The New EU Equal Pay Directive: Weighing Costs and Benefits

In a previous blog, we highlighted the history, requirements, and key benefits of the new EU directive that seeks to support the principle of equal pay for equal work, or work of equal value, between men and women through pay transparency and enforcement mechanisms.

As member countries work the directive into their own laws, the new regulations will undoubtedly require some resources, time, and focus for employers. What are the benefits from an employer perspective? What will the cost impact be on employers? Will the benefits outweigh the costs? How can employers best manage this new reality of transparency and equal pay?

The potential costs for employers

While pay transparency and equal pay practices can bring significant benefits to employers, there are also costs associated with implementing and maintaining these practices. Here are some of the costs employers may face:

Data Collection and Analysis: Ensuring pay transparency and equal pay requires employers to collect and analyze data on employee pay and compensation practices. This can be time-consuming and may require additional resources or software to manage the data.

Pay Adjustments: To achieve equal pay, employers may need to make pay adjustments for some employees. This can be costly, especially if the employer has a large workforce.

Training and Communication: Employers must communicate the new pay transparency and equal pay policies to their workforce and provide training to managers and employees on how to implement these practices. This can be time-consuming and require additional resources or software.

Legal Compliance: Employers must comply with applicable laws related to pay equity and equal pay. This may require additional legal counsel and compliance monitoring.

Compensation Structure Changes: To implement pay transparency and equal pay, employers may need to restructure their compensation practices. This can be costly and may require additional resources.

Overall, the costs of implementing pay transparency and equal pay practices will vary depending on the size and complexity of the organization, and on whether the organization has tools to automate the necessary tasks and ensure efficiency. However, these costs should be weighed against the potential benefits of increased employee satisfaction, productivity, and legal compliance, as well as against the costs of inaction and the potential savings that can be realized from pay transparency.

How equal pay can save costs

While some critics of pay equity reporting cite increased costs to employers, the benefits named above can bring with them significant benefits such as:

Reduced Turnover: When employees see they are being paid equitably, they are more likely to stay with their employer. High turnover rates can be costly for employers, as they must spend time and resources recruiting, hiring, and training new employees.

Increased Productivity: Employees who feel their pay is fair and transparent are generally more motivated and engaged in their work. This can lead to increased productivity and efficiency, which can save costs for the employer.

Reduced Legal Costs: By ensuring pay transparency and equal pay practices, employers can avoid legal action related to pay discrimination. This can save significant legal costs, time, and resources that would otherwise be spent on legal defense.

Improved Reputation: Employers who are known for their fair and transparent pay practices can build a positive reputation as an employer of choice. This can attract top talent and help to retain existing employees, reducing the costs associated with recruitment and turnover.

Enhanced Employee Loyalty: When employees feel they are being paid fairly, they are more likely to be loyal to their employer. This can lead to a positive workplace culture, higher levels of engagement, and reduced costs associated with absenteeism, low morale, and poor performance.

Overall, pay transparency and equal pay can save costs for an employer by promoting a positive workplace culture, increasing productivity, reducing turnover and legal costs, and enhancing the employer's reputation as a fair and equitable employer.

The cost of inaction

In addition to missing out on the benefits for recruiting, reputation, productivity, etc., failure to comply with regulations is likely to result in penalties. The EU directive instructs member states to “provide for effective, proportionate and dissuasive penalties in the event of infringements of national provisions.” Fines are to consider the gravity and duration of the discrimination and should take into consideration any intent to discriminate along with “any other aggravating or mitigating factors that may apply in the circumstances of the case, for instance, where pay discrimination based on sex intersects with other grounds of discrimination,” commonly known as intersectionality. Repeated infringements are to have additional specific penalties or other financial disincentives.

Public contracts should ensure pay equity as well, by having “pay setting mechanisms that do not lead to a pay gap between female and male workers that cannot be justified by gender-neutral factors in any category of workers carrying out equal work or work of equal value,” to be enforced by penalties and termination conditions.

Failure to comply also runs the risk of triggering court-ordered changes. The directive says that courts “should be able to require an employer to take structural or organisational measures to comply with its obligations regarding equal pay.”

Furthermore, in a court case, the directive shifts the burden of proof to the employer to prove that there has been no direct or indirect discrimination in relation to pay.

Meeting the fair pay challenge

Whether it’s to comply with the law or to attract talent, motivate your workforce, create a culture of fairness, or reduce legal risk, establishing pay transparency and equity can pay big returns. 

Companies that are serious about fair pay are putting systems in place that will enable them to deliver at scale. That means automation of pay processes, transparency so that employees understand what they are being paid and why, external and internal benchmark comparison, and advanced analytics to identify, report, and fix pay gaps, identify at-risk employees, and proactively focus programs to remedy unfair practices.

To learn how beqom can help your organization support fair and transparent pay practices, contact our rewards specialists for more information.

Download beqom’s 2023 Leveling the Paying Field Report for insight into employee experiences and perspectives on the gender pay gap, pay transparency, and other aspects of compensation.