual performance differences)
• Employers must share details on how its pay framework is set, managed and maintained with employees
• Confidentiality clauses that prohibit employees from discussing their salary details with others will be rendered null and void. Employees can discuss/ share their salary details with whoever they choose
• Workers have the right to request information from their employer annually which shows information on their pay level and the average pay for male and female workers performing the same jobs as them or work that has been rated of ‘equal-value’. Employers are expected to remind employees of this right annually.”

Another key feature of the EU Pay Transparency Directive are gender pay gap reporting requirements, which are dependent on the number of employees in an individual country:

• Employers with 100+ employees must publish details of their gender pay gap
• Employers with 250+ employees must publish their GPG by 7 June 2027 and annually thereafter
• Employers with 150-249 Employees must publish their GPG by 7 June 2027 and every 3 years thereafter
• Employers with 100 – 149 Employers must publish their GPG by 7 June 2031 and every 3 years thereafter
• Employers with less than 100 workers may publish their GPG if they wish to
• If a gender pay gap of more than 5% exists, employers will be required to work with a staff body/ Works Council to conduct further analysis in the form of a Joint Pay Assessment to identify the causes and to develop a corrective action plan.”

Stuart said:

Given the complexity of the EU pay transparency regulations and the penalties that can be levied, US firms must not delay putting into place preparations to comply within the two-year limit.

However, firms must not rush or push though changes without due diligence. As a poorly implemented compliance policy will still put them at risk of a penalty if it is not fit for purpose.

Would you like to know more?

If you would like to discuss any of the above, please speak to your usual Blick Rothenberg contact or Stuart Hyland using the form below.