Can Market Rates Justify a Pay Gap? What New Rulings Mean for Global Employers in 2026

Can an employer legally pay employees differently because one lives in a more expensive location, has harder-to-find skills, or was recruited during a labor shortage? In many cases, yes. However, "market conditions" are not a universal defense against equal pay or discrimination claims, and employers need objective reasons for pay differences and evidence to support them. The financial and reputational penalties for non-compliance are severe, and companies should never take the risk.

Today, a major UK equal pay decision in September 2026 has brought this question back into focus. In Next Retail Ltd and Next Distribution Ltd v Thandi and others, the UK's Employment Appeal Tribunal (EAT) considered whether differences between the pay of predominantly female retail employees and predominantly male warehouse employees could be justified by different labor market conditions. The decision and later appeal concerned UK employment law, but the problem is increasingly international as multinational employers routinely adjust salaries according to location, skills, talent availability, recruitment difficulties, cost of living, employee experience, and local market expectations.

At the same time, pay transparency rules are making these differences easier for employees and regulators to identify. For global employers, the question is therefore changing from "Can we pay these employees differently?" to "Can we demonstrate why we pay them differently?"

What Happened in the Next Equal Pay Case?

On September 7, 2026, the UK Employment Appeal Tribunal delivered its judgment in Next Retail Ltd and Next Distribution Ltd v Thandi and others.

The case concerned pay differences between employees working in Next's retail stores and distribution centers, as store employees were predominantly women, while warehouse employees were predominantly men.

The employees had previously succeeded in establishing that the work could be of equal value. However, Next argued that differences in basic pay were explained by market forces rather than sex. This distinction matters, they argued.

The argument went that Next's warehouse operations had to compete for workers in a different labor market from its retail stores. Different recruitment and retention conditions thus affected the wages necessary to attract employees.

After an initial tribunal found in favor of the store workers, the EAT later concluded that the earlier tribunal had taken the wrong approach to Next's market-forces defense concerning basic pay. The judgment therefore demonstrates that genuine differences in labor market conditions can explain why workers performing work of equal value are paid differently.

However, the decision should not be interpreted as giving UK employers a general right to justify any salary difference by referring to "market rates." This is because the EAT considered specific evidence and circumstances, and other elements of the employees' claims were treated differently. The case therefore reinforces the importance of being able to demonstrate why a difference exists rather than simply asserting that it reflects the market.

Can Employers Pay Workers Differently Because of Market Conditions?

Employers can often pay employees differently based on legitimate factors such as experience, skills, location, responsibilities, or recruitment conditions. However, legality depends on the applicable employment and discrimination laws, and employers may need to demonstrate that differences result from objective factors rather than protected characteristics. This final point is particularly important for international employers dealing with multiple jurisdictions and interpretations of fair or equal pay.

Consider 2 software engineers performing broadly similar roles.

One was recruited in a market where experienced engineers were readily available and accepted a salary of $80,000. Another was recruited 18 months later during a severe talent shortage and required $100,000.

There is an obvious commercial explanation for the $20,000 difference.

But that does not necessarily end the legal analysis.

Employers may need to consider:

· whether the employees perform the same or comparable work

· whether the salary difference disproportionately affects a protected group

· whether the original justification remains relevant

· whether local law permits the employer to rely on that particular factor

· and any other number of extenuating factors

Common reasons for salary differences may include:

The central issue is therefore not whether salary differences exist but how those differences were created, justified, and maintained.

Why "Market Rate" Is Not a Universal Defense

Employers commonly benchmark compensation against local salary data.

That makes commercial sense, as an engineer in San Francisco, a sales manager in Warsaw, and an accountant in Bangkok operate in different labor markets. However, saying that someone is being paid "the market rate" does not automatically resolve an equal pay question.

Firstly, because employers should be able to establish what they mean by the market. For example, is the benchmark based on the employee's city, country, industry, company size, seniority, qualifications, or a combination of these factors?

Secondly, employers should also consider whether the same methodology is being applied consistently. In this case, suppose a company uses geographic benchmarking to reduce the salary offered to employees in lower-cost locations but allows individual managers to exceed those bands when recruiting particularly desirable candidates. Over time, the company may accumulate substantial differences between employees doing similar work.

Those differences may have perfectly legitimate origins, but they become infinitely harder to defend if the company cannot reconstruct the decisions that gave rise to them.

The Next case is particularly relevant here because the employer did not simply argue that warehouse workers happened to earn more. The dispute examined whether different labor market conditions actually explained the difference.

That distinction is useful well beyond the UK.

Pay Transparency Is Making Salary Differences More Visible

Historically, employers could operate inconsistent compensation systems for years without individual employees necessarily knowing how their pay compared with colleagues. However, that environment is changing.

The EU Pay Transparency Directive is one of the clearest examples of a general tightening of the rules. EU rules will now require pay structures to allow employers to assess equal work or work of equal value using objective, gender-neutral criteria, including factors such as skills, effort, responsibility, and working conditions.

