Pay transparency is being tightenedThe new EU directive on pay transparency and what employers need to consider now

Across the EU, the gender pay gap averages 12.7%. In Germany, too, women earn still less than their male colleagues. In order to further reduce the gender pay gap in the EU, the EU has adopted a new directive on pay transparency. The new EU directive on pay transparency came into force on 7 June 2023. The EU member states now have until 7 June 2026 to transpose the directive into national law. As some of the measures adopted go beyond what the German Pay Transparency Act currently provides for, the German legislator will also have to make improvements in this context. We can therefore only recommend that you familiarize yourself with the content of the directive now and take preparatory measures within your company so that you are not surprised by the extent of the rules to be observed in two years’ time. This is because the sanctions will also be tightened.

The Directive provides for the following minimum measures:

Pay transparency for jobseekers:

In future, job candidates must be informed about the initial salary or the salary range for the role in the job advertisement or at least prior to the job interview.  Employers will also be prohibited from asking applicants about their previous salary. This is intended to ensure that existing pay discrimination and bias are not perpetuated when employees change jobs. In general, application processes must be designed in such a way that they are non-discriminatory.

Right to information in an existing employment relationship:

In future, employees will be able to request that their employer inform them in writing within two months’ period of their individual income and average pay levels, broken down by gender and for groups of employees performing the same or equivalent work. At present, this obligation only applies in Germany to companies with more than 200 employees. The right to information shall not depend on the size of the company any more or the number of employees belonging to the peer group. In addition, the right to information can still also be asserted via the works council. Employers must also disclose the criteria used to determine pay and career path progression. These criteria must be non-discriminatory and objective gender neutral. Employers must also inform all employees annually about their right to information. Also this is something new.

It should also be noted that the Directive is based on the definition of employee under European law. This means that all employees in the broadest sense, i.e. temporary workers, employees with on-demand contracts, etc., are covered (and even job applicants, see above). Another special legal consequence therefore concerns external managing directors, mostly in limited liability companies. Due to the different notion of an “employee” in EU law, German courts are obliged to apply it if German law constitutes an implementation of European law. There have recently been a number of decisions by the Federal Labour Court in which this EU concept of employee has been used, with the result that statutory provisions which, according to German legal understanding, only affected employees but not representatives of undertakings such as managing directors, have also been extended to external managing directors if, in individual cases, a dependency on the decisions of the shareholders has been established. This could therefore have the consequence that even managing directors of a GmbH have a claim for information against their company, for example if there are several managing directors in the company. It remains to be seen how this will be handled in practice.

Right of information during an employment relationship

Employees will have the right to request information on their individual pay level and the average pay levels, broken down by gender, and for categories of workers doing the same work or work of equal value to them. Contrary to the current right to information according to the current Transparency Act, the size of the company is irrelevant, and the number of employees belonging to the peer group is also irrelevant for the right to information. Furthermore, the right to information can also be asserted via employee representatives, which can also lead to an extension of the information rights of work councils.

Employers must also disclose the criteria used to determine pay and career progression. The criteria must be objective and gender neutral.

In addition, employers will be required to issue an annual reminder to employees that they are entitled to this information.

Gender pay gap reporting

Employers with at least 100 employees will have to publish information on the pay gap between male and female employees. Until now, only companies with at least 500 employees have had to do this. The reporting obligations will therefore be massively extended to medium-sized companies. The directive stipulates that in the first phase, employers with at least 250 employees must report annually and employers with 150- 249 employees every three years. From five years after the deadline for implementing the directive (i. e. as of 2031), employers with 100 to 149 employees are also obliged to report every three years. The directive does not stipulate any reporting obligations for companies with fewer than 100 employees.

Joint pay assessment

If the pay report shows a gender pay gap of at least five percent and the employer cannot justify the gap based on objective gender neutral factors, a pay assessment should be carried out in cooperation with the employee representatives. This company audit procedure, which is already provided for under German law, will therefore also be extended to many smaller companies.

Sanctions for non-compliance

The directive stipulates that employees who have been suffered from unfair treatment in terms of their salary due to their gender will have a claim for “full” compensation of damages and are to be treated as if the identified disadvantage had not occurred. The damages must therefore include at least the full payment of lost remuneration, including the associated bonuses or other benefits. In the event of a dispute, it will be up to the employer to demonstrate and prove that there was no discrimination in relation to pay. As in the existing AGG (“General Equal Treatment Act”), there will be a reversal of the burden of proof in future if the information provided suggests gender-specific discrimination in terms of salary. Furthermore, member states must establish specific sanctions for violations of these regulations, including fines. The German Pay Transparency Act does not currently provide for this either.

The new EU Directive on pay transparency only specifies the minimum requirements. National legislators are free to apply stricter standards when implementing the directive.

Since it remains to be seen how national legislators will implement the directive, the regulations described will, however, must be implemented in any case. Therefore, it is worth questioning your own processes now and analyzing whether measures need to be taken in order to meet the strict requirements for pay transparency in the future.

Do you have further questions on these or other topics? Our experts will be happy to support you with solutions tailored to your individual needs.