5 minute read | July.31.2024
With the aim of ensuring equal pay for equal work or work of equal value, the European Pay Transparency Directive (Directive (EU) 2023/970, the "Directive") came into force on June 6, 2023.
The Directive provides for even more detailed and far-reaching regulations than the German Pay Transparency Act (Entgelttransparenzgesetz, the "GPTA") which already exists since 2017 and must be transposed into national law by the EU member states by June 7, 2026. It is expected that the German legislative will significantly adapt and revise the GPTA in accordance with the Directive.
This article provides an overview of the key elements of the Directive compared to the existing provisions of the GPTA and outlines what employers will have to prepare for in the future.
1. Pay Transparency for Job Applicants
While the GPTA is only applicable from the start of employment, the Directive already provides job applicants with a right to information from their potential employer during the application process. Employers shall provide information on the starting salary or its range and any relevant provisions of a collective agreement applicable to the position. In this way, the position of applicants in salary negotiations is intended to be strengthened through increased transparency.
Additionally, the Directive prohibits employers from asking applicants about their pay in current or previous employment or otherwise proactively seeking to obtain such information.
2. Information Obligations and Individual Right to Information
According to the Directive, employers should proactively provide their employees with information on the criteria used to determine their pay, pay levels, and pay trends. As part of the transposition into national law, EU member states have the option of exempting companies with fewer than 50 employees from this obligation. To date, the GPTA does not contain any such obligation for transparency.
As one of its core instruments, the Directive also provides employees with an individual right to information. At the request of the employees, employers must provide information in writing, broken down by gender and groups of employees, on average pay levels of persons performing the same or equivalent work. This obligation applies regardless of the size of the company. The current GPTA only provides for an individual right to information on average monthly gross pay in companies with 200 or more employees. For the purpose of the Directive, "pay" means any remuneration paid directly or indirectly to the employee. In addition to the base salary, "pay" therefore also includes, for example, bonuses, overtime compensation or company cars.
In line with the Directive, EU member states should also take measures to prohibit contractual conditions that prevent employees from disclosing information about their remuneration such as NDAs with respect to pay information.
3. Reporting Obligations and Joint Remuneration Assessment
Moreover, the reporting obligations for employers to the relevant authorities set out in the GPTA will be drastically tightened according to the Directive. Specifically, the Directive provides for a reporting obligation for employers with 250 or more employees from July 2, 2027, which will be reduced to 100 employees in three further steps by 2031. The GPTA only provides for a reporting obligation for employers with more than 500 employees.
In addition to extending the scope of application, the Directive also extends the content of the reporting obligations: Various factors, primarily regarding the gender pay gap for both, fixed remuneration and variable remuneration components, must now be reported and made publicly available, for example on the company website.
Furthermore, in cases where the report reveals an objectively unjustified pay gap of more than 5 %, the Directive requires employers to carry out a joint pay assessment in cooperation with employee representatives, if this gap is not justified by objective gender-neutral factors and has not been corrected by the employer within six months of the reporting date.
4. Consequences of Non-Compliance
The Directive requires the EU member states to establish a right to damages and compensation for employees who have suffered harm because of the breach and obligations relating to the principle of equal pay. Besides the full back payment of the pay difference, the associated bonus payments, and non-cash benefits, it will also be possible to claim compensation for lost opportunities and non-material damages. Currently, employees in Germany are already entitled to equal pay and compensation if they are disadvantaged and pay differently because of their gender.
In this respect, the employee's position is supported by a reversal of the burden of proof in the Directive. If an employee establishes facts that indicate direct or indirect pay discrimination or a breach of the above obligations, the burden of proof is on the employer to prove the contrary. The GPTA does not explicitly provide for such a provision, nevertheless, the Federal Labor Court has so far derived a reversal of the burden of proof in such cases from the presumption effect of § 22 of the German General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz).
In addition to empowering employees to enforce their rights, the Directive also requires the EU member states to provide for effective, appropriate, and prohibitive sanctions for the breaches of rights and obligations relating to the principle of equal pay. The GPTA currently does not contain any sanctions.
5. Recommendations for Employers
Although the EU member states still have time until July 7, 2026 to implement the Directive and therefore there is no urgent need to act, employers should start thinking about the new obligations early on and start making preparations. The principle of equal pay and a large part of the obligations under the Directive are already established in German law.
Employers are well advised to review and adapt their pay structures in line with the new obligations, particularly in view of the uncertainty regarding the planned sanctions. This process can be time-consuming, especially if the works council is involved.