The EU Pay Transparency Directive is the world’s most significant new pay equity legislation in over 50 years. The scope and scale of the changes required by the directive are staggering. According to recent research, nearly half (47%) of companies with major operations in Europe are worried about the impact it will have on their organizations. I suspect that many companies that are not worried may not yet have fully realized the directive’s impact.

Why is the EU’s pay transparency directive such a big deal? It mandates that companies disclose pay scales, communicate openly about career progression and publicly report pay gaps—with a mandatory requirement to fix gaps that cannot be justified. It also adds severe consequences—uncapped damages—for organizations that don’t comply. To put it bluntly: The stakes are high, and the requirements are wide-reaching.

If you are reading this and thinking, “I’m so glad this only impacts companies in Europe”—not so fast. The majority of the obligations affect employers with even a single employee in the EU. And the clock is ticking: The upcoming 2025 compensation cycle will be the last merit cycle to make pay adjustments that will be baked into public pay gap reports filed in 2027, as those reports will be based on 2026 compensation data.

Related: Pay transparency: How companies can get it right this year

EU Pay Transparency Directive: What to know

I recently spent nearly six months in Europe, where I participated in more than a dozen roundtables and hundreds of conversations with large employers across the region to get a better sense of how business leaders are preparing for the directive. The results were eye-opening. Stemming from those conversations, here are five key points leaders need to know about the EU pay transparency directive.

1. Going from “name and shame” to “explain or fix.”

This is not another “name-and-shame” law where pay gaps are reported and then promptly forgotten. Gaps between peers will be required to be corrected if they cannot be explained. There will be harsher enforcement and greater reparations, with uncapped damages and penalties assessed at the member-state level, for companies that don’t complete their pay gap reporting.

2. Moving from equal pay for equal work to equal pay for work of equal value.

Equal pay for equal work is the way that people often think of pay equity. It’s straightforward: Two software engineering managers with the same skills, experience and performance should be paid equally.

The EU pay transparency directive has a different aim, focused on addressing pay gaps arising from undervaluing roles traditionally held by women. The directive takes the view that different jobs can have similar value to a company, even if they’re not the same, and those roles should be equally compensated. For example: HR, IT and finance managers might have very different tasks, but their roles could be seen as equally valuable due to similar levels of decision-making, leadership and organizational impact. Under the new EU Pay Transparency Directive, these roles should be compensated similarly if their value is deemed equal.

3. Don’t overlook the right to information.

While the pay gap soaks up a lot of media focus around the EU Pay Transparency Directive, don’t sleep on another critical piece of the directive: the right to information. This allows employees to ask what the average pay is for men and women in similarly valued roles across the organization. Importantly, it applies to all employers—unlike the pay gap reporting parts of the directive that apply only to companies that meet a certain employee-count threshold.

It will also kick in earlier than the pay gap reporting requirements, with employers required to provide answers to related questions on Day 1 of the directive going into effect. (The implementation deadline is June 7, 2026.)

4. The directive’s requirements are the floor, not the ceiling.

Going into my conversations and roundtables, we—as a collective HR, total rewards and legal community—hoped to find more commonalities between jurisdictions, but the reality is that there are likely to be a lot of differences from country to country.

The directive allows member states to layer on additional requirements as they transpose the directive, which we’re already seeing countries like Sweden and Belgium do.

For example, Sweden released a lengthy 388-page draft of reporting requirements, while Belgium’s was only a page and a half and applies only to about 7,000 (mostly public sector) employees subject to the jurisdiction of the Fédération Wallonie-Bruxelles. So if you have employees across multiple member states, be prepared to address localized requirements beyond the baseline requirements.

5. The top concern is internal communication.

From our roundtables, the No. 1 struggle that we heard across the board was communication. It’s one thing to analyze and identify the pay gaps and make adjustments; it’s another thing entirely to prepare and navigate your organization through it.

Learn more about critical global and EU-focused HR issues at HR Tech Europe, March 4-5 in Amsterdam. Register here.

Different organizations are facing unique communication challenges. A leader of a company with a large engineering population, for example, said that the bulk of their employees were almost “like calculators” when it came to understanding their pay and pay gaps. For that organization, there’s a need to go deep into the weeds. But those at organizations on the other end of the spectrum said they need to keep things dead simple and streamlined.

Many of the communication duties will be thrust onto managers. But many managers don’t even understand their own pay, so how are they going to communicate to their employees about how they’re paid? Empowering managers to discuss pay openly in the right way will be crucial. Pay explainability is going to be a hot topic over the next few years and will form an anchor point in many companies’ EU Pay Transparency Directive communication plans.

Preparing for the EU Pay Transparency Directive can’t happen overnight. It’s going to be a journey. If you haven’t already, get onboard and start taking the steps now—before it’s too late.