Employees will also have stronger rights to obtain information about their individual pay and average pay levels for categories of workers performing the same work or work of equal value.

This will mean recruitment is affected too, as applicants must receive information about the initial salary or salary range, while employers cannot ask candidates about their previous salary history.

The Directive also contains a particularly important 5% threshold. Covered employers in the EU may have to undertake a joint pay assessment whenever reporting reveals a difference in average pay between female and male workers of at least 5% within a category of workers. The employer will then face problems if they cannot justify it using objective, gender-neutral criteria, and the difference remains uncorrected for 6 months.

EU countries were required to transpose the Directive by June 7, 2026, while reporting requirements are being phased in according to employer size, but the practical consequence extends beyond gender pay reporting, and the implications go far beyond the EU.

This is because, worldwide, employers increasingly need compensation systems capable of explaining why employees are paid differently, even in positions or industries where these differences are inevitable.

Pay Transparency Is Not Only a European Issue

The direction of travel is broader than the EU, with changes there simply being representative of a wider global shift towards accountability.

Australia, for example, publicly releases employer-level gender pay gap information. In March 2026, the Workplace Gender Equality Agency published results covering approximately 5.9 million Australian employees and 10,500 employers.

The data itself demonstrates why employers are paying more attention to compensation structures, as Australia's private-sector average total remuneration gender pay gap is currently 21.1%, according to WGEA.

These changes are made more complex in some areas than others. The United States, for example, also specifically presents a different challenge because employers must navigate overlapping federal, state, and sometimes local requirements, all of which are in the process of evolving. Pay transparency and salary history requirements can therefore differ substantially depending on where an employee or applicant is located.

For multinational employers, this creates an important compliance problem: there is no single global rule governing when and how employees can be paid differently.

The Same Pay Decision Can Have Different Consequences Around the World

A multinational company might employ 5 people with the same job title:

These figures alone do not establish whether the employees are being paid fairly or legally.

The roles may involve different responsibilities, local market salaries may differ substantially, employees may also have different experience, and statutory benefits and employer costs may also vary.

With so many influencing factors, even employees performing effectively identical work in the same location may legitimately receive different compensation in some circumstances.

An employer needs to understand both its global compensation methodology and the local employment rules applying to each worker, and that becomes increasingly important as international teams grow to encompass multiple jurisdictions.

6 Global Pay Strategies That Can Create Compliance Problems

1. Paying Employees According to Their Local Market

Location-based compensation is common among international employers. Though the right approach can be relatively straightforward: determine the market value of a position in each location and establish salary bands accordingly.

However, problems can arise when employers do not use a consistent methodology. For example, what happens if an employee's salary is based on national market data while another's is based on a high-cost city? What happens if managers are allowed to exceed salary bands without documenting why?

2. Reducing Pay When Remote Employees Relocate

Remote work makes geographic compensation considerably more complicated.

Imagine an employee originally hired in San Francisco who permanently relocates to Spain. In this case, should they continue receiving their California salary?

An employer using location-based compensation may want to move the employee onto a Spanish salary band. However, reducing an existing employee's salary is very different from establishing compensation for a new hire because contractual requirements, employee consent, local employment law, collective agreements, and discrimination risks may all become relevant.

The fact that a salary would be competitive in Spain does not necessarily mean an employer can simply reduce it, and a lack of clarity around reasons for salary changes can cause perceived injustices.

3. Paying New Hires More Than Existing Employees

Labor shortages can quickly create salary compression. For example, suppose an employer hired experienced technicians for €45,000 in 2023 but must offer €55,000 to attract equivalent candidates in 2026. In this case, it would seem only logical that the newer employee may consequently earn significantly more than an experienced colleague.

Again, there may be a legitimate explanation: the labor market changed. However, the employer should consider what happens next.

If market conditions normalize, does the difference remain justified indefinitely? Could the disparity disproportionately affect employees of a particular sex or age group? Could it cause experienced employees to leave?

Now, the original reason for a salary difference and the justification for maintaining it are not necessarily the same.

4. Allowing Candidates to Negotiate Their Salaries

Individual negotiation is another apparently neutral process that can produce substantial pay differences, but it opens the door to potential problems. For example, equally qualified candidates may receive different salaries simply because one negotiated more aggressively.

As a result, employers should nevertheless consider the aggregate effect of these decisions. Standard salary bands and documented criteria can reduce this risk while still allowing employers flexibility when recruiting scarce talent.

5. Setting Salary According to Previous Pay

Using salary history can perpetuate disparities created by previous employers, and it’s something that is also increasingly restricted.

Under the EU Pay Transparency Directive, employers cannot ask applicants about their pay history in current or previous employment, and similar restrictions already exist in parts of the United States at federal and state levels, as well as elsewhere in other jurisdictions around the world.

For multinational employers, basing global compensation decisions on salary history can therefore create both compliance and consistency problems.

6. Paying a Premium for Hard-to-Fill Positions

This is perhaps the clearest international lesson from the Next case.

