The European Pay Transparency Directive

German Law International Labor Law Magazine

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Introduction

On 6 June 2023, the European Pay Transparency Directive (EU) 2023/970 came into force, setting new minimum requirements for pay transparency in employment. The purpose of the directive is to create pay transparency in companies and to detect and prevent gender-based pay discrimination. National legislators have until 7 June 2026 to implement the directive. The German legislator will most likely amend the existing Pay Transparency Act ­(EntgTranspG) for this purpose. It is not yet possible to predict exactly what form the amendment will take. However, the directive itself and the accompanying recitals provide a number of new instruments and procedures ­relating to pay transparency that will be relevant to German employers. Examples include pay transparency in the application process and an employee’s right to information about pay regardless of the number of employees in the company. It is worth taking a look at the key provisions of the directive in order to prepare for the increasing administrative burden in companies. Compliance risks should also be assessed prior to the implementation of the directive in order to be able to react in a timely manner once the directive has been implemented. The following article is not exhaustive and is intended to provide an overview of the key changes to pay transparency.

Art. 4: Equal and equivalent work

An essential factor for the comparability of pay is the obligation to guarantee equal pay for equal work or work of equal value, as set out in Art. 4 (1). These terms are already defined in § 4 (1) EntgTranspG. It is likely that the legislator will expand and specify the list of criteria for determining non-discriminatory pay systems (§ 4 (4) 2 EntTranspG).

It also follows from Art. 4 (2) that the development of ­instruments and methods for the assessment of pay as an aid for employers and social partners is initially the primary task of the respective member state. It is not yet clear how far-reaching and sophisticated the national pay ­assessment systems will be. At the same time, however, German employers can test analytical procedures for the evaluation of individual jobs and fields of activity within a company in terms of pay law before the directive is implemented. This is because the directive does not exclude the use of individual pay evaluation systems. These offer the advantage of being individually adaptable to the indivi­dual company and the differing comparison groups of ­employees, thus providing more precise results.

According to Art. 19 (1), the comparability of activities is not only limited to those with the same employer, but also to a single source, provided that this source sets uniform remuneration conditions. According to recital 29, such a source may, for example, be the group parent company if it establishes uniform remuneration rules for subsidiaries and there is no collective bargaining coverage for these. Collective agreements and works council agreements are also likely to qualify as a uniform source. If no actual comparator can be determined, Art. 19 (3) allows recourse to a hypothetical comparator, including any remuneration ­statistics. This is intended to extend pay transparency to ­gender-specific fields of activity.

Art. 5: Information about remuneration in the application procedure

The right to information regulated in Art. 5 (1) is not ­included in the EntgTranspG and shifts pay transparency to the application process. As a result, job applicants have the right to receive information about the starting salary or salary range paid by the target employer before the ­interview. The literal interpretation of the provision suggests that employers must act independently and provide pay information in accordance with the provision in a job advertisement, before the interview, or in some other way.

Furthermore, in accordance with Art. 5 (2) employers may not ask applicants about their pay history from previous employment as part of a job interview The right to information is not tied to a threshold number of ­employees and therefore applies to all companies.

According to recital 32, the purpose of the right to information is to avoid a lack of information on the part of ­applicants and to strengthen their negotiating position. At the same time, the negotiating power of the parties to ­employment contracts should not be restricted to negotiating a salary outside the disclosed salary range. How the balancing act between the contractual freedom of the ­parties to employment contracts and gender-neutral, ­objective salary assessment is to be achieved, however, ­remains open.

In purely factual terms, the negotiating power of the ­parties to an employment contract is likely to be limited if the employer cannot base higher pay on objective, ­gender-neutral criteria. Otherwise, the employer would run the risk of not being able to rebut the presumption of pay discrimination in the event of a subsequent disclosure and review of salaries by third parties.

Art. 7: Right to information in existing employment

Art. 7 (1) provides for a right to information for all ­employees, irrespective of the threshold, regarding their own individual pay level and the average pay level of other groups of employees, broken down by gender and by individual groups of employees who perform the same or equivalent work. The main difference from § 11 (3) 2 ­EntGTranspG is that the average number of comparable employees, not the statistical median, is used as the comparative figure.

Furthermore, the directive does not set a time limit for the assertion of the right to information, whereas § 10 (2) EntGTranspG generally provides for a blocking period of two years for the relevant employee after the request for information has been made. In the future, following the implementation of the directive, employers may be subject to repeated requests for information from the same employees as a result, whereby the legal limits are likely to lie in the assertion of the claim in breach of trust. Employers must inform all employees of the existence of the right to information once a year in accordance with Art. 7 (3). According to Art. 7 (4), employers are obliged to respond to requests for information within two months. Furthermore, according to Art. 7 (5), regulations that prohibit the disclosure of remuneration are inadmissible.

Non-disclosure clauses in employment contracts regarding salary, which are already considered to be ineffective in most cases under current case law, should finally ­become a thing of the past.

