Overview of the German Pay Transparency Act

The German "Act on Advancing the Transparency of Pay Structures" (Entgelttransparenzgesetz) came into force on 6 July 2017, and bundles together regulations and requirements that had already been established in the German General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz), German Basic Law (Grundgesetz) and, European laws such as Article 157 TFEU. According to its introductory statement, the Transparency Act is intended to close the so-called "adjusted gender pay gap", and address differences in pay between men and women despite their comparable qualification and work. In 2016, such gender pay disparities were still at 6% to 7%, according to surveys of the German Federal Statistical Office (Statistisches Bundesamt).

Although the Act came into force in the middle of last year, it has had little effect on business practice so far, which is surprising because it specifically addresses requests for discrimination-free structuring of pay systems in section § 4 (4), employee entitlement to information) in section § 10 (1), and reporting duties for management in section § 21 (1). These areas constitute high bureaucratic hurdles, particularly for employers not bound by collective bargaining agreements. This administrative burden is also likely to outweigh the financial burden, estimated at approximately EUR 3 million for the economy as a whole. According to the introductory statement detailing the justification for the act, information alone affects more than 14 million employees, although it is estimated that only about one per cent of employees will actually demand information. Since a request is only possible every two years, approximately 70,000 requests per year are expected.

The practical relevance of the act has been rather low so far, clearly because asserting a claim to information under section § 25 (1) of the act was not possible until 6 January 2018.

Nevertheless, it should be kept in mind that the administrative burden imposed by the act is great, and that the legal consequences for failure to provide information have not yet been fully clarified. In particular, employers with more than 200 regular employees are advised to deal with the requirements of the act now since 6 January 2018 was the deadline for employers to provide employees with crucial information. This information includes the median of gross monthly remuneration and up to two further remuneration components, if at least six employees of the opposite sex perform the same or equivalent work. Simplified information procedures exist for companies bound by or applying collective bargaining agreements. These companies need only name the remuneration regulations under the collective bargaining agreement, and communicate where these can be inspected.

In the following newsletter, we answer important questions regarding the claim to information. For more general information about the Transparency Act, please refer to our client newsletter of May/2017.

To whom is the request for information to be addressed?

In companies bound by or applying collective bargaining agreements, employees generally contact the works council. The works council may demand, however, that the employer assumes this responsibility. Furthermore, the employer may assume the responsibility on its own initiative (see § 14 German Pay Transparency Act). In companies not bound by or applying collective bargaining agreements, the act identifies employers as the first contact, if there is no works council. In this case, this rule also applies to companies with employers bound by or applying collective bargaining agreements. Both types of companies – those bound by collective bargaining agreements and those not bound by collective bargaining agreements – may delegate tasks if the declaration that responsibility is assumed was received by the other party before the request for information. Moreover, the assumption of responsibility is valid for the term of office of the acting works council. The involved parties must inform one another about received requests for information and the answers provided. Employees must be told whom they may contact.

We generally recommend that employers assume the responsibility for answering the request for information, and conclude a works agreement on this with the works council in order to avoid liability in the event of incorrect answers.

What is deemed remuneration in the German Pay Transparency Act?

According to section § 5 (1) German Pay Transparency Act, remuneration includes all base or minimum wages, salaries, and payments rendered directly or indirectly in cash or in kind on the basis of an employment relationship. According to rulings rendered by the ECJ, the employer must provide remuneration.

It is irrelevant whether remuneration or the individual remuneration component is granted by statute, agreed upon in individual or collective contracts, subject to a works agreement, granted voluntarily, or on the basis of a company practice. Specifically, remuneration encompasses the following:

a. Continued payment of remuneration during illness

b. Payments during times of maternal leave

c. Special payments such as premiums, Christmas and holiday bonuses

d. Stock options and a long-term incentive plan at the employer's company

e. Benefits such as direct and accident insurance, and sick pay

f. Additional payments, such as for unfavourable working hours, difficult working conditions

g. Pay for extra work

h. Non-cash benefits such as staff discounts in the employee cafeteria, company contributions to a gym membership, use of company facilities at reduced prices

