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New EU pay-gap rules will impact UK businesses

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New EU rules on pay transparency that aim to close the gender pay gap look set to have a ripple effect on how businesses in the UK operate.

20th Dec 2023
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A European directive aims to close the gender pay gap by increasing pay transparency, an action that will affect the UK market. This shift will prompt companies to review and update existing pay and related people practices. 

The new rules will mean that EU companies will have to disclose salary details and take action if their gender pay gap exceeds 5%. 

Those who are victims of pay discrimination will also be given compensation alongside penalties for employers who break these rules. 

Employers will not be allowed to ask candidates about their pay history and workers will be entitled to ask their employers about average pay levels and the criteria used to determine pay and career progression. 

These adjustments in pay transparency are expected to create ripples that extend beyond EU borders, impacting how businesses in the UK operate and manage their pay systems.

Its effect on UK businesses 

Employers in the UK will see a shift in the market due to European employers implementing their new processes.

Stuart Hyland, partner at tax advisory firm Blick Rothenberg, shared how this can be a win-win for both employers and their people. “Recent media headlines illustrate the need for a fit-for-purpose reward strategy with pay equity and transparency at its core, as exemplified by the news of equal pay claims bankrupting one large city council in the UK with the expectation that others are likely to follow,” he said. 

Alongside this, there have been ongoing disputes regarding equal pay in some of the major UK supermarkets, with potential penalties reaching into the billions.

“These were all large claims involving many hundreds of employees, but one recent employment tribunal for just a single equal pay claim in London cost the business over £3m in addition to any reputational damage,” Hyland said. 

With the rise of insolvencies alongside the increase in the national minimum wage, businesses are evidently struggling. Therefore, UK employers need to respond effectively to the increased transparency set by their competitors.

Failure to do so could cause further strain, impacting talent acquisition and retention, and potentially subjecting businesses to penalties that might tip them over the edge.

Preparation is key 

Despite the deadline being June 2026 for the new regulations to be written into law, Hyland shared how important it is to be prepared. Being proactive can provide a competitive advantage, allowing organisations to maximise the benefits of these new changes. 

“It must surely only be a matter of time before the UK follows the rest of the world in setting up increased transparency regulations,” he added.

Hyland came up with three main tips that employers should be doing now. 

1. Leadership teams, HR and other key stakeholders should be fully aware of the upcoming legislation

Hyland said, “Many employers seem to think that it does not apply to them if they have only a small number of employees or think that the regulations are like those that have already been introduced in the US.

“Both of these assumptions are incorrect as the EU regulations are much more wide-ranging and require a significantly more extensive response from employers of all sizes,” he added. 

2. Analyse current practices against the requirement of the regulations and develop a change plan 

A “readiness assessment” is advised to help the business smoothly plan and deliver any changes. 

Hyland said, “The changes that are likely to be required are not those an employer will want to leave to the last minute and rush as they could seriously impact employee morale and engagement if done badly.”

3. Prepare an employee education and communication programme 

“Many employers appear to be overlooking this important step in their planning and experience teaches us that this will be important in ensuring a smooth transition to the new regulatory framework.”

Who will be hit the hardest?

Although these regulations will have an impact on all, some employers will have more changes to address. 

Employers who don’t use an analytical job evaluation system to determine work of equal value and support their grading system must prioritise addressing this matter.

Hyland said, “Many employers (including some of the largest firms in the world) simply match their roles into a market pay survey and use the resulting levels as the basis for their own grading system. This will not be sufficient under the new regulations, which specify the need for a more robust and defensible approach.”

Those who have discretionary pay practices such as giving business leaders money for bonuses and asking them to distribute it as they see fit will need to change this practice. 

Hyland continued, “The EU pay directive is intended to mark the demise of discretionary pay practices and will require more structure and transparency to be put into place around the reward decision-making process.”

Lastly, employers that don’t have a documented rewards strategy will need to implement one. 

“Employers will be required to publish parts of their reward strategy as they will have to explain to employees how pay is set, managed and progressed,” Hyland concluded. 

When will you start preparing for these new changes and how do you think this will impact your business? Let us know in the comments below.

Replies (2)

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By FactChecker
20th Dec 2023 22:19

*When will you start preparing for these new changes and how do you think this will impact your business?*

Never / Not at all (but then the only corporations in which I've worked that take notice of this kind of rubbish had two things in common - 1) they were very large (typically international); and 2) they don't exist any more (having failed or been acquired).

“The EU pay directive is intended to mark the demise of discretionary pay practices and will require more structure and transparency to be put into place around the reward decision-making process.”
Amazing ... doesn't sound one bit like the dynamic beast that we know to lie at the heart of the EU - they wouldn't actually enjoy all that unnecessary admin would they? Would they?

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By JustAnotherUser
02nd Jan 2024 15:59

Ah the good old pay gap calculation....

From UK Gov...

Take the mean (average) hourly pay for men and subtract the mean (average) hourly pay for women.

eg: Acme Ltd has 4,445 full-pay relevant employees. 1,345 are men, and 3,100 are women.

If an employee does not self-identify as either gender (of the 2), you can exclude them from your calculations.

try to use information employees have already provided, such as in HR or payroll records for the gender...

0.5% of the population in the census answered that the have a different gender than that at birth....
1 in 200
6.0% did not answer the question on gender identity.
93.47% selected same as at birth.

I just checked the latest report from HSBC, AstraZeneca, diageo, unilver (wow... the average female pay was 28% higher than male pay in 2022).... none of the most recent reports mention trans or any other genders, as its not mandated for them to do so I assume, so by my calculations we have a potential margin of error in the UK of 6% where that data is not included in the basic maths of the subject.

I do not intend to poke fun at the matter but mostly curious how we navigate gender equality in 2024 if the government and companies are not addressing gender differences?

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