Directive (EU) 2023/970 on strengthening the application of the principle of equal pay for men and women for equal work or work of equal value through pay transparency and enforcement mechanisms represents a new regulatory framework requiring greater transparency from employers in determining and explaining pay. It applies to employers in the public and private sector and to workers who have an employment contract or are in an employment relationship in accordance with national law, collective agreements and the practices of Member States.

In practice, the Directive requires employers to be able to explain how they determine pay, why pay differences exist and whether those differences are based on objective, measurable and gender-neutral criteria. Member States were required to implement it by 7 June 2026, but the Republic of Croatia has not yet done so. Based on announcements made to date, the Directive is expected to be transposed into Croatian legislation through amendments to the Labour Act only towards the end of 2026.

Transparency in the hiring process

One of the more significant changes concerns the recruitment process. Employers will be required to inform candidates in a timely manner of the starting salary or salary range for a position, and will not be permitted to ask candidates about their pay in their current or previous employment.

The purpose of this prohibition is to prevent a candidate's prior underpayment from carrying over into a new employment relationship. In other words, the pay for a new position should be determined based on the value of that position, the employer's internal criteria and objective circumstances — not on what the candidate happened to earn elsewhere.

For employers, this means defining the budget for a given position earlier and setting the salary range more clearly. This may streamline the recruitment process and reduce misaligned expectations on both sides, but it also limits the degree of flexibility that has traditionally existed in salary negotiations.

Employees' right to pay information

The Directive gives workers the right to request information about their individual pay level and about the average pay of workers performing equal work or work of equal value, broken down by gender.

This does not mean workers will have the right to know the exact salary of each individual colleague. It does mean, however, that employers will need to maintain organised data in order to respond to such requests and present averages for comparable categories of workers.

The key message for employers is that the focus will shift from the question of how much each person earns to whether the employer can demonstrate why pay differences exist. Pay differences will not necessarily be prohibited in themselves, but they will need to be justified by objective criteria — such as experience, complexity of work, responsibility, performance, specific expertise or other verifiable reasons.

A broader definition of pay

The Directive takes a broad view of what constitutes pay. For the purposes of transparency and reporting, it is not only basic salary that counts, but also all other remuneration connected to the position, including both fixed and variable components.

This is significant because the current Labour Act defines pay through the lens of basic salary, allowances and other remuneration, while certain payments — such as holiday pay and Christmas bonuses — are not considered pay in the strict sense. The Directive takes a wider approach, meaning that for the purposes of analysing pay differences, allowances, bonuses, incentives, holiday pay, Christmas bonuses, benefits in kind and other work-related remuneration may all be relevant.

Employers should therefore use the preparatory phase to review which elements of remuneration they pay to workers, on what basis, and whether those criteria are objective, measurable and gender-neutral. Particular attention should be paid to variable remuneration, as this is where undocumented differences most commonly arise in practice.

Gender-neutral criteria and job evaluation

One of the fundamental obligations under the Directive concerns the establishment of pay structures that enable equal pay for equal work or work of equal value. Employers will therefore need to be able to demonstrate the criteria on which they base their pay structures, pay grades and the valuation of individual positions.

In this context, it is worth noting that the European Institute for Gender Equality (EIGE) has developed a practical toolkit for gender-neutral job evaluation and classification[1]. The toolkit is designed for organisations of various sizes and includes guidelines, examples and templates to help employers review existing job descriptions, pay grades and promotion criteria.

While the EIGE toolkit is not the only route to compliance, it represents a useful reference point and an example of good practice at EU level. Employers would do well to review their job classification systems, job descriptions, pay grades, bonuses and promotion criteria before the rules take effect.

Reporting on pay gaps

A particularly important obligation applies to employers with 100 or more workers, who will be required to report on pay differences between women and men.

The reporting obligation will be phased in based on employer size. Employers with 250 or more workers will report annually; those with 150 to 249 workers every three years; and those with 100 to 149 workers also every three years, but with a later start date.