Art. 9: Reporting obligations

Art. 9 (1) provides for far-reaching changes with regard to the reporting obligations on the pay gap for employers. In particular, reports must reflect the gender pay gap and the average gender pay gap, including variable remuneration components. In terms of content, the reporting obligation under § 21 EntgTranspG only covers measures to promote equality and establish equal pay, and information about the average total number of employees and the average number of full-time and part-time employees.

According to § 21 EntgTranspG, only companies with more than 500 employees and that are obliged to prepare a management report in accordance with § 264 and § 289 of the German Commercial Code are required to report. In contrast, the threshold has now been reduced to 100 employees in accordance with Art. 9 (4). The implementation period will be staggered depending on com­pany size and begins for companies from a size of:

• 250 employees with a reporting obligation as of 7 June 2027 and annual reporting intervals;
• 150 to 249 employees with a reporting obligation as of 7 June 2027 and reporting intervals every three years;
• 100 to 149 employees with a reporting obligation as of 7 June 2031 and reporting intervals of three years.

Reports must be made available on the company’s website or by other means (Art. 9 (7)).

Companies with fewer than 100 employees may draw up voluntary reports on pay in accordance with Art. 9 (5). According to recital 42, such voluntary reports can be ­rewarded in the form of a pay transparency label. An ­employer could then use a pay transparency label to ­advertise their company in order to show potential applicants that they comply with pay transparency standards, thus increasing the attractiveness of the position. In addition, Art. 9 (5) gives national legislators the option of obliging companies with fewer than 100 employees to provide information about pay.

According to Art. 10 (1), employers are required to carry out a joint pay assessment with employee representatives, if the report according to Art. 9 shows a gender-specific difference of 5% in the average pay level of employee groups that is not justified by objective, gender-neutral criteria, and the employer does not correct pay within six months of the report. The aim of joint pay assessments is to eliminate unjustified pay differences in cooperation with employee representatives.

Financial risks to employers

In the future, employers will have to protect themselves against claims for damages made by employees who have experienced discrimination, fines from the authorities, and exclusion from public procurement procedures.

Art. 16 of the directive contains a right to compensation for breaches of equal pay by employers. Employees will have to be placed in the position in which they would have been if there had been no pay discrimination. This ­includes, in particular, material and non-material ­damages as well as interest on arrears. In the past, claims for damages due to pay discrimination were based on § 15 AGG.

In addition, Art. 18 (1) provides for a shift in the burden of proof to the employer in cases of pay discrimination, if an employee credibly establishes facts that demonstrate that there has been pay discrimination. According to Art. 18 (2), it should be sufficient for the burden of proof to shift if an employer does not comply with its obligations under Art. 5, 6, 7, 9 or 10. This employer would then have to prove that the breach was obviously unintentional and minor. The BAG (ruling of 21 January 2021 ‒ 8 AZR 488/19) has so far applied § 22 AGG to pay discrimination. Following the implementation of the directive, this provision is likely to become more important with regard to breaches of duty by employers under the directive.

Furthermore, “dissuasive” fines will be implemented in ­accordance with Art. 23 (1). The legislator will most likely introduce various administrative offenses for violations of the above provisions. The EntgTranspG does not yet contain such sanctions.

In addition, Art. 24 (2) of the directive provides for exclusions from public procurement procedures. The directive thus specifies that violations of equal pay fall under § 124 (1) 1 of the Act against Restraints of Competition (GWB) and can constitute a reason for exclusion.

From a compliance perspective, employers who prepare reports on a voluntary basis should pay attention to the fact that by preparing a report on the gender pay gap, any pay discrimination could be uncovered for the first time and a factual basis for claims for damages and fines could be created.

On the other hand, a voluntary report following a successful exclusion from public procurement procedures may constitute exculpatory grounds pursuant to § 125 (1) No. 3 GWB. It should be considered whether reporting is appropriate on a case-by-case basis.

Remuneration transparency is also likely to play a greater role in employment law due diligence in the future. If irregularities are discovered in this respect during due dili­gence, this may have an impact on purchase price negotiations. In this context, corresponding indemnities, representations and warranties in the company purchase agreement will also become relevant.

Conclusion

It will be interesting to see how the directive actually is implemented by the legislator. However, due to the signi­ficant deviations from the EntgTranspG, employers must already be prepared to adapt their remuneration systems accordingly. The complexity of pay transparency systems and the associated legal hurdles require a certain lead time for proper implementation. As a result, it would be advisable to introduce pay transparency systems before the ­directive is implemented. These can then be gradually evaluated and optimized. When the worst comes to worst – the implementation of the directive – companies will be better prepared for the new requirements. Failure to do so could result in fines, claims for damages and exclusion from public procurement procedures. Particular attention should also be paid to documentation requirements. If employers are diligent in preparing reports, the above risks can be minimized. This is because the relevant ­reports will be the flip side of the pay structure in the ­respective company and will show whether there is possible pay discrimination.