The Transparency of Pay Act at a Glance
German Parliament has passed the "Act on Transparency of Pay". It aims at promoting gender equality in pay. To achieve this, it imposes various obligations on companies requiring them to disclose salary information and take other action. The scope of these obligations and the consequences of non-compliance remain unclear in several points. The government draft was adopted by the German Bundestag on March 30, 2017. The German Bundesrat has confirmed the draft on May 12, 2017. The new law is expected to come into force in July, 2017.
The provisions at a glance
The new rules essentially relate to three aspects:
1. Individual right to information on the remuneration paid to peers of the other gender and criteria to determine remuneration in the company – relevant for establishments with regularly more than 200 employees;
2. (voluntary) audit of provisions on remuneration and distribution of remuneration regarding discrepancies in pay through companies – for companies with regularly more than 500 employees;
3. Reporting obligation regarding certain aspects of equal pay – for companies with regularly more than 500 employees, which have to file a status report according to Sections 264 and 289 of the German Commercial Code.
Furthermore the law contains several other provisions which apply to all employers regardless of the size of the company or establishment.
The provisions in particular
1. Individual right to information
Employees working in establishments with regularly more than 200 employees will have a right to the following information in order to verify the gender equality of their remuneration:
- disclosure of the remuneration that employees of the other gender receive for comparable work on a monthly average;
- breakdown of this information for up to two specified wage components (e.g. base salary, bonus payments);
- information on the relevant criteria for the determination of their own remuneration as well as the remuneration for the same / comparable work
This right can be first exercised six months after the law comes into force, thus likely at the end of 2017 (Section 25 (1) government draft).
1.1 Application procedure
Employees requesting respective information must lodge an application for same in writing or by email with the competent body. This is generally the works council but employers are free to take over and handle (some or all) information requests instead. This procedure is recommended in practice. Equally, however, the works council can decide that the employer should take over this obligation and handle information requests. Where works council do not exist, requests must be filed with the employer.
In their request to information, employees shall specify which other employees (of the respective other gender) they consider "comparable" to themselves for the purpose of gender equality pay. The law does not, however, provide for any consequence if this information is not provided in the request.
Following a request for information, the employer has three months to provide the relevant information. Should this deadline be missed but the information be provided at a later point in time, no negative consequences would arise. Yet, failure to provide information at all leads to a shift of the burden of proof. This means that in case of litigation for salary adjustment (see under 4) the employer has to substantiate and prove that in fact there is no gender discrimination in pay (Sec 15 (5) government draft).
1.2 Preparation of disclosure of information
In order to gather the relevant information to comply with the request, companies must identify the comparative remuneration (i.e. the Euro amount that will serve as reference for an assessment of gender equal pay) as well as criteria and procedures to determine remuneration in the company. Where works councils are handling the requests, they will need to rely on information provided by the company for this purpose.
The comparative remuneration is determined by reference to the remuneration of all "comparable employees" of the respective other gender. Employees are "comparable" in this sense if they carry out the same or at least comparable work. Crucial criteria for this are the nature of the work, educational requirements and the conditions of the work. Companies bound by a collective bargaining agreement (including those who apply a collective bargaining agreement by reference in the employment contracts) can derive the comparison group from the salary groups of the collective bargaining agreement. Should the comparison group consist of less than six people, the comparable remuneration must not be disclosed due to reasons of data protection (Sec 12 (3) government draft).
Once the group of comparable employees has been established the next step is to identify the comparative remuneration. For this purpose, companies will have to identify the average monthly salary of each employee in the comparison group for the last calendar year. All cash benefits and contributions in kind have to be taken into account (i.e. also benefits in kind like company cars). Part-time remuneration has to be projected to full-time remuneration.
The comparative remuneration, however, is not the average salary of all employees in the comparison group but the statistical median of the individual salary amounts. The statistical median is the "middle value" of a data set. To identify this value, companies will have to rank the individual salaries by their respective amounts and identify the "middle" amount. For example, if the comparison group consists of seven employees, the "middle" amount (i.e. the median) is the fourth highest salary within the comparison group. Therefore, if six out of seven employees earn on EUR 1,000 gross while one employee earns EUR 4,000 gross the median would be EUR 1,000 gross. The average salary of the comparison group (which would be EUR 1,428.57 in this case) is therefore not relevant in this context.
In addition to the comparative salary, companies will need to disclose the "criteria and process for determining remuneration". The new law does not, however, define what exactly this means and what information must be shared with the employees in this respect. Only for companies which are bound by or apply collective bargaining agreements it is clarified that indication of the rules of the collective bargaining agreement and notification of where they can be reviewed suffices. It remains unclear however what particulars have to be disclosed in cases where the determination of pay is governed by a works agreement with the works council (and not by a collective bargaining agreement with a union). That it should be sufficient to indicate the rules of the works council agreement seems obvious, yet cannot be derived from the law or its official justification.
