Pay Transparency Act

The Act on Advancing the Transparency of Pay Structures (the Pay Transparency Act) entered into force on July 6 2017. The act bundles together some regulations and requirements that had already been established in the General Equal Treatment Act, the Basic Law and European law (including Article 157 of the Treaty on the Functioning of the European Union) and, according to its introductory statement, is intended to close the adjusted gender pay gap (ie, the difference in pay despite comparable qualifications and workload).(1)

Although the act came into force in mid-2017, it has yet to play a significant role in business practice. This is surprising, because it imposes, among others, the following requirements that present notable bureaucratic hurdles particularly for employers not bound by collective bargaining agreements:

  • Section 4(4) regarding the request for discrimination-free structuring of pay systems;
  • Section 10(1) regarding employees' entitlement to information; and
  • Section 21(1) regarding the duty to report in the management report.

This administrative burden is likely to outweigh the financial burden, which is estimated to be approximately €3 million for the economy as a whole. According to the act's introductory statement of the justification, in theory, the information claim alone affects more than 14 million employees. Further, it is assumed that about 1% of employees will actually demand information. Considering that a request is possible only every two years, approximately 70,000 requests per year are expected.

That the act's practical relevance has proved limited thus far can be explained by the fact that it was not possible to assert the information claim under Section 10(1) until January 6 2018 (according to Section 25(1)). Nevertheless, it should be kept in mind that the administrative burden imposed by the act is great and the legal consequences of failings to provide information have yet to be clarified. Employers in establishments with more than 200 regular employees are advised to deal with the act's requirements immediately because, as of January 6 2018, these employers must provide employees with information about the median of the 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. There are simplified procedures in this regard; however, they are only for companies bound by or applying collective bargaining agreements. Employers must name the remuneration regulations under the collective bargaining agreement and communicate where these can be inspected (for further details please see "Transparency of Remuneration Act approved").

Request for information

In companies which are bound by or apply collective bargaining agreements, employees must contact the works council. However, the works council may demand that the employer assume this responsibility or the employer may assume the responsibility on its own initiative (Section 14 of the act). According to the act, in companies not bound by or which do not apply collective bargaining agreements, the employer is the first contact if there is no works council. If that is the case, the rule that applies to employers bound by or applying collective bargaining agreements also applies to such companies.

The following applies to both companies bound and not bound by collective bargaining agreements:

  • The task may be delegated only if the declaration that the responsibility is assumed has been received by the other party before the request for information. Moreover, the assumption of the responsibility applies at most only 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 informed about whom they may contact.

It is generally recommended that employers assume the responsibility for answering the request for information and conclude a works agreement with the works council in order to avoid liability issues in the event of incorrect answers.

Remuneration

According to Section 5(1) of the act, remuneration includes all base or minimum wages and salaries, as well as all other payments rendered directly or indirectly in cash or kind on the basis of an employment relationship. According to the European Court of Justice, remuneration must additionally be provided by the employer.

It is irrelevant whether the remuneration or individual remuneration component is:

  • granted by statute;
  • agreed in individual or collective contracts;
  • subject to a works agreement; or
  • granted voluntarily or on the basis of company practice.

Remuneration encompasses the following:

  • continued payment of remuneration during illness;
  • payments during maternity leave;
  • special payments (eg, premiums or Christmas and holiday bonuses);
  • stock options and a long-term incentive plan at the employer's company;
  • benefits regarding direct and accident insurance and sick pay;
  • additional payments (eg, for unfavourable working hours or difficult working conditions);
  • pay for extra work;
  • non-cash benefits (eg, staff discounts in the employee cafeteria, company contributions to a gym membership or use of company facilities at reduced prices);
  • reimbursement of training costs for works council members;
  • company pensions for surviving dependants;
  • paid release from the obligation to work due to age; and
  • benefits granted by a third party due to a company pension system.

Determining the value of a pay component (eg, a stock option) can be difficult in individual cases. In the case of non-cash benefits (eg, permission to use a company car for private purposes, company childcare facilities, sporting facilities or meal and travel allowances), the corresponding financial value of the employer's contribution must be considered. With regard to stock options, the non-cash benefit consists of the difference between the preferential price and the normal subscription price outside the company. In the case of a company car that is also provided for private use, the non-cash benefit consists of the value of the car (1% of the gross list price of the car) plus a commuting allowance (gross list price of the car x 0.03% x distance in kilometres). However, in the case of a bonus payment based on a target agreement at the employer's discretion, only the factors that make up the bonus are covered by the information claim.

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

Comparable work

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

Work is classed as the same if employees actually perform the