Equal pay – employers have a clear list of tasks ahead of them!

According to the latest government analysis from 2021, the adjusted gender pay gap in the EU stood at 11.4 % (7 % in Germany in 2022). Referring to Article 11 of the United Nations Convention on the Elimination of All Forms of Discrimination Against Women, the European legislator is therefore once again attempting to reduce this pay gap between men and women. On 10 May 2023, it adopted Directive (EU) 2023/970 "to strengthen the application of the principle of equal pay for equal work or work of equal value between men and women through pay transparency and enforcement mechanisms" (the "Directive").

The Directive imposes extensive obligations on employers:

The Pay Transparency Directive: Equal Treatment Directive 2.0?

The Directive is essentially a second attempt at addressing this issue, as the EU had already adopted the Equal Treatment Directive (Directive 2006/54/EC) back in 2006. It provides the underlying basis for the provisions of the German Transparency in Wage Structures Act ("EntgTranspG"), which prohibits pay discrimination (section 3 (1) EntgTranspG), prescribes equal pay (section 7 EntgTranspG), and grants employees individual rights to information (sections 10-16 EntgTranspG). Under section 21 (1) EntgTranspG, employers are currently required to submit a report if they usually employ more than 500 staff and are required to draw up a management report in accordance with sections 264 and 289 German Commercial Code (HGB). This applies to around 20,000 companies in Germany.

A study by the Institute of Economic and Social Research (WSI) and the Hans Böckler Foundation shows that, between 2019 and 2021, at least one claim for information was asserted in only one in four companies with employee representation in Germany, and in only one in ten in the public sector. Only just under half of all companies subject to this obligation have complied with the obligation to submit the report. As is the case in Germany, the pay gap has remained stable in most EU Member States in recent years. The practical impact of the German Pay Transparency Act is therefore limited at present. The situation appears to be similar in the other EU Member States.

Significant increase in employers' obligations

Whilst the current legal situation – under both European and national law – is structured such that employees must first gather information in order to be able to substantiate any existing pay gap, the new Directive now imposes extensive obligations on employers regarding information, reporting, consultation and provision of information. Provisions including the obligation to provide compensation (Article 16 of the Directive), a shift in the burden of proof (Article 18 of the Directive), restrictions under public procurement law (Article 24 of the Directive) and a list of penalties (Article 23 of the Directive) help ensure compliance with these obligations.

Compared with the current legal situation, this will significantly increase employers' obligations. As per Article 2, the Directive applies to all public and private employers, as well as to employees and job applicants.

During the recruitment process …

… employers must not ask candidates about their current or previous pay (Article 5 (2) of the Directive). Conversely, job applicants are entitled to receive information from their prospective employer regarding their starting salary or salary range prior to the interview (Article 5 (1) of the Directive). In addition, employers must ensure that job advertisements and job titles are gender-neutral and that recruitment processes are conducted in a non-discriminatory manner (Article 5 (3) of the Directive).

During the employment relationship …

… employers must:

• make easily accessible to their employees the criteria that are used to determine their pay, pay levels and pay progression (Article 6 of the Directive). These criteria must be objective and gender-neutral.
• inform all employees annually of their right (Article 7 (1) of the Directive) to request and receive, in writing, information regarding their individual pay and average pay levels. The information provided by the employer must include the gender of the employees listed and the formation of a reference group ("equal work or work of equal value") (Article 7 (3) of the Directive).
• Furthermore, employees must not be prevented from disclosing their salary for the purpose of enforcing the principle of equal pay (Article 7 (5) of the Directive).

Employers have extensive obligations regarding consultation and provision of information

Employers must provide information on the gender pay gap and the proportion of employees receiving complementary or variable components to the relevant bodies (inspectorates, equality bodies, employee representatives) and to employees (Article 9 of the Directive). This requirement will be phased in from 7 June 2027 for employers with more than 100 employees.

If there is a pay gap of at least 5 % which cannot be justified by objective, gender-neutral criteria and has not been rectified within six months, employers will in future be obliged to work together with employee representatives to identify, correct and prevent discriminatory differences in pay ("Joint pay assessment", Article 10 of the Directive).

"Joint pay assessment" with employee representatives

In accordance with Article 10 (2) of the Directive, the "Joint pay assessment" comprises:

• an analysis of the proportion of employees in each category of employees;
• information on the average pay levels of the employees, as well as on complementary or variable components for each category of employees;
• any differences in average pay levels between employees in each category of employees;
• the reasons for such differences in average pay levels, on the basis of objective, gender-neutral criteria, if any, as established jointly by the employee representatives and the employer;
• the proportion of employees who benefited from any improvement in pay following their return from maternity or paternity leave, parental leave or carers' leave, if such improvement occurred in the relevant category of employees during the period in which the leave was taken;
• measures to address differences in pay if they are not justified on the basis of objective, gender-neutral criteria;
• an evaluation of the effectiveness of measures from previous joint pay assessments.

These assessments must be made available to employees, employee representatives and labour inspectorates (Article 10 (3)).

Conclusion and practical advice for businesses – The sooner companies begin an evaluation, the better!

The Directive marks a paradigm shift. In the past, when it came to pay inequality, it was initially up to employees to exercise their right to information to identify the inequality and then seek an adjustment. Now it is up to employers to take the first step: They are required to continuously monitor pay structures within the company and to take proactive measures on their own initiative as soon as a pay gap of more than 5 % is identified. Whilst this is backed up by numerous sanctions, the rights of employees and their representatives are significantly expanded.

Member States have until 7 June 2026 to transpose the Directive (Article 34 (1) of the Directive). The first reporting obligations (for employers with at least 250 employees) will come into force on 7 June 2027 (Article 9 (2) of the Directive). A new draft bill to amend the current German Transparency in Wage Structures Act has not yet been tabled. The German Transparency in Wage Structures Act was evaluated for the second time in the summer of 2023 to assess its effectiveness. The German Federal Ministry for Family Affairs, Senior Citizens, Women and Youth (BMFSFJ) intends to incorporate the findings from this evaluation into the revision of the Act, as well as to incorporate the EU Directive. At first glance, it seems as though there is still plenty of time to make the necessary adjustments. However, in the world of legislation, even generous deadlines are often tight and prone to unforeseen delays.

Evaluation of pay structures; preparing documents in good time

This impression is misleading: Employers should, in fact, begin evaluating their pay structures (including special remuneration components) at an early stage. Experience shows that this will take some time. The same applies to the need to form reference groups. This way, the remaining time can be used to make necessary – including long-term – adjustments in a timely manner and to eliminate the gender pay gap. Ideally, the following documents should be prepared well in advance:

• Guideline/policy on "non-discriminatory recruitment procedures"
• (Sample) information letter to employees (specifically regarding criteria for determining pay/pay levels and pay trends; individual pay levels, formation of reference groups)
• (Sample) information letter to inspectorates, equality bodies and employee representatives on the gender pay gap and the proportion of male and female employees receiving complementary or variable components
• (Sample) "Joint pay assessment"

It should be noted that in companies with a works council, the works council has a mandatory right of codetermination regarding the structure of remuneration under section 87 (1) no. 10 German Works Constitution Act (BetrVG). In addition, the works council has a number of other rights to information and participation. In addition, it may inspect the payroll, section 80 (2) second sentence BetrVG. The sooner the details are worked out and future plans developed, the easier it will be to involve employee representatives in matters subject to mandatory codetermination and to develop tailor-made solutions.