2. Company auditing
The new law further contains provisions to encourage companies with regularly more than 500 employees to conduct internal audits to review their remuneration schemes and actual remuneration in light of gender equality. While this was initially drafted as a legal obligation, companies can now decide whether they want to conduct an audit voluntarily.
Should companies decide to conduct a voluntary audit, legal pitfalls can arise. Reason is that employees must be informed about the results of a (voluntarily) audit (section 20 (2) Sentence 1 government draft). In addition, the company audit has to be reported on during works meetings (Section 20 (2) sentence 2 government draft and section 43 (2) Works Constitution Act).
These obligations exist regardless of when the audit was conducted and whether the company had any opportunity to resolve any potentially identified discrimination in pay. By disclosing a negative audit result, however, companies may prepare the ground for litigation for salary adjustment This applies even for those employees who do not exercise their right to information on comparative remuneration under the new law. In order to avoid this, companies will have to evaluate whether at all and in which form a company audit should be conducted.
3. Reporting Obligation
Companies with regularly more than 500 employees which have to publish a status report according to sections 264 and 289 of the German Commercial Code are further required to publish a report regarding gender equality and equal pay in the German Federal Gazette. This report extends to measures on promoting gender equality and their results as well as measures taken to achieve equal pay.
For companies which are bound by or apply collective bargaining agreements these reports have to be prepared every five years. For all other companies a period of three years applies (section 22 (1), (2) government draft). The applicable reporting period covers the preceding five or three years respectively. As an exception to the rule, the reporting obligation arises for the first time in the year following the coming into force of the law (i.e. 2018). For the first report, the reporting period is restricted to the preceding year (2017) (section 25 (2), (3) government draft).
4. Consequences of possible pay discrimination
The law does not state what kind of consequences employers face in case of a pay discrimination. The official justification of the law refers to the existing legal bases for entitlements to salary adjustment in case of pay discrimination and to compensation and damages under the Equal Treatment Act (AGG), Section 15 AGG (Bundestag-Printed Matter 18/11133, pages 46 and 56).
Entitlements to salary adjustment, i.e. to adjust the salary to the relevant comparative remuneration, are recognized by the courts already to date. They are deducted from the principle of equal treatment and the legal concept of provisions under the Equal Treatment Act (namely sections 2 (1) Nr. 2, 8 (2) AGG; cf. BAG NZA 2008, 532). Under this case law, employees can claim salary adjustment if comparable employees are compensated differently and this difference is based on gender. Employees initiating litigation for salary adjustment have to demonstrate and prove these circumstances. However, this does not apply in cases where a shift of the burden of proof is applicable. If the burden of proof has shifted, it will be up to the companies to prove that there is either no difference in pay or that the difference is not based on gender. Furthermore employers can exonerate themselves by presenting factual reasons which justify the difference in pay.
The legislator refrained from codifying this case law. It is merely codified that a shift in the burden of proof takes place in cases where the employer does not meet its informational obligations according to the law (see under 1 above).
As the new law leaves open numerous questions, it can be expected that it will be further developed to a great extent by judicial decisions. In practice the following topics will probably be most important:
- Conducting internal audits with the goal to review the remuneration system and actual remuneration with regard to gender equality. The review should be conducted in such a way that the obligation to publish the results can be avoided at least until companies could prepare a concept to resolve any possible discrimination.
- The handling of information requests where disclosing the statistical median would suggest a discrimination (even though there might be none). Reason is that disclosing only the median (i.e. the "middle amount") of salaries in the relevant comparison group can be misleading. This is the case, for example, if the employee in question earns less than the median but more than the average salary of the comparison group. The same is true for cases where the median amount of both female and male employees is exactly the same. In this case, a female employee who receives information that she is paid less than the median of her male peers may suspect gender discrimination even though her salary is also below the median of female peers. To avoid legal actions in situations like this, companies should consider providing additional information in response to an information requests in order to refute the (wrong) impression of discrimination at an early stage.
- The defense against claims to adjust the wage.
- In order to be able to respond to such claims employers should make arrangements to identify the correct comparison group and to identify the respective salary. Possible reasons to justify a difference in pay and any decisions on merit increases should be documented for new hires.
- It remains to be seen, whether claims to salary adjustment will be raised only internally or also by way of litigation. In the past, employees were reluctant to take legal actions in gender equality matters. Claims for damages or compensation due to discrimination in pay were usually raised only at the termination of the employment relationship. Therefore it seems likely that requests for information on comparative remuneration and respective claims for payment will become mostly relevant in connection with the termination of employment.