WTW on the EU Pay Transparency Directive for Middle East multinationals

With the EU Pay Transparency Directive coming into effect, Middle East-headquartered multinationals with European operations may need to take extra steps to adhere to legislation that is stringent than their home markets. WTW leaders Roman Weidlich and Tamsin Sridhara walk through the directive’s impact and what is needed to be well prepared.

When Middle East headquartered multinationals expand their operations into Europe, there are multiple people issues to be aware of, from navigating the diverse cultural landscape, including cultural norms, work ethics, and communication styles; to language barriers; and the complex labour market.

One particular area of focus that has grown in importance recently is the EU Pay Transparency Directive that many multinationals with headquarters outside of Western Europe and North America may not be fully aware of. The EU Pay Transparency Directive comes into effect in 2026 – and non-compliance can cost not only the company’s reputation but also millions of euros in penalties and/or claims.

Emphasis on Pay Equity

When managing compensation and benefits, one key challenge is to strike the right balance between being market pay competitive, internally equitable, and able to recognise individual contributions.

For-profit organisations often tend to prioritise market competitiveness and individual contributions at the expense of internal pay equity. In its commitment to equal pay, the European Union (EU) is now using greater pay transparency and enforcement rights as the way to ensure employers deliver equal pay.

The EU Directive

A Q&A on the main features and implications of the EU Directive:

What is the purpose of the EU Pay Transparency Directive?
The main purpose of the EU’s Pay Transparency Directive, which comes into effect in 2026, is to address and reduce the gender pay gap within the EU by promoting transparency and ensuring equal pay for equal work or work of equal value.

Who and what is subject to this legislature?
All private and public sector employers in each of the 27 member states of the European Union, regardless of the size of operation, are subject to this law. The definition of pay in the Directive covers all pay including base, variable, benefits in cash and in kind.

What are the specific requirements?
The EU Pay Transparency Directive includes several key requirements, including:

• Pay transparency for job seekers: Employers must provide information about the initial pay level or range in job advertisements or before job interviews. This ensures that candidates know what to expect in terms of salary, promoting transparency from the outset.
• Right to Information for employees: Employees have the right to request information regarding their individual pay level and the average pay levels, broken down by gender, for categories of employees doing the same work or work of equal value within the company.
• Reporting obligations: Companies with at least 100 employees are required to report on the gender pay gap within their organisation. This reporting should include information on pay differences between male and female employees and should be made publicly available.
• Joint pay assessments: If the pay reporting reveals a gender pay gap of at least 5%, and the employer cannot justify this gap with objective, gender-neutral factors, they will need to conduct a joint pay assessment in cooperation with employee representatives.
• Prohibition of pay secrecy: The Directive prohibits contractual clauses that prevent employees from disclosing their pay or seeking information about the pay of others, thereby promoting a culture of openness.
• Compensation and remedies: The Directive strengthens the rights of employees to seek redress and compensation for pay discrimination. Employers bear the burden of proof to demonstrate that there is no discrimination when a claim is made.
• Enforcement and penalties: Member states are required to establish effective, proportionate, and dissuasive penalties for breaches of the directive, which may include fines or other sanctions.

These requirements are designed to create a more transparent and equitable pay structure, helping to reduce the gender pay gap and promote fair treatment in the workplace. Member states are expected to implement these provisions into their national laws, adapting them to their specific legal and organisational contexts.

The EU Directive requires EU employers to move further along the spectrum of pay transparency, with any company with 100+ employees reaching stages 5 and 6.

What is the timeline for compliance?
The EU Directive passed in 2023 and has given up to three years for the individual member states to transpose the requirements into local law – by 2026 at the latest.

• Transposition progress: To date, Poland, Malta and Belgium have published final regulations for part of the Directive provisions, and other member states including Sweden and the Netherlands have issued draft regulations. We are hearing of progress in many other EU member states towards issuing draft regulations.
• Compliance for employers: Once the directive is transposed into national legislation, employers in member states will be required to comply with the new local rules. WTW will be providing updates on transposition through our Global News Briefs. It is important for employers and other stakeholders to stay informed about the specific timelines and requirements set by their national authorities, as these will detail the exact compliance dates and procedural requirements based on the transposed national laws.

What are the consequences of non-compliance?
If a company doesn’t comply with the EU Pay Transparency Directive, it can face several, often severe, consequences:

• Fines: Companies might have to pay financial penalties for not following the rules.
• Legal claims: Employees can take legal action and, through an equal pay claim, seek compensation if they experience pay discrimination.
• Sanctions: Authorities might impose other penalties or require companies to fix their practices. Companies may be forbidden from bidding for public contracts.
• Reputation damage: Non-compliance can harm a company’s reputation, making it harder to attract and retain employees.
• More scrutiny: Companies might face increased monitoring by authorities to ensure they follow the rules in the future.

Each EU country will have specific details on these consequences based on how they implement the Directive into their national laws.

Action agenda for multinational companies

There are several immediate actions for the headquarters of multinationals overseeing operations in Europe, including:

• Develop a full understanding of the Pay Directive details and its implications for your company.
• Understand the company’s readiness for the Directive and identify key gaps.
• Ensure a plan is in place or being developed covering what the company needs to do to address these gaps and prepare and who at corporate, regional and/or local level is responsible for doing what.
• Gain leadership and business support for the plan with approval for any additional resourcing needs.

Practically, broader preparation activities will require:

Enhanced data and analytics capabilities
Compliance requires extensive data collection and pay equity analytics every year starting from 2026. Companies can start by determining whether they need to invest in additional analytics software and develop more central capabilities to allow for an efficient year-on-year compliance in the EU and to support regular global pay equity analytics.

Validate or introduce a new job structure
Pay equity requires robust job levelling and architecture to determine jobs or work of equal value. For many multinationals, this means either testing and enhancing current structures or the introduction of a new job levelling system to meet EU and broader global business needs. EU guidance states that a factor-based job levelling system is the most robust approach for pay equity and transparency purposes. It is also an enabler for internal career mobility and a basis for consistent application of a whole range of HR programs underpinned by job size.

Review and update pay-related policies
The refreshed policies need to clearly state the criteria for determining and progressing rewards. The impacted policies include recruitment, promotion, and annual review so that they are robust, and any differences in male and female pay decisions are for objective reasons. Where the analytics indicate that are differences in pay that cannot be explained, remedial action may be needed with additional pay budget required.

Enable effective communication and engagement
Delivering pay equity is core to employees’ trust in being paid fairly. Communications providing employees with increased transparency regarding their pay need to be carefully managed to ensure that managers, employees, and union representatives understand the additional information being given and that the response is largely positive.

Conclusion

If your organisation plans to or already operates in Europe, addressing the Pay Equity and Transparency Directive should be a key part of your HR agenda. It not only requires specific actions but also provides the opportunity to reap the broader benefits of internally consistent pay.

Furthermore, it provides headquarters with a unique opportunity to review their parent role towards international subsidiaries on their journey to ensure that headquarters take ownership of HR strategies, programs, and policies that are most effectively managed from headquarters.