What do the new EU rules on the gender pay gap mean for your startup?

It is 66 years ago that the EU first introduced the principle of equal pay for male and female workers doing work of equal value. Yet the gender pay gap stubbornly persists in the bloc. Women earn average about 13% less than men, with significant differences between Member States.

To close this gap, the European Parliament and the Council have recently given their approval a set of new rules adopting binding wage transparency measures. For the first time in union history, this legislation also addresses intersectional discrimination (on the combined basis of ethnicity, race, religion, etc.) and addresses the rights of non-binary individuals.

“This legislation makes it crystal clear that we will not tolerate any form of gender pay discrimination in the EU,” said Kira Marie Peter-Hansen, rapporteur for the Committee on Employment and Social Affairs.

The guideline will apply to all employees with a legal employment contract, collective agreement and applicable practice, as well as to all employers in the public and private sectors.

For some companies, this groundbreaking law may simply (and hopefully) mean the normalization of existing practices; for others, it may require systematic change. But what exactly does it mean?

1. No more pay discrimination

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Employers must ensure that their pay structures do not reflect gender-based differences between employees performing the same job or work of equal value. This not only concerns salaries, but also all other benefits, such as bonuses and travel allowances.

To help businesses (particularly start-ups and SMEs), Member States should provide employers with training and tools to assess the value of work based on four objective criteria: skills, effort, responsibilities and working conditions.

2. Complete wage transparency

The new rules require companies to inform job seekers about the starting salary or salary range of open positions, either in the job description or prior to the interview. However, employers do not have the right to ask about the salary history of the candidates.

Workers will also be entitled to information on their individual and average wage levels – broken down by gender – for work of equal value. In addition, they have access to the criteria used to determine pay and career progression, which must be objective and gender neutral.

Member states may exempt employers with fewer than 50 employees from this obligation and allow them to make these criteria available only upon request. But at least they should provide ready-made templates to reduce administrative hurdles for micro-enterprises and SMEs.

3. More fairness for employees

The burden of proof for wage-related disputes no longer rests with the employee.

“That is especially important [this] has shifted from the employee to the employer when a gender pay discrimination suit is filed,” said Yoko Spirig, co-founder and CEO of the Swiss startup Ledgytold TNW.

“Companies now have to prove that there is no discrimination when challenged, rather than the employee having to prove the presence of discriminatory practices. This step is welcome and sends a clear signal to companies to get their payroll data and processes in order now.”

Employees who have experienced gender pay discrimination can also claim and receive compensation, including full recovery of back wages, related bonuses and in-kind payments.

4. Report, report, report

According to the directive, companies with more than 250 employees will have to report annually on their gender pay gap. For a workforce between 150 and 249 this drops to every three years and for a workforce between 100 and 149 to every eight years.

Member States can exempt companies with less than 100 employees, or choose to make them mandatory as well.

If the reporting shows that there is a difference of more than 5% that cannot be justified by objective, gender-neutral criteria, then they must carry out a joint wage assessment with the employee representatives.

The purpose of the assessment is to identify problems and implement solutions that eliminate gender pay discrimination.

5. Watch out for the penalties

Employers who break the rules will face “effective, proportionate and dissuasive penalties”, such as fines and even withdrawal of government benefits.

“I particularly welcome the proposal to penalize companies that fail to address their gender pay gap, as it is imperative that companies stop resting on their laurels – complacency will get us nowhere,” said Jenny Keisu, CEO of the Swedish eboatmaker X coasttold TNW.

Keisu stressed that all companies should monitor the gender pay gap “like any other key KPI” even more regularly than the legislation suggests.

What are the next steps?

The rules will enter into force 20 days after their publication in the Official Journal of the EU, which is still pending. They will apply to all employers in the union, even though smaller ones (micro-enterprises, start-ups and SMEs) will initially have fewer obligations and more help from member states.

As this is a directive, EU countries are given some freedom over how they choose to apply the rules and they have three years to implement them.

“It is encouraging that the European Parliament is taking a position and affirming that change has to happen sooner rather than later,” said Marta Sisí Jiménez, head of HR at Freepik companya Malaga-based scale-up.

“[Especially] for Europe’s rapidly expanding startups looking to expand, these new rules set clear guidelines on an issue that was previously unclear,” she told TNW.

But this historic – and necessary – change may not come without its challenges. Jiménez noted the potential resistance from founders who are already navigating a difficult landscape, with declining investment and increased regulation.

David Perez, VP of Stakeholder Relations at Cabifypointed out another possible challenge: the validity of the required data.

“It should be borne in mind that when analyzing the gender gap, many factors can skew the data, such as the number of women and men in one department versus the other,” Perez told TNW. “That’s why we believe it’s vital to do an ad hoc analysis of each job so that someone is sought not on their gender, but on what they can contribute to the job.”

But regardless of any challenges, the benefits of ensuring equal pay are great and far-reaching, from achieving equity and social justice to strengthening business performance and strengthening the economy.

From the point of view of the startup ecosystem in Europe, the new rules also promote a level playing field.

“This regulation will begin to shape a labor market where large companies and SMEs will compete for talent on the same terms, with the same rules,” Perez noted. “A labor market in which this data will be reported in a uniform and common way by all companies.”