New EU Rules to Close the Gender Pay Gap

Today is a historical day. The EU Directive on pay transparency entered into effect today (6 June 2023). This EU Directive contains a range of new rules to combat wage discrimination and help close the gender pay gap. The average pay gap in the EU is 13% and has only decreased minimally in the past 10 years. From now on, the Member States will have three years to implement the EU rules in national law. In this newsletter we will discuss the concrete implications for the Netherlands and the other Member States.

The right to equal pay for men and women for equal work or work of equal value is enshrined in Article 157 of the Treaty on the Functioning of the European Union (“TFEU”). In addition, the requirement to ensure equal pay is set out in the “Recast Directive” from 2006 (EU Directive 2006/54/EC), after which this EU Directive was still supplemented in 2014 with a recommendation of the European Commission on pay transparency. In spite of these existing regulations, there are problems to implement and enforce this principle in practice. An important reason given for these problems is that wage discrimination often remains unnoticed due to the absence of pay transparency, so that workers do not or cannot bring claims.

That is why, on the (shared) initiative of the President of the European Commission, Ursula von der Leyen, the Gender Equality Strategy 2020-2025 mentioned that the European Commission would propose new binding measures on pay transparency. On 4 March 2021 the European Commission published the proposal for an EU Directive.

The purpose of the EU Directive is to combat wage discrimination and to help close the gender pay gap in the EU by introducing a new set of rules. The EU Directive applies to employers in the public and private sectors, and to all workers with an employment agreement or an employment relationship. Besides, some measures apply to applicants for employment.

The EU Directive contains many important rules for employers. The 5 key obligations are described below.

1. Pay transparency for applicants for employment
   
   Employers are obliged to provide applicants with information about the initial pay or the pay range of the position concerned, and where applicable, the relevant provisions of the collective labour agreement, so that informed and transparent negotiations on pay can be conducted. Employers are not allowed to ask applicants about their pay history at their current or previous employers. Besides, employers shall ensure that job vacancy notices and job titles are gender-neutral and that recruitment processes are led in a non-discriminatory manner, in order to ensure the right to equal pay for equal work or work of equal value.
   
2. Transparency of pay setting and pay progression policy
   
   Employers are obliged to give their workers easy access to the criteria that are used to determine workers’ pay, pay levels and pay progression. Those criteria must be objective and gender neutral. The Member States are free to exempt employers with fewer than 50 workers from this transparency obligation.
   
   
3. Right to information
   
   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. Such information can be requested through their workers’ representatives or through an equality body. Employers shall provide the information within a reasonable period of time, but in any event within two months from the date on which the request is made. In addition, employers are obliged to inform all their workers of this right to information on an annual basis. Incidentally, workers cannot be prohibited (e.g. through a confidentiality clause in the employment agreement) from voluntarily disclosing their pay for the purpose of the enforcement of the principle of equal pay. However, employers are permitted to require workers not to use information concerning the pay or pay level of others for any purpose other than to exercise their right to equal pay.
   
   
4. Reporting on the pay gap
   
   Employers will be obliged to report on the pay gap between female and male workers. It depends on the number of workers how often reports must be provided:
   
   - Employers with 250 workers or more: by 7 June 2027 and every year thereafter;
   - Employers with 150 to 249 workers: by 7 June 2027 and every three years thereafter;
   - Employers with 150 to 149 workers: by 7 June 2031 and every three years thereafter;
   - Employers with fewer than 100 workers may report on a voluntary basis, unless the Member States impose the obligation to report on these employers.
   
   The accuracy of the information included in the reports on pay shall be confirmed by the employer’s management, after consulting workers’ representatives. Workers’ representatives must also get access to the methodologies applied by the employer.All information included in the report shall be communicated to the supervisory body in theMember State concerned. Besides, the employer may publish the information on its website or make it publicly available in another manner. An exception applies in relation to the information about the gender pay gap between workers (broken down by categories of workers and by ordinary basic wage or salary and complementary or variable components); this information needs to be provided only to the workers and the workers’ representatives, or upon request to the labour inspectorate and the equality body
   
   
5. Joint pay assessment
   
   In cooperation with the workers’ representatives, employers have to perform a joint pay assessment if the following three conditions are met:
   
   a) The pay reporting demonstrates a difference in the average pay level between female and male workers of at least 5% in any category of workers;
   b) The employer has not justified such a difference on the basis of objective, gender-neutral criteria; and
   c) The employer has not remedied such an unjustified difference in the average pay level within six months of the date of submission of the pay reporting
   
   The joint pay assessment shall be carried out in order to identify, remedy and prevent differences in pay between female and male workers which are not justified on the basis of objective, gender-neutral criteria. When implementing the measures arising from the pay assessment, the employer shall remedy the unjustified differences in pay within a reasonable period of time, in close cooperation with the workers’ representatives. This shall include an analysis of the existing gender-neutral job evaluation and classification systems or the establishment of such systems, in order to ensure that any direct or indirect pay discrimination on the grounds of sex is excluded.

An important aspect of the EU Directive is to allow the effective enforcement of the measures proposed. That is why the EU Directive refers to the following provisions, among others:

• Shift of burden of proof: If an employer fails to comply with the obligations of pay transparency, this employer will have to prove in legal proceedings that there is no pay discrimination.
• Right to compensation: The Member States shall ensure that any worker who has sustained damage as a result of an infringement of any right or obligation relating to the principle of equal pay has the right to claim and to obtain full compensation or reparation for that damage. Such compensation consists of the full recovery of back pay and related bonuses or payments in kind, compensation for lost opportunities, non-material damage, any damage caused by other relevant factors, as well as interest on arrears. The compensation or reparation cannot be restricted by the fixing of a prior upper limit.
• Proceedings: It is important that collective actions can be instituted not only by workers, but also by workers’ representatives, on condition that that the workers agree to this.
• Penalties: The Member States shall adopt effective, proportionate and dissuasive penalties. Such penalties should include fines that may be based on the employer’s gross annual turnover or on the employer’s total payroll. When determining these penalties, all relevant aggravating or mitigating factors shall be considered that may apply in the circumstances of the breach or the repeated breach.

The Member States now have three years’ time to implement the EU Directive in national law. For all Member States, including the Netherlands, this means that compliance with the EU rules will become mandatory ultimately on 7 June 2026. The bill on ‘Equal Pay for Men and Women’ that was already submitted in the Netherlands on 7 March 2019 does not (yet) fully comply with the rules set out in the EU Directive. This means that the Dutch legislator will now have to make a move.

At present, it is clear in any case that the EU rules will have drastic consequences for employers. The threshold for individual workers to enforce equal pay in legal proceedings (through an individual or collective action) will be lowered, and will include the option to claim full compensation. In addition, there is a risk of (high) fines. To anticipate on this, employers may choose to conduct a pro-active audit within their organizations in order to examine which measures should still be taken. In this process, it is important to also take into account the position (and rights) of the Works Council and the trade unions.

If you have questions on this topic, please feel free to contact Soo-Ja Schijf.