Examining the Impact of EU Directive 2023/970 – Transparency and Equal Pay

Since the publication of EU Directive 2023/970 in May 2023, there have been numerous communications published by traditional advisory channels discussing what companies must do and how they should prepare for the changes mandated under this directive.

Rather than reviewing the directive through the lens of compliance, I’m going to cover the opportunities this directive and the articles within present for organizations operating in the EU Member States. (Related reading: “Spring/Summer 2024 Europe Labour Market Report.”)

Inclusion of the Extended Workforce

It’s not a stretch to assert that most organizations view the directive’s intent as holistically positive. It’s intended to strengthen the application of equal pay for equal work between men and women throughout the EU and reduce the gender pay gap.

While EU member states may differ in how they interpret the directive – the definition of “employer” is vague, for example – it includes a description of employment that would appear to broaden the scope beyond traditional full-time employment: “This Directive should apply to all workers, including part-time workers, workers on a fixed-term contract and persons with a contract of employment or employment relationship with a temporary agency …” (Section 18).

You’ll notice there is no direct mention of gender, age or protected classification accompanying this definition, but as quoted above it “should apply to all workers.” The directive further states that the existence of a relationship “should be guided by the facts relating to the actual performance of the work and not by parties’ description of the relationship.” 

Jump ahead to Section 19 and you’ll see this broadening of scope doesn’t stop at individuals engaged in an employment relationship, but relates to applicants as well and emphasizes the importance of pay transparency. Let’s start here in discussing the opportunities the directive offers organizations. 

Pay Transparency and Talent Acquisition Impact

Many organizations have viewed pay transparency as a negative force in talent acquisition as it opens the organization to additional risks related to poaching or cost inflation. Although this is a possibility, when you consider that this directive applies to all companies greater than 100 employees, these concerns should be mitigated.

If everyone is acting in good faith and is open about the wages they are willing to pay for talent, the market should naturally find a fair level, avoiding auction-style bidding wars for talent.

Transparency for job seekers will also provide transparency for employers, shifting pay practices away from exercises in probability and putting the emphasis on preparation and research. If you’re willing to collect pay data and use it properly, not only are you less likely to be blindsided by external offers, buy you’ll also have more time to focus on the right candidates for your needs.

Pay Rates vs. Qualitative Factors

It’s well documented that applicants weigh many factors before joining an organization. While surveys typically indicate compensation isn’t at the top of most lists, it’s always a variable in the equation.

Cynicism may lead some to conclude that compensation’s ranking is commonly undervalued in these studies due to participants’ aversion to being viewed as pay driven. Transparency can set this variable as a relative constant, driving qualitative values to play a more significant role in attracting and retaining talent.

Put another way, if pay transparency partially reduces the influence pay rate plays in talent acquisition and assigns greater value to qualitative aspects, the market is no longer tilted in favor of companies with the deepest pockets. Furthermore, all commercial aspects being equal, there’s a better chance that each candidate you engage with is genuinely interested in your organization. 

Fostering Cross-Functional Collaboration and Alignment

You may not think of governments as models for efficiency, but this directive has the potential to be a catalyst for collaboration in the private sector. In short, the key reporting and measurements required under EU Directive 2023/970 will encourage human resources and extended workforce/procurement leaders to be in lockstep once it becomes law.

To reduce the compliance risk related to pay equality or transparency, leaders from both groups will need detailed knowledge of what the other is doing to attract, engage and retain the talent needed to drive the organization forward.

Section 28 contains key language on this front, calling out the processes and standards for comparisons between parties protected under the directive. There are many common standards used in job classification and analysis, but there are also a few that fall far outside the margins of what practitioners would deem “standard.”

One particularly interesting inclusion is the ability for parties to compare themselves to hypothetical peers. This comparison puts the burden of protection on organizations to simulate comparisons.

While most would agree peer comparison is a sound practice when identifying inequity, few have needed to manufacture or simulate a peer to use as a comparator. This effort may have extensive application in the extended workforce since many organizations hire unique positions or engage contingent talent in non-standard locations.

It also means extended workforce leadership and procurement managers must partner closely with their HR colleagues to create remuneration structures and strategies for roles and locations not previously included in their purview. Some organizations will likely decide the prudent direction is to create universal structures that apply to all positions and locations in which the company has engaged resources.

Even this effort isn’t infallible, though. Each time a new role is introduced in the corporate (full-time) or external (contingent) job catalog, the same updates must be made in the complementary catalog, making communication and alignment between stakeholders critical.

Looking at this through a more optimistic lens, this may be the catalyst that drives all organizations to harmonize their taxonomies and agree on a universal language for how they catalog and describe the work being done throughout the organization. Anything short of that exposes the company to unwanted risk. 

What You Can Do Today to Prepare for Compliance

EU Directive 2023/970 goes into effect for all organizations on or before 7 June 2027 and is subject to individual member states drafting their own laws in the spirit of the directive. This leaves some time to gather your teams and develop a plan that will put you on the right path regardless of the nuanced changes likely to appear as member states begin publishing their individual legislature.

Although this post isn’t intended as a comprehensive guide to complying with the directive, the following recommendations can help your organization prepare:

1) Develop an inventory of:

a) Job titles

b) Locations

c) Employees

d) Contractors

e) Pay practices

f) Decision makers (those who can initiate an offer or change in pay)

2) Open a dialogue between the necessary departments at your organization:

a) Human Resources

b) Procurement and extended workforce leaders

c) Legal

d) Compliance

3) Build a current-state analysis:

a) What is our position if this was live today?

b) What do we need to improve this position?

c) What is our current culture around transparency?

d) How do we measure and validate skills?

e) What potential challenges exist in our current job titles and categorization (duplicates, unique roles, jobs that are difficult to compare)?

f) Can we develop a more widely accepted job catalog and taxonomy?

4) Compare yourself to the external market:

a) What data do we need?

b) Are we using common nomenclature?

Once you have put some time into the items above, you’ll have a better sense of the activities needed to create compliant processes in your organization. Many organizations may choose a wait-and-see approach, but regardless of the final language included in the statute, the steps above are ones from which every company can benefit.

For much more on the European talent landscape, including deep dives on the UK/Ireland, Germany, Switzerland, the Netherlands and Sweden, check out our latest European Labour Market Report.

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Disclaimer: The content in this blog post is for informational purposes only and cannot be construed as specific legal advice or as a substitute for legal advice. The blog post reflects the opinion of Magnit and is not to be construed as legal solutions and positions. Contact an attorney for specific advice and guidance for specific issues or questions.