Navigating pay transparency: insights into UK, EU and US legislation and trends

July 19, 2024

Our recent global webinar explored how businesses should respond to pay transparency legislation and trends in the UK, Europe and the US. In conversation with Elouisa Crichton (Partner in the UK Employment team), Davide Boffi (Partner and Europe Head of Employment and Labour) and Brian Baggott (Partner in our Kansas City office), we discussed current frameworks and upcoming legal developments relating to pay transparency, and best practices to identify and mitigate related risks within your business.

What is the difference between pay equity and pay transparency?

Pay equity means the non-discriminatory principle of receiving equal pay for equal work, whereas pay transparency focuses on the practice of being open and sharing information about pay. Of course, whilst the two are intrinsically linked, the principles are fundamentally different and, if employers have concerns or issues in relation to pay equity (i.e. discriminatory pay practices), the shift towards pay transparency could open them up to risk and litigation.

Current and upcoming legislation

In the UK:

• Pay equity rules are contained in the Equality Act, which ensures equal pay for men and women doing the same job or jobs of equal value. Pay discrimination connected to other protected characteristics is also prohibited.
• Pay transparency rules apply in certain areas: employers with 250 or more employees are required to report on their Gender Pay Gap. This includes reporting on pay structure and providing high-level statistics on gender pay gaps (e.g. comparisons between genders at senior and junior levels). Executive Pay Reporting is also required for certain UK-listed companies. As part of their "Plan to Make Work Pay", the new government has proposed a draft Bill which commits to enshrining the full right to equal pay for ethnic minorities and disabled people, and introduces mandatory ethnicity and disability pay reporting for employers with 250 or more employees.

In the EU:

• Pay equity for men and women doing equal work or work of equal value has been a longstanding legal requirement in all member states. Additionally, individual member states have adopted various provisions to promote equality between men and women. There are also broader equality laws which can prevent discriminatory pay practices.
• Pay transparency rules will soon apply under the recently adopted EU Directive 2023/970. Member states have until 7 June 2026 to implement the Directive. It applies to employers from both the public and private sectors, and to all employees and job applicants. Obligations on employers include providing information on entry-level compensation during hiring procedures, prohibiting enquiries about current or past pay and ensuring gender-neutral job vacancy notices. Workers have the right to request and receive information about their individual pay level and average pay levels. The Directive also introduces sanctions against gender-based pay discrimination and requires gender pay gap reporting for employers with 100 or more employees.

In the US:

• Pay equity laws exist at both the federal and state levels. The Equal Pay Act prohibits wage discrimination based on gender and there is other legislation which prohibits discrimination based on various protected characteristics.
• State level pay transparency laws are a growing trend. Many states have their own version of the Equal Pay Act and have also enacted laws to address equal pay and pay transparency. These laws generally require employers to disclose relevant salary ranges in job postings and advertisements, and may include anti-retaliation provisions. There are no comprehensive federal pay transparency laws.

How to prepare for changes?

To prepare for the upcoming changes (especially in the EU), employers are encouraged to take advice as to whether they should assess their current pay structure, conduct an equal pay analysis and/or remedy any risk areas. Strategies for analysing and understanding a company's pay structure could include conducting a comprehensive pay audit, consulting external resources such as market surveys and compensation consultants, and gathering internal feedback. Legal compliance and documentation are also crucial.

To determine whether and what action has to be taken, employers will need to:

• be in possession of the relevant data on pay, job type, location, other relevant factors that influence pay (such as seniority) and potentially certain characteristics of the individual job holders (their race, sex, disability status etc.). A preliminary task may be to understand what information is already held about employees and what further information it is necessary to obtain. Employers should remember that processing the personal data of employees in new ways must comply with data protection laws (so specialist advice may be required);
• consider taking advice on how to analyse pay practices to help protect against any future claims (depending on the information that is found). Care should be taken before such analysis is conducted and employers should bear in mind that any advice or information may not be subject to legal privilege; and
• ensure the data together with the process, cost and risk/benefit analysis are all well understood before taking any action.

If a problem is identified in the analysis, employers should be aware of the legal considerations and potential challenges. They should consider the impact on employees, the potential for litigation and the long-term implications of any changes to pay structures. Employers are advised to seek guidance on the appropriate steps for implementing pay adjustments, ensuring that any modifications comply with the usual processes for contractual changes, which may apply on both an individual and collective basis. Correcting pay practices going forward may shine a light on historic pay disparity.

A global approach?

Companies may wish to explore a global approach to pay transparency, aiming for consistency and uniformity in their practices. A global approach may mean different things to different companies. For example, it could mean full transparency about pay, other types of voluntary reporting or taking steps to introduce pay transparency, such as during the recruitment process. However, whilst there could be many benefits, such as talent acquisition and retention, and other administrative advantages, the implementation of a one-size-fits-all approach may come up against challenges due to the unique laws and regulations in different regions. Additionally, it may unnecessarily expose pay issues that exist within an organisation, creating reputational risk and potentially causing competition issues by providing key information to competitors in the market.

Whilst in the UK, subject to certain data protection restrictions, it would be lawful to voluntarily undertake pay transparency reporting, and some businesses may choose to do this ahead of any legal obligation (often to showcase their commitment to pay equity and diversity), it might not be desirable for the reasons detailed above. On the other hand, in the US, voluntarily implementing pay transparency reporting is likely to be difficult to put in place due to the patchwork of laws in different states. A uniform approach would be easiest in the EU. Indeed, the new 2023 Directive will align the legislation of individual EU member states and assist multinational companies as they will all be required to adopt a consistent approach within the EU. Any policy will need to comply with at least the minimum standards required by the Directive. Of course, considering this exercise will be easier once the Directive has been introduced in all member states and the requirements in the different jurisdictions can be compared with one another.

At this stage, given that different jurisdictions are at different junctures in their pay transparency journey, we would suggest that any global approach taken right now is limited to understanding pay within the organisation and, where appropriate, correcting any issues identified. Greater transparency can follow. By taking these preparatory steps now, it will be easier to be ahead of the curve when legislation starts to take effect.

If your business needs any advice on the legal requirements of pay equity and transparency, assistance with analysing current pay structures or finding that "sweet spot" in terms of a global approach that works for your organisation, please do not hesitate to reach out to Dentons.