ANALYSIS: US Employers Confront Pay Gap Following New EU Mandate

US multinational companies will soon have to comply with a wider international medley of pay equity laws, as European Union member states incorporate a new EU directive that requires greater transparency on gender-based pay issues than domestic state laws do.

Some forward-looking US states might feel pressure to broaden their own laws to keep up. But any change that does come on this side of the Atlantic will most likely be imposed by the companies themselves.

Despite efforts to narrow the gender pay gap, it still persists. Men earn 16% more than their female counterparts in the US, and 13% more in the EU.

The EU Pay Transparency Directive, which took effect in June, mandates broader pay disclosure obligations for both job applicants and existing employees at companies operating in any of the EU’s 27 member states. In comparison, only 10 US states have pay transparency laws, and those that do primarily focus on disclosures during recruiting.

The directive covers companies of a certain size, including some US multinationals, who employ or hire EU citizens working in the EU. This directive does not apply to US companies who do not operate within the EU.

However, this push by the EU will have some rippling effects on the way US multinationals approach their compensation practices and policies. It might also drive non-covered employers to start to reevaluate how they determine compensation within their organizations.

EU Directive’s Broad Obligations

The EU directive aims to combat gender pay discrimination in the EU by requiring companies to conduct joint pay assessments, an auditing process done with input from employee representative groups. These assessments will be familiar to US federal contractors who are required to conduct and submit similar audits of their compensation systems and practices to ensure nondiscriminatory pay practices (but without any required joint employee input).

Employers covered by the EU directive will be required to publicly report the annual compensation for both male and female employees and must take remedial measures if the gap between them exceeds 5%. The directive also includes provisions on restitution for victims of pay discrimination and penalties for non-compliant employers.

Covered employers will no longer be able to ask job candidates about their pay history. However, current employees are entitled to request information regarding salary information—broken down by sex, of employees doing the same work, or work of equal value, as well as the criteria used to determine pay and career progression—beyond what is publicly available in the company’s gender pay gap report. The employer’s criteria must be objective and gender neutral.

Unlike regulations, directives are not automatically binding, and all member states must transpose the directive into their national law by June 7, 2026. By then, covered US multinationals should have been given notice on how to comply with the relevant national laws of the member states they do business in.

The actual requirements of these national laws will likely vary. EU member states may grant additional rights to their citizens, going beyond what is minimally required by the directive, so long as the national law does not directly conflict with the directive’s requirements.

Influence on State Laws

The scope of the EU directive signals to legislators in pay transparency-friendly states how pay disclosure requirements could be broadened beyond the pre-employment process.

State lawmakers, especially those in progressive states, may see the EU pay disclosure demands as a more constructive and effective way to achieve gender-pay equity because salary disclosures are required prior to and during employment.

The 10 existing US pay transparency laws primarily focus on pre-employment pay disclosure. For example, some states compel employers to disclose the hourly rate or salary range in job listings and advertisements, while others go further, requiring employers to include other forms of compensation and a general description of benefits in their ads and job listings as well. And for some states, the wage disclosure requirement doesn’t kick in until later in the process, after candidates make themselves known. These states require employers to provide pay information to candidates upon request or at certain stages in the application and hiring process.

US Gets Ahead of the Curve

The US may not be on pace with the EU on some aspects of pay equity, but some states are ahead of the EU directive’s ban on asking job candidates about their pay history. Roughly 20 states already have laws banning or restricting the use of salary history during the hiring process.

But unlike the EU, the US states steer clear of granting current employees the right to access certain company-wide pay information or requiring employers to conduct regular pay audits to determine gender-based pay disparities. Such mandates are absent from the 10 state pay transparency laws.

Voluntary Compliance and the ‘Brussels Effect’

Even if US states place no additional pay transparency requirements on companies, multinational companies may opt to voluntarily implement these standards in their domestic operations.

At times, multinationals have voluntarily applied a high compliance standard required by EU law to their operations within the US, even when US regulations were much more relaxed or even non-existent. This phenomenon even has a name: the Brussels Effect.

Some multinationals are already considering, or actively implementing, measures required by the directive. This could be in part due to pressure from shareholders who have submitted 11 disclosure or reporting proposals relating to the gender pay gap in 2023 so far, compared to only five proposals in the same timeframe in 2022, according to Bloomberg data (accessible on the Bloomberg Terminal at BI PROXY <GO>).

Companies considering pay transparency initiatives as part of an ESG strategy should be aware of certain SEC disclosure requirements.

This shift toward a higher standard for pay transparency by multinationals across their operations in all jurisdictions will likely be precipitated by an effort to curb compliance costs coupled with social pressure.

Broadly implementing the EU standard will keep companies in compliance with all current US laws and give their employees and the public insight into their pay equity initiatives. A cost-benefit analysis could reveal that it would be less expensive to implement one compliance standard, rather than manage multiple in various jurisdictions.

Additionally, multinational companies operating in progressive US states may use this as an opportunity for them to prepare for what they perceive will be an inevitable shift in state law toward greater pay transparency requirements in the years to come.

More employers will take proactive steps to conduct pay equity analyses; document factors that contribute to compensation decisions (especially starting salaries); and preserve the evidence that supports non-discriminatory explanations for pay-gender disparities. The efforts will help mitigate compliance risks in the future.

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