Equal Pay and the EU Pay Transparency Directive: Navigating the Gender Pay Landscape

Pay equity and pay transparency remain key areas of focus for global employers. At the EU level, delay by many member states in transposing the EU Pay Transparency Directive (the Directive) has given employers additional time to prepare. However, continued uncertainty over how the Directive will ultimately be implemented in many jurisdictions makes it difficult for multinational organisations to make consistent and practical compliance decisions.

In this LawFlash, we discuss the latest transposition developments and potential implications for employers as they prepare to comply with the Directive across jurisdictions.

Recent developments in this space have not solely been confined to the European Union. September also brought an important UK development, with the Employment Appeal Tribunal (EAT) issuing its decision in Next Retail v Thandi and others. The judgment provides useful guidance on the circumstances in which an employer may be able to justify differences in pay between groups of employees performing comparative work or work of equal value. We consider the decision and its practical implications for UK employers below.

EU PAY TRANSPARENCY DIRECTIVE TRANSPOSITION ROUNDUP

Since our last LawFlash, EU Pay Transparency Directive: The Deadline for Transposition Has Passed—What Now?, on this topic, progress in implementing the Directive has remained mixed. Many EU member states have delayed implementation or have yet to complete the legislative process.

At the date of publication of this LawFlash, the implementation status is as follows:

• Countries that have fully implemented the Directive: Greece, Italy, Lithuania, Malta, and Slovakia.
• Countries that have indicated an implementation date of no earlier than 1 January 2027: Czech Republic, Denmark, Finland, Sweden, and The Netherlands.

Full implementation across the European Union remains distant. Even where countries have enacted legislation transposing the Directive, the substantive requirements may not yet apply or the legislation may only implement certain parts of the Directive.

Greece, for example, enacted legislation transposing the Directive into Greek law on 6 July, but the substantive provisions do not take effect until 1 November, giving employers additional time to prepare. Other member states remain at various stages of the legislative process.

Recent developments as at the date of publication of this LawFlash include the following:

• Spain and Portugal: published draft legislation toward the end of summer and conducted consultation processes through the end of August. While the precise implementation dates are yet to be confirmed, both countries have proposed reducing the Directive's threshold of 100 employees for pay gap reporting by applying reporting requirements to employers with 50 or more employees.
• France: published updated draft legislation in early September. In addition to proposing a lower pay gap reporting threshold of 50 employees, the French government has indicated that it intends to introduce a minimum sample size for categories of workers when responding to employee requests for pay information, with a view to addressing data privacy concerns.
• Czech Republic: recently published a final bill that largely tracks the Directive's key requirements but proposes delaying employees' information rights and employers' pay gap reporting obligations until 2028.

Notwithstanding the piecemeal nature of local implementation, employers should not underestimate the work that may be required to comply with the Directive and should consider taking preparatory steps before local legislation becomes effective.

Against this fragmented implementation landscape, multinational employers may wish to establish a common framework for assessing work of equal value and develop an overarching compliance plan that can be adapted to reflect the final requirements in each member state.

NEXT RETAIL V THANDI AND OTHERS

The EAT overturned a significant aspect of an Employment Tribunal (ET) decision concerning Next's justification for paying predominantly male warehouse workers higher basic rates of pay than predominantly female retail staff whose respective work had been found to be of equal value.

The law in the United Kingdom requires that men and women performing roles of equal value must be paid the same rate unless there is a material factor which explains and justifies the difference. 

Background

The claimants argued that retail sales consultants, 77.5% of whom were female, were paid less than warehouse operatives, 52.78% of whom were male, and were entitled to additional pay under equal pay law.

In the first instance, the claimants successfully persuaded the ET that a number of differences in pay placed Next's retail sales consultants at a particular disadvantage when compared to its warehouse operative colleagues which could not be justified by Next. A key finding made by the ET was that relying on market forces to justify the pay differentials was essentially an argument about cost and could not be used to justify unequal pay. 

Next appealed the ET decision, arguing that the differences in pay were underpinned by reasons that were justifiable.

Judgment

The EAT upheld the ET's finding that the claimants had demonstrated a particular disadvantage. However, it concluded that the ET had erred in aspects of its analysis of legitimate aims and proportionality when assessing Next's justification arguments.

In particular:

• Basic pay and unconsolidated awards: The EAT found that differences in basic pay and certain unconsolidated awards were justified by Next's legitimate aim of recruiting and retaining warehouse staff. The evidence showed that Next experienced recruitment and retention challenges in its warehouses that did not apply in the same way to its retail workforce. The EAT also took account of the role of collective bargaining in determining certain payments to warehouse staff.
• Sunday pay and long-service awards: The EAT also considered differences arising from collective bargaining and legacy arrangements in relation to Sunday pay and certain relatively small differences in long-service awards.

The EAT did not, however, accept Next's appeal in relation to all contractual differences. In particular, its appeal concerning night-time premiums and paid rest breaks was unsuccessful. In relation to the relevant justification advanced for those differences, the EAT did not accept cost saving as a legitimate aim.

KEY TAKEAWAYS

It is still unclear whether the judgment will be subject to a further appeal. Going forward, employers may wish to consider the following practical points:

Document the reasons for pay differences.

When seeking to justify differences in pay between groups performing equal work or work of equal value, employers should be able to identify objective, gender-neutral reasons for those differences. A claimant's pay does not have to be increased simply because a comparator is paid more, especially if the difference can be objectively justified. Employers should document the rationale for pay decisions at the time they are made rather than seek to construct the evidence later.

Market factors can be relevant, but justification remains fact specific.

Recruitment and retention needs, labour market conditions, and collective bargaining may provide legitimate reasons for differences in pay, but they will not automatically justify a difference. Employers will still need to establish and adopt proportionate measures. Employers relying on labour market conditions should retain evidence supporting the recruitment or retention challenges and the resulting pay decisions.

Proactively review pay structures.

Equal pay claims can be legally complex, lengthy, and fact sensitive. Employers should consider the composition of their workforce and whether differences in pay, premiums, allowances, or other contractual benefits between groups performing equal work or work of equal value could create equal pay risk.

Consider a privileged equal pay review.

Employers may wish to consider conducting an equal pay audit or broader pay equity review, where appropriate under legal privilege, to identify potential disparities, understand their causes, and determine whether remedial or other preparatory action may be appropriate.

HOW WE CAN HELP

Morgan Lewis lawyers stand ready to assist employers in keeping abreast of these changes and any applicable implementation timelines to appropriately plan for the impacts such changes could have on their workforce.