The decision has been criticised by the British Humanist Association (BHA), which claims children are being denied access to the best teachers because of the law.
Four years after the BHA complained to the European Commission (EC) alleging that UK law breaks European law in allowing widespread discrimination in employment by faith schools, and two years after the EC took the matter up as the subject of a formal investigation, the Commission has decided that there is no breach of current legislation.
The BHA has expressed its disappointment and confusion at the decision, which was announced with very little explanation.
The European Employment Directive only allows employers to discriminate against employees on the basis of religion where there is 'a genuine, legitimate and justified occupational requirement' (GOR) that the employee shares the faith of the school.
The Equality Act 2010 recreates GOR law in UK law, except that there is an exemption that allows faith schools to stipulate that every teacher must share the school's faith.
On delivering its decision, the EC said: "After careful analysis of all relevant elements, we have come to the conclusion that the UK has provided sufficient clarification as regards its narrow interpretation of Sections 58 and 60 [the relevant law], which merely enables the faith-based education and is limited to ensure the maintenance of the religious character of the school. We consider that such an interpretation is in line with Article 4 of the Directive."
BHA chief executive Andrew Copson commented: "We are very disappointed with this decision, and will be seeking a full explanation as to on what basis it was reached so that we can plan our next steps.
"It is fundamentally wrong that children are denied access to the best teachers when schools prioritise whom they employ not on the basis of who the best candidate for the job is, but also on the basis of religion.
"How can it possibly be right that many 'faith' schools require the maths teacher, the PE teacher or the science teacher to share the religion of the school?
"There is clearly no 'genuine occupational requirement' that any of these individuals are religious, but UK law allows discrimination in this way. It urgently needs to be amended, and in refusing to say as much the EU Commission has seriously failed in its responsibilities. It is a failure of justice and transparency."