EU Adopts New Rules to Enforce Pay Transparency – Are You Ready for the Pay Transparency Directive?
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On 24 April 2023, the Council adopted the Pay Transparency Directive. By means of pay transparency and corresponding enforcement mechanisms, this Directive should now bring about a turnaround in the long-standing efforts to guarantee the principle of equal pay for equal work throughout the EU. After all, this principle can already be found in the Treaty of Rome from March 1957. More than 66 years later, the Council has now approved the Pay Transparency Directive. The European Parliament had already approved it on 30 March 2023. Only the publication of the Directive in the EU Official Journal is outstanding which will take place in the next few days.
From the perspective of EU law, the Directive represents a milestone which, from a German perspective, will require fundamental and far-reaching revisions to the Pay Transparency Act ("EntgTranspG") and, if necessary, other statutory provisions. However, in deviation from the usual two-year implementation period, the national legislator has three years from publication of the Directive in the EU Official Journal to do so. Companies should prepare well for this point in time.
In particular, the Directive provides for the following obligations, which in many ways go beyond the currently binding requirements (Pay Transparency Act, Equal Treatment Act ("AGG"), Art. 157 Treaty on the Functioning of the European Union (TFEU), etc.).
Disclosure of the initial pay salary or its range to applicants (Art. 5 Pay Transparency Directive)
Art. 5 of the Directive provides that applicants are entitled under national law to be informed of "the initial pay or its range, […], to be attributed for the position concerned", which must be based on objective, gender-neutral criteria. In addition, the applicant must be informed of the relevant provisions, if any, of the collective bargaining agreement that the employer applies in relation to the position. This information must be provided by the employer a manner that ensures "an informed and transparent negotiation on pay, such as in a published job vacancy notice, prior to the job interview or otherwise." A corresponding obligation has not yet been provided for in German law and is likely to pose a considerable challenge to both collectively bargained employers and employers who are not bound by collectively bargaining agreements. A mere reference to collective agreements – which are generally not publicly available to private employers – is unlikely to be sufficient. A summary of the remuneration principles laid down in a collective agreement, a works agreement or a company guideline also does not appear to be a feasible approach for reasons of legal certainty. Will employers be forced to disclose all compensation regulations, possible bonus policies, etc. to all applicants in the future? This would probably also have the consequence that in the future competitors would receive exact knowledge of the employer's salary structure. It remains to be seen how the German legislator will deal with this conflict situation when implementing the Directive.
Extensive right to information – average decisive (Art. 7 Pay Transparency Directive)
Pursuant to Art. 7 para. 1 Pay Transparency Directive, employees can demand that their employer informs them of their individual pay level and on the average pay levels, broken down by sex, for categories of workers doing the same work or work of equal value to theirs. In contrast to the right to information under the Pay Transparency Act, it does not matter how large the company is or how many employees belong to the comparison group. It thus indirectly makes it possible to know the remuneration of individual colleagues if there are only two comparable positions in the company. Furthermore, the Directive does not refer to the statistical median previously used as a basis in Germany, but to "average pay levels". Employees can exercise this right via "their workers’ representatives, in accordance with national law and/or practice", i.e. the works council or the trade union, or via the equality body, according to Art. 7 para. 2 Pay Transparency Directive. The works council thus acquires an even more extensive right to information than that granted to it under Sec. 80 para. 2 of the Works Constitution Act (Betriebsverfassungsgesetz "BetrVG"). Pursuant to Art. 7 para. 3 of the Pay Transparency Directive, the employer must respond to the employee's request for information within two months and not after three months as is the case under the Pay Transparency Act. Furthermore, the employer must actively inform the employees annually about their existing right to information, as is already the case with the expiry of vacation entitlements. These two information obligations can possibly be combined in the future. Finally, Art. 7 para. 6 of the Directive stipulates that employees may not be prevented from disclosing information about their pay. The member states are obliged to prohibit such contractual agreements.
