The Pay Gap Paradox: Transparency Leads to New Liabilities

“We found a pay gap, but it’s not gender-based. Do we still need to worry about it?”

If I had a euro for every time I’ve get this question, I could easily fund my next vacation. And I get why it’s confusing. The EU Pay Transparency Directive focuses on reporting gender pay gaps, so technically, you’re off the hook for finding that 8% variance caused by age, right?

Wrong! Here’s where it gets interesting (and also a bit ironic): The very transparency mechanisms that the Directive introduced to address gender inequality will inadvertently put a spotlight on every other type of pay disparity in your organization. And once you’ve uncovered it, you can’t let it stand.

The Transparency Trap You Didn’t See Coming

Let’s be honest, even before pay transparency became mandatory, most employees had some idea what their colleagues earned. People talk, especially around performance appraisal time. Employees help one another. But how their compensation or salary increase is determined, is often shrouded in corporate secrecy.

Now? Your employees have legal rights to salary range information. They can request details about pay criteria. They’re seeing job postings with salary bands that make internal inequities glaringly obvious. What was once hidden in HR databases will increasingly be visible to the people it affects most.

The result? Pay gaps that were previously invisible are now front and center in your organization. And trust me, your employees are noticing and don’t care about its cause: gender, location, tenure, age etc.

The Legal Reality: It’s More Than Gender

Before we continue, let me make one thing clear: while the EU Pay Transparency Directive focuses on gender pay gap reporting, that doesn’t mean other forms of pay discrimination are legally permissible. The EU Employment Equality Directive (2000/78/EC) prohibits discrimination in employment and working conditions, including pay, based on religion or belief, age, disability, and sexual orientation. The Racial Equality Directive (2000/43/EC) added equal treatment irrespective of racial or ethnic origin. This means if you discover pay gaps based on any of these characteristics, you’re legally obligated to investigate and address them – regardless of whether they fall under the Pay Transparency Directive’s reporting requirements.

Put simply: ignoring a pay gap because it’s not gender-based could mean you’re knowingly breaking EU employment law. The transparency mechanisms designed to expose gender inequality are inadvertently shining a light on other forms of discrimination that you’re already required to prevent and remedy. So when HR professionals ask me, “Do we need to worry about fixing non-gender pay gaps?” the answer isn’t just “yes, it’s good practice.” It’s “yes, because the law requires it.”

Beyond Gender: The Pay Gap Iceberg

While gender gets regulatory attention, the reality is that pay gaps in most organizations are multifaceted beasts. In my experience working with compensation structures, I regularly see significant disparities based on:

Geographic arbitrage – Same role, different locations, wildly different pay scales that can’t be explained based on cost-of-living differences.
Tenure bias – Long-serving employees whose salaries haven’t kept pace with market rates, while new hires come in at premium wages.
Negotiation advantages – Systematic differences in pay based on who negotiated hardest during hiring, creating patterns that often correlate with personality types, cultural backgrounds, or career confidence levels.
Hiring manager inconsistencies – When each manager has their own interpretation of “competitive salary” or “labor shortage premium,” you end up with a compensation lottery system.
Role inflation – The same work packaged under different job titles and salary bands, often without any real justification.
Educational premiums – Paying significantly more for degrees or certifications that have little correlation with actual job performance.

Internal Liabilities

And the real kicker? While these gaps might not trigger EU reporting requirements, they’re creating very real business risks. Because once you start to communicate about your pay policies, and employees compare their compensation to your communications, they will come to light. Here’s what you should remember about your compensation strategy: transparency is fundamentally changing the risk around pay equity. The most immediate risk is internal. When employees discover significant pay disparities that can’t be logically explained, several things happen:

Trust erosion happens fast. Nothing kills employee engagement like discovering your colleague makes 20% more for doing identical work, especially when the reason boils down to “they started in 2022 and you started in 2021.”
Top performer flight risk increases dramatically. Your best people are typically the most employable. When they realize they’re underpaid relative to peers, they don’t stick around to see if you’ll fix it voluntarily.
Team dynamics shift. Pay disparities create weird hierarchies that have nothing to do with performance or contribution. Suddenly, project leadership gets awkward when the highest-paid person isn’t necessarily the most qualified.
Internal discrimination claims become more likely. While your pay gap might not be gender-based, employees may identify other patterns – age, ethnicity, educational background – that could form the basis of discrimination claims.

The Ripple Effect

But the risks don’t stop at your office door. Internal pay practices have a way of becoming external reputation issues. Because disgruntled employees don’t just leave quietly anymore – they share salary information and their experiences with pay equity. Glassdoor and review sites become compensation transparency platforms. Your talent acquisition will become harder when word spreads that your compensation practices are inconsistent or unfair. Top candidates start asking more detailed questions about pay equity during interviews.

But unequal practices can have commercial and monetary consequences too. In case your compensation practices become a public relations issue, client and partner relationships can suffer. Especially if you work with organizations that have strong diversity, equity, and inclusion commitments. These event might also attract regulatory attention, even if you’re technically compliant. Patterns of pay disparity, even non-gender based ones, can attract scrutiny from labor authorities who might look more closely at your overall employment practices.

Your Strategy: Treat All Pay Gaps Seriously

So, what’s the practical approach for HR and compensation professionals dealing with this new reality?

Don’t limit your pay equity analysis to gender. When you prepare for the EU Directive, build comprehensive dashboards that examine compensation across every dimension that matters in your organization. Look at tenure, geography, department, hiring manager, educational background – any factor that might create systematic differences in pay. And please spend serious time on analyzing pay equity in light of protected characteristics like age, cultural background, religion and so on.

Your employees will have access to more salary information than ever before. You need to be able to explain your compensation decisions clearly and consistently. If you can’t articulate why two people doing similar work earn different amounts, that’s a problem waiting to happen. My mantra is: “Can you explain why you pay what you pay in objective terms?”

You don’t have to publish everyone’s salary on the board. But you must build clear, logical pay structures that employees can understand. When people can see how compensation decisions are made, they’re more likely to trust the process even if they disagree with the outcome.

Your (hiring) managers will play an outsized role in compensation communication. They make compensation decisions that create long-term liabilities. This is where pay transparency begins. You must invest in training, so they make consistent, defensible offers that align with your broader compensation strategy. Especially in the beginning, review the offers often to ensure they abide by your policies. If not, go back and reinforce through additional training. If you don’t pay enough attention here, you will constantly run after new issues.

Don’t wait for employees to discover and complain about pay disparities. Run regular audits that identify and address compensation inequities before they become relationship-damaging trust issues.

The Bottom Line: Compliance vs. Competition

Here’s the thing that many organizations are still figuring out: meeting the minimum regulatory requirements around gender pay reporting is table stakes. The companies that will thrive in this new transparency environment are those that go beyond compliance to build genuinely fair and defensible compensation systems. The EU Pay Transparency Directive might focus on gender, but the transparency it’s creating is much broader than that. Smart organizations are using this moment to examine all their compensation practices, not just the ones that require regulatory reporting.

Because ultimately, fair pay isn’t just about avoiding lawsuits or meeting compliance requirements. It’s about building the kind of workplace culture that attracts and retains the best talent in an increasingly competitive market. And in a world where salary information is becoming more transparent every day, organizations that get ahead of this trend will have a significant competitive advantage over those that wait for problems to find them.