A new approach to remuneration transparency

Since the Pay Transparency Act (EntgTranspG - PayTransparency Act) came into force in 2017, it has been described as a "toothless tiger". Critical voices emphasise the lack of effectiveness of the EntgTranspG. Transparency alone is not enough be effective. For example, many criticised that the right to information provided for in the EntgTranspG was not sufficient. For example, the benchmark used by the law to determine pay (in)equality is the statistical median. This represents the average of all remunerations, which often differs from the actual average salary. Furthermore the right to information only applies in companies with more than 200 employees. The EntgTranspG does not provide for sanctions in the case of existing pay inequality.

The Federal Labour Court on wage transparency

Even though the Federal Labour Court (BAG) brought movement into the discussion on remuneration transparency through a series of decisions in 2021 (for more information see here), this was not enough to create effective instruments against pay inequality. Nevertheless, the decision of the BAG in 2023 (BAG, judgement of 16.2.2023 - 8 AZR 450/21), which stated that individual negotiating skills of employees are not an argument for pay inequality, made an impact and brought remuneration transparency into the focus of employees and works councils [for further information, see here]. Among other things, the BAG ruled that a pay disadvantage due to gender is presumed for the same or equivalent work if employees prove that they are paid less than a comparable person.

Remuneration Transparency Directive of the European Union

Particular attention must be paid to the topic of remuneration transparency since June 2023 at the latest. At that time, the Remuneration Transparency Directive of the European legislator, which makes an adaptation of at least the EntgTranspG necessary, came into force. The Remuneration Transparency Directive must be transposed into national law by the national legislators by June 2026. There is a need for adaptation especially in the following points:

Equal work or work of equal value

While the definition of equal work or work of equal value (§ 4 para. 1, 2 EntgTranspG) is most likely in line with the requirements of the Remuneration Transparency Directive, there is a need for improvement in the group of persons to be compared.

The Remuneration Transparency Directive stipulates that the same work or work of equal value can also be performed with other employers (Art. 19 para. 1 Remuneration Transparency Directive). For comparability, the Remuneration Transparency Directive cites a "consistent source which determines the pay conditions". Such a source can exist if the pay conditions are regulated by legal provisions or agreements that relate to several employees (recital 29). It is also irrelevant that the comparators are simultaneously employed with the respective employees (Art. 19 para. 2 Remuneration Transparency Directive). Furthermore, the use of hypothetical comparators should be possible if there are no actual comparators (Recital 28).

Remuneration transparency already in the application process

Art. 5 of the Remuneration Transparency Directive extends remuneration transparency to the period before employment. Job applicants shall have the right to receive information on starting salary or its range from the future employer. This information is to be made available before the job interview. In this, the EntgTranspG also needs to be amended, as it does not provide for such a right so far.

Right to information

Employees already have the right to information to verify equal compensation (sections 10 ff. EntgTranspG). Currently, however, this right to information is only available to employees in companies with more than 200 employees. According to the Remuneration Transparency Directive, the minimum number of employees is completely eliminated. Employers of all sizes will be obliged to provide the information (Art. 7 of the Remuneration Transparency Directive).

Moreover, the Remuneration Transparency Directive focuses on the "average renumeration amount" which differs from the statistical median used in the EntgTranspG. The average income communicated upon request will be divided according to gender and for groups of employees performing the same or equivalent work. The European legislator has seen the discrepancy between the statistical median and the average income (Art. 3 No. 1 Remuneration Transparency Directive), so that the German legislator cannot invoke a different interpretation of the Remuneration Transparency Directive, but will have to adapt.

The EntgTranspG must be amended to the effect that in the future, the employer must provide the information within two instead of three months since the request for information. In addition, the employer must inform all employees annually about their right to information.

Reporting obligation

In addition to the above obligations, the Remuneration Transparency Directive constitutes a reporting obligation for medium-sized companies with at least 100 employees. The scope of the reporting obligation is also significantly expanded. While currently only measures to promote equality and the average number of employees are to be included, the Remuneration Transparency Directive requires the provision of concrete information on the gender pay gap (Art. 9 Remuneration Transparency Directive).

The start of the reporting obligation is staggered according to the size of the companies:

• Companies with more than 250 employees: Reporting obligation from June 2027 and every subsequent year;
• Companies with 150 to 249 employees: Reporting obligation from June 2027 and every three years thereafter;
• Companies with 100 to 149 employees: reporting obligation from June 2031 and every three years thereafter

Claim for damages

The EntgTranspG does not yet contain a claim for damages. Even if employees can actually prove unequal pay, the consequence for the employer is only a claim by the employee for subsequent payment of the difference of the remuneration. Compensation for discrimination can at most be claimed under section 15 of the General Equal Treatment Act (AGG).

The right to compensation now laid down in the Remuneration Transparency Directive (Art. 16 Remuneration Transparency Directive) will probably go beyond this and at least enable and encourage more direct action against unequal treatment by employees.

Reversal of the burden of proof

The Remuneration Transparency Directive provides that employers have the burden of proving that there is no unequal pay treatment, provided that the employees substantiate facts that give rise to the assumption of pay discrimination (Art. 18 Remuneration Transparency Directive). In the above-mentioned BAG decision from 2023, this shift in the burden of proof has already been carried out. Nevertheless, it would be desirable to explicitly include it in the EntgTranspG.

Sanctions

The EntgTranspG's reputation as a "toothless tiger" could come to an end with the requirement to include sanctions. The Remuneration Transparency Directive provides that national legislators shall adopt sanctions that are "effective, proportionate and dissuasive". For example, fines are explicitly mentioned (Art. 23 para. 1 Remuneration Transparency Directive).

Current need for action

In principle, before transposition into national law in 2026, the Remuneration Transparency Directive does not trigger any need for employers to take action. However, due to the ongoing involvement of the BAG with the issue of pay transparency and the BAG's willingness to strengthen the rights of employees even without adapting the EntgTranspG, employers are well advised to become active now. In particular, the reporting obligations will affect employers in the future in the processes of their operational practice and represent a not inconsiderable bureaucratic and financial burden for employers. Especially considering the sanctions that will apply in the future, employers are well advised to plan enough time to adapt their operational structures accordingly and to start as early as possible.

Employers should therefore already look at the status quo in their own company, create definitions of equal work and work of equal value and analyse the existing remuneration structures. It is highly recommended to adapt remuneration policies and structures now in order to eliminate existing and future pay discrimination.

The Remuneration Transparency Directive makes it very clear that remuneration is becoming much more transparent. Employers should be proactive, not least with regard to sustainability criteria (ESG criteria), and subject existing practices to review and revision.