How Do I Calculate Gross Pay Under the EU Pay Transparency Directive? Ask the Navigator

By Murray Simpson

BLOG OVERVIEW: The EU Pay Transparency Directive defines pay broadly, covering basic wage plus complementary and variable components, and requires employers to express pay levels as gross annual pay and a corresponding gross hourly rate. Of the five Member States that have transposed the Directive, Italy alone narrows pay level to fixed and continuous elements. Neither the Directive nor national law resolves how to compute gross annual pay for mid-year joiners and leavers, part-time workers, mid-year promotions, or unpaid leave, or whether gross pay covers every worker employed during the year or only a year-end snapshot.

Question:

How do I define and calculate “gross pay” for compliance with the EU Pay Transparency Directive (the Directive) when the concept is not uniform across the EU and is not straightforward to apply to workers in my organization?

Response:

This is a critically important question for compliance planning, particularly for a multinational employer with workers in different EU Member States. For a complete response, four sub-questions must be answered, taking each in turn below.

1. What does “gross pay” mean under the Directive?

The EU Pay Transparency Directive defines “pay” broadly as all compensation received by a worker either in cash or in kind, and it divides this broad measure of pay into two parts: (i) a worker’s ordinary basic wage or salary and (ii) any additions to that wage or salary received directly or indirectly by the worker. These additions are designated as “complementary or variable components” of pay, and, according to Recital 21, “may include, but are not limited to, bonuses, overtime compensation, travel facilities, housing and food allowances, compensation for attending training, payments in the case of dismissal, statutory sick pay, statutory required compensation and occupational pensions.”

For satisfying workers’ right-to-information requests and reporting gender pay gaps to workers and their representatives, the Directive requires employers to compute average “pay levels” by gender for each worker category. It is here that the Directive introduces the concept of “gross pay” by defining “pay level” as the broad measure of “pay” above stated as a gross annual figure and a gross hourly rate.

2. Do the five Member States that have transposed the Directive conform to the Directive’s definition of gross pay or deviate from it?

All five Member States (Slovakia, Malta, Italy, Lithuania, and Greece) define “pay” broadly, doing so largely in line with the Directive. Of the five, Italy is the only one that narrows what is included as gross pay when defining the pay levels used in right-to-information disclosures and pay-gap reporting.

More specifically, Italy defines pay (“retribuzione”) as all sums and values paid to a worker, including in-kind benefits and variable components. However, it narrows what is included in pay level (“livello retributivo”) to only fixed and continuous elements of pay, which, in practice, comprise base salaries from Italy’s national collective bargaining pay scales; allowances tied to the job classification level, role, or, if applicable, seniority of a worker; and other components of pay applied uniformly to all workers in the same category of workers.

What Italy excludes from the calculation of pay level are individual merit increases negotiated outside the collective pay scales (“superminimi individuali”), discretionary bonuses tied to individual performance, and one-time or temporary payments to a worker that are not applied to the entire worker category. The exclusion of these components has been heavily criticized because such components are specific to individual workers and discretionary in nature, making them more susceptible to gender bias.

3. With a definition of gross pay in hand, what practical problems arise in measuring gross annual pay for workers?

There are various practical issues in measuring gross annual pay that the Directive does not address, leaving the details to Member States to specify in transposition legislation or regulatory guidance. One such issue is how to compute gross annual pay for a worker who joins or leaves the workforce mid-year. Should the worker’s pay reflect the actual gross amount received for the partial year of work or should the gross pay be annualized to a full-year equivalent?

A second issue is how to treat the pay of part-time workers. Should the employer annualize a part-time salary to a full-time equivalent? If so, how does the employer annualize complementary or variable components such as a one-time bonus and overtime pay for a part-time worker? Does dividing the part-time worker’s actual gross pay received by total hours worked to obtain a gross hourly rate suffice?

A third issue is how to treat workers who are promoted mid-year or divide their time between two positions. Does the employer blend the worker’s pay into a single gross annual figure and assign the worker to a single worker category, or does the employer instead generate two full-time equivalent figures and assign the worker, if needed, to each of two worker categories?

A fourth issue is how to treat employees who are on unpaid leave for part of the year. Is the actual pay received by the worker the correct figure or should the worker’s pay be adjusted upward as if he or she worked the entire year?

There are other practical problems to consider, but the examples above clearly indicate that measuring gross annual pay and the corresponding hourly rate is not a simple task.

It should be noted, however, that Lithuania shifts the resolution of these issues from employers to Sodra, the Lithuanian social insurance authority. Instead of calculating gross pay levels themselves, Lithuanian employers will submit payroll, hours worked, and job group data to Sodra monthly. Sodra, in turn, will incrementally aggregate the monthly data into gross annual pay by worker and subsequently compute the required pay gap metrics for employers.

4. Is gross pay calculated for each worker who worked some hours over the calendar year, or can it be measured solely for a snapshot of employees in the employer’s workforce as of the end of the calendar year?

A snapshot of workers on the last day of the calendar year relieves the employer of any concerns raised above regarding workers who worked a partial year and then separated from the workforce mid-year. Such workers would not be included in the year-end snapshot. In addition, there may be fewer workers on leave as of a specific snapshot date in comparison to all workers who took leave over the course of the entire year. A snapshot, however, does not relieve the employer from concerns about how best to compute the gross annual pay of part-time workers or workers who either joined the workforce mid-year or were promoted mid-year, given that the year-end snapshot will almost certainly include such workers.

The Directive and the national laws of the five Member States that have completed transposition do not have provisions that explicitly and unambiguously settle the question posed above. While the Directive, in Article 9(2)-(4), requires employers to report pay-gap information “relating to the previous calendar year,” it nowhere indicates whether an employer must convert the basic wage and all complementary and variable components into an annual gross figure for (a) every worker who works at least some hours over the calendar year or (b) only the workers included in a snapshot of the workforce at the end of the calendar year. Article 56b(2) in Greece’s transposed national law requires pay-gap information to be calculated based on gross annual pay “for each active employee” which may suggest a whole-year workforce, but it does not clearly exclude the possibility of an employer simply examining each active employee as of a snapshot date.

Implementing regulations and monitoring-body guidance provide some country-specific clarity. For example, the aforementioned monthly data flow from a Lithuanian employer to the social insurance body, Sodra, will include the total accrued pay, supplementary pay, and paid working time for each worker, implying that a worker employed only from February to June would appear in five monthly submissions from the employer to Sodra. This suggests gross annual pay will be computed for the whole-year workforce. However, given that Lithuania’s centralized approach is still in the implementation stage, the treatment by Sodra of workers joining and leaving within the monthly-aggregation model may not be fully decided.

In addition, Malta explicitly set the reporting period for required first-year pay gap reports as January 1 to December 31, 2026, which, being a full calendar-year rather than a snapshot date, leans toward capturing gross pay and hours worked across the whole year for any workers who worked during the year. Such an interpretation is not definitive, however. One alternatively could capture gross pay and hours worked across the whole year solely for a year-end snapshot of the workforce.

In sum, sufficient guidance is not currently available to provide a conclusive answer on whether gross pay must be calculated for all workers who worked some hours during a calendar year or only for workers in an employer’s workforce as of specific snapshot date.