Reporting obligations – average and median to be specified (Art. 9 Pay Transparency Directive)
In addition to the right to information, the Directive introduces extensive reporting obligations. Unlike the right to information, these only apply to employers – i.e. companies – with at least 100 employees. However, smaller companies may also be required by national legislation to provide the following information.
According to this, employers have to provide information "concerning their organisation", including the difference between the average pay levels of employees (cf. Art. 3 para. 1 para. c Pay Transparency Directive) and the difference between the median pay levels of employees (Art. 3 para. 1 lit. e Pay Transparency Directive) of an employer. In this respect, the median currently used for the right to information pursuant to Sec. 11 para. 3 Pay Transparency Act has not yet become obsolete.
When and how often the reporting obligations take effect depends on the size of the company. For companies with 250 or more employees, the reports must be submitted annually, starting four years after the date on which the Directive comes into force, i.e. one year after the end of the three-year implementation period. For employees between 100 and 250 workers, graduated deadlines apply. Here, too, the obligations go well beyond the status quo (Sec. 21 Pay Transparency Act), which has so far only affected companies with generally more than 500 employees which are required to prepare a management report in accordance with Secs. 264 and 289 of the Commercial Code (Handelsgesetzbuch "HGB").
Joint pay assessment with employee representatives in the event of excessive pay differentials (Art. 10 Pay Transparency Directive)
If the reports pursuant to Art. 9 of the Directive reveal a gender pay gap of at least 5% (again, only the average is relevant here, the median is not taken into account!) and the employer cannot justify the gap with objective, gender-neutral factors, the employer must carry out a pay assessment "in cooperation with" its employee representatives. This joint pay assessment has to include, among other things, "measures to address differences in pay if they are not justified on the basis of objective, gender-neutral criteria." Here, too, it remains to be seen how the German legislature will implement this provision – in any case, it seems hardly conceivable that the Directive will oblige the introduction of a corresponding right of co-determination. This would be a complete novelty from the perspective of other member states, which only have information and consultation rights.
Compensation of employees (Art. 16 Pay Transparency Directive)
According to Art. 16 para. 1 of the Directive, member states are obliged to ensure that employees who have been discriminated against on the basis of their gender with regard to pay receive compensation or reparation. This includes not only full recovery of (back) pay and related bonuses or payments in kind, but also compensation for any consequences caused by the discrimination, such as compensation for lost opportunities, non-material damage or other damage that may also arise from the overlapping of several grounds of discrimination.
Far-reaching shift of the burden of proof (Art. 18 Pay Transparency Directive)
Art. 18 para. 2 Pay Transparency Directive shifts the burden of proof: If the employer has not complied with his transparency obligations, it is up to him in possible court proceedings to prove that he has not discriminated against the employee with regard to pay – and this in all cases mentioned by the Directive (Articles 5, 6, 7, 9 and 10 Pay Transparency Directive). This means that – possibly – even a breach of the annual duty to provide information on the right to information (Art. 7 para. 3 Pay Transparency Act) will result in a reversal of the burden of proof.
Sanctions (implementation probably as fines) for violations of obligations under the Pay Transparency Directive (Art. 23 Pay Transparency Directive)
To enforce the principle of equal pay for equal work, member states have to establish sanctions that are "effective, proportionate and dissuasive" according to Art. 23 para. 1 of the Directive. These could include fines based on the employer's annual turnover or total payroll. It remains to be seen what sanctions the Pay Transparency Act, which has so far been criticized as a "toothless tiger", will provide in the future.
The Pay Transparency Directive provides for far-reaching obligations and a considerable amount of additional bureaucracy. However, there is currently no need for employers in Germany to take action solely on the basis of the Pay Transparency Directive. This does not mean, however, that equal pay should not already be started today: Employers are already obliged to prevent or – where it still exists – eliminate all discrimination on the grounds of gender. This applies to all working conditions, but especially to pay! In an ideal world, employers should therefore be able to look forward to the expiry of the implementation deadline with ease.