Sometimes an employer genuinely needs to pay more to attract workers. For example, a factory facing severe technician shortages may need to offer a 15% premium. This can be a legitimate commercial decision, but employers should be able to document why the premium was necessary, how it was calculated, and whether it remains necessary.

Likewise, a temporary labor shortage can otherwise become a permanent unexplained salary difference, but leaves the issue open for argument if the labor market changes later.

Global Salary or Local Salary: Which Model Should Employers Use?

There is no universal compensation model that works for every international employer.

Broadly, companies have 3 options.

The right approach depends on factors including the organization's workforce, locations, industry, talent requirements, and compensation philosophy.

However, international expansion increases the importance of having a methodology rather than a collection of individual salary decisions.

When Can a Legitimate Pay Difference Become Discrimination?

Intent is therefore not always the decisive question. A company may never deliberately decide to pay a group of workers less while still accumulating substantial disparities through years of decentralized recruitment, individual negotiation, acquisitions, promotions, and inconsistent salary reviews.

This is one reason pay transparency can expose problems that were previously difficult to identify.

The EU currently reports a gender pay gap of 11.1%, though this doesn’t automatically mean that the EU as a whole suffers from systemic gender-based discrimination in the case of salaries. Instead, it represents a highly complex combination of factors, some of which may be justifiable due to market dynamics.

Effectively, a gender pay gap is not itself proof of unlawful equal pay discrimination, but instead it simply measures differences in average earnings and can reflect numerous structural factors.

For employers, however, a visible gap inevitably and rightly creates the next question: What explains it?

7 Questions to Ask Before Paying Comparable Workers Differently

Before establishing or maintaining a significant salary difference, international employers should consider:

1. Are the employees performing the same work or work of comparable value?
2. What specific factor explains the difference?
3. Can the company demonstrate that factor with objective evidence?
4. Is the same criterion applied consistently to other employees?
5. Does the resulting difference disproportionately affect a protected group?
6. Does the decision comply with the employment and discrimination rules applying in each location?
7. When will the company review whether the justification still exists?

The final question is particularly easy to overlook, as a salary premium that was entirely reasonable during a severe labor shortage may become difficult to explain 5 years later if market conditions have changed.

Periodic pay reviews should therefore examine not only how much employees earn, but why differences between comparable employees continue to exist.

Why International Hiring Makes Pay Equity More Complicated

Global employment introduces factors that rarely arise in a purely domestic workforce.

Employees in different countries may receive different:

• Base salaries
• Mandatory bonuses
• Holiday entitlements
• Pension contributions
• Health benefits
• Allowances
• Employer social security contributions
• Overtime entitlements
• Equity compensation
• Severance protections

Comparing base salaries alone can therefore be misleading. Multinational employers consequently need to consider total compensation as well as base salary.

There’s also another complication that also needs to be considered: employees may not all work for the same legal employer.

A global team could include employees of the parent company, employees of overseas subsidiaries, contractors, and workers legally employed through an Employer of Record, or EOR. (For an explanation of what an EOR is and does, see our full guide here)

This makes consistent job architecture and compensation policies even more valuable.

How Can Employers Reduce International Pay Equity Risk?

The objective should not necessarily be to pay every employee the same amount.

Instead, employers should develop a compensation structure capable of explaining legitimate differences.

A practical process can involve:

Define roles → establish objective job levels → benchmark local markets → create salary bands → document exceptions → monitor disparities → review regularly.

Employers should pay particular attention when recruiting internationally at speed.

An urgent need to secure a candidate can make an above-band salary commercially sensible, so recording the reason at the time is much easier than trying to reconstruct it several years later.

Global HR teams should also coordinate with local experts before applying compensation policies across borders. Rules governing equal pay, discrimination, salary transparency, collective bargaining, and contractual salary changes vary considerably between jurisdictions.

Equal pay does not necessarily mean identical pay. But differences should increasingly be explainable, consistent, and supported by evidence.

How Can an EOR Help With International Compensation?

An Employer of Record can help companies understand the local employment requirements surrounding international hiring without requiring the company to establish its own legal entity in every market.

For compensation planning, this can include information concerning local salary expectations, statutory benefits, payroll deductions, employer contributions, mandatory bonuses, working time requirements, and employment contract rules.

However, an EOR does not eliminate an employer's need for a coherent global compensation strategy, nor does using an EOR automatically remove equal pay or discrimination risks. Instead, strong collaboration between an informed company and a compliant EOR will be the best way to create structured, fair, and compliant payroll systems.

For a detailed list of EOR compliance considerations, see our guide here.

Pay Employees Compliant Worldwide With INS Global

In general, local expertise can help international employers understand what a proposed compensation package means within each employee's actual employment environment.

That’s why INS Global supports companies hiring, paying, and managing employees across 160+ countries through Employer of Record, recruitment, payroll, and global mobility services.

By combining a consistent international hiring strategy with local employment expertise, companies can make compensation decisions that reflect both global business requirements and the rules of the markets where their employees actually work.

To find out more about how we offer compliant employment solutions in markets all over the world, contact our expansion advisors today for a free consultation.