i. Reimbursement of training costs for works council members

j. Company pensions for surviving dependants

k. Paid release from work due to age

l. Benefits granted by a third party due to a company pension system

Determining the value of a pay component, such as a stock option, can be difficult. In the case of non-cash benefits, such as permission to use the company car for private purposes, the company’s child care facility, sports facilities, meals or travel allowance, the corresponding financial value of the contribution will have to be taken into account. With regard to stock options, for example, the non-cash benefit is the difference between the preferential price and the normal subscription price outside the company. In the case of a company car available for private use, the non-cash benefit consists of the value of the car (1% of the car’s gross list price) plus a commuting allowance (gross list price x 0.03% x distance in kilometres). In the case of a discretionary bonus payment based on a target agreement only the factors that make up the bonus are covered by the claim to information.

Sick pay, parental benefit or compensation for reduced working hours are not to be included. These are only benefits with a remuneration replacement function that are granted on the basis of the employment relationship.

When is work comparable?

The claim for information for remuneration exists when comparable work is carried out by at least six persons of a peer group of the opposite sex. In the absence of clear statutory requirements, however, it is difficult to determine the conditions for comparable work.

Work is comparable when it is the same work or equivalent work.

Work of employees is considered the same when they actually perform the same or identical work. Such cases are rare. If the work is not the same, it can be compared on the basis of equivalent work.

The evaluation of whether employment constitutes equivalent work poses considerable problems due to abstract statutory requirements. Equivalent work exists if employees are judged to be in a comparable situation. Employers bound by collective bargaining agreements can refer to employees in the same salary group. When collective bargaining agreements do not apply, actual objective factors of the work must be considered, including (without limitations) the type of work, educational and training requirements, and working conditions.

This definition is sufficiently abstract to apply to any industry and profession. But its abstractness also involves a disadvantage. It is hard to determine with legal certainty whether work is equivalent since it is not set out how assessment factors are to be weighed. On the other hand, the degree of difference required to deny that work performed by different employees is equivalent has not been defined. Owing to this vague definition and the ensuing legal uncertainty, a convincing and reliable argument for or against the comparability of employees is indispensable.

How is the comparable remuneration (median) determined?

In response to the request for information, the employer must communicate the comparable remuneration received by the employees of the respective opposite sex. Attention must be paid here because the term “comparable remuneration” in the act does not refer to the average remuneration (arithmetical mean) employees of the opposite sex receive for the same or equivalent work. Adding up the salaries of the peer group and then dividing the total by the number of the members of the peer group does not yield the information required by the German Pay Transparency Act.

What must be communicated instead is the statistical median of the average monthly gross remuneration received by the peer group in the course of a calendar year. This is the employee remuneration that is in the middle position when the total remunerations of the peer group are listed by amount in descending order. This mid point constitutes the mean value. Thus, if the number of members belonging to the peer group is uneven, the remuneration of the employee whose salary amount is exactly in the middle represents the median. If the peer group has an even number of members, the median is between the remuneration of the two employees who jointly form the median range in salary amount. Calculating this median poses practical problems for the legal practitioner. Also in this case, simplifications apply to employers bound by or applying collective bargaining agreements that define the salary group of the employee requesting information. All other companies face the challenge of having to determine – after having established the relevant peer group – the mean value of the remuneration.

What formalities and deadlines must be met?

Employees must assert their request for information in writing. In companies not bound by and not applying collective bargaining agreements, the employer must provide the information also in writing within three months after receipt of the request for information. For companies bound by and applying collective bargaining agreements, however, there are no formalities, and deadlines. It appears advisable, nevertheless, to take the requirements for companies not bound by collective bargaining agreements as a guideline for evidentiary purposes, and to avoid court disputes.

Consequences of failure to provide information

For employers not bound by and not applying collective bargaining agreements, the German Pay Transparency Act establishes in section § 15 (5) that if an employer fails to satisfy the request for information and there is a dispute, he bears the burden of proof that no violation of the principle of equal pay exists. This also applies if the works council was not able to provide the information due to the fault of the employer. The act does not provide for a reversal of the burden of proof for companies bound by or applying collective bargaining agreements.