For employers with 150 or more workers, it is worth noting that the first reports are expected as early as 2027 and will cover data from 2026. This means that data preparation, pay system reviews and the alignment of recruitment, promotion and remuneration criteria should not wait until the announced amendments to the Labour Act enter into force — starting earlier will make it possible to submit the first reports within the required legal framework.

Reporting should not be seen as a box-ticking exercise. The results may trigger additional obligations, particularly where a pay difference is identified that the employer cannot objectively justify.

The 5% threshold: when additional obligations kick in

One of the most practically significant elements of the Directive is the 5% threshold for differences in average pay between women and men within a given category of workers.

Exceeding this threshold does not automatically mean that something unlawful has occurred. However, if a report shows an average pay difference of at least 5% that cannot be justified on objective and gender-neutral grounds, and the employer fails to address it within six months of submitting the report, an obligation arises to carry out a joint pay assessment together with worker representatives.

The joint pay assessment involves a more detailed analysis of the pay system, the proportion of women and men across worker categories, average pay levels, variable remuneration, the criteria used to determine pay, and the reasons behind any differences identified. Where differences are found to lack objective justification, the employer will be required to adopt and implement concrete measures to address them.

The 5% threshold is, in practical terms, an early warning signal. Pay differences are not prohibited in themselves — but they must be explainable, documented and grounded in objective criteria.

Pay transparency and data protection

The Directive does not create open access to everyone's salary, nor does it allow individual pay data to be shared freely. Any data processed for pay transparency purposes must be handled in accordance with the GDPR and used solely for the purpose of applying the equal pay principle.

For employers, this means that alongside transparency obligations, appropriate safeguards will need to be in place — particularly regarding who handles the data, who receives it and in what form.

Greater legal and financial exposure for employers

The Directive strengthens the legal protections available to workers. Those who believe they have not been paid equally must have access to legal proceedings, even after their employment has ended. With the worker's consent, proceedings may also be initiated or joined by associations, organisations, equality bodies, worker representatives or other authorised entities.

· Compensation for damages

A worker who has suffered harm will be entitled to full compensation or restitution, including recovery of outstanding amounts, related bonuses or payments in kind, compensation for lost opportunities, non-material damages and default interest. Such compensation may not be subject to a predetermined cap.

· Burden of proof

Where a worker presents facts from which pay discrimination may be presumed, it will fall to the employer to prove that no discrimination took place. In practice, a general reference to experience, performance or market conditions will not be sufficient — the reasons will need to be specific, verifiable and documented.

· Legal costs

Even where the employer prevails, the court may consider whether the worker had reasonable grounds for bringing the claim and whether it is appropriate in the circumstances for the worker to bear the costs. An employer's success in litigation will not automatically mean the worker picks up the bill.

· Sanctions

The Directive provides for sanctions for breaches of equal pay rights and obligations, including specific penalties for repeat infringements. Where an employer fails to comply with an order from a competent authority or court, Member States must ensure that recurring financial penalties can be imposed to enforce compliance.

What can employers do now?

The Directive is broadly drafted and leaves Member States a degree of flexibility in how they implement it.

For this reason, we do not think it makes sense for employers to undertake full formal alignment of their internal policies and procedures with the Directive at this stage — at least not until Croatia establishes a concrete national legal framework and completes the transposition process.

That said, this is not an invitation to sit back and wait. Employers with 150 or more workers in particular should already be taking action, given that their first reports — covering 2026 data — will be due in 2027. These employers should by now have begun a sensible internal review of their existing pay systems and started preparing for the application of the Directive and the amended Labour Act.

Practical preparation might include reviewing job descriptions, pay grades, and the criteria used for basic pay, allowances, bonuses and promotion, as well as checking that pay data is being recorded in a way that will support future reporting. It is also worth identifying any categories of workers where pay differences are at or above the 5% threshold and ensuring that objective, documented explanations are in place for any such differences.

The broader point for all employers is that preparation is not simply about producing a report — it is about building a pay system that is transparent, defensible and grounded in objective criteria.

The question is no longer whether pay transparency rules will apply, but when and how. Employers who put clear, objective pay frameworks in place now will be far better positioned to meet future regulatory demands and the growing expectations of their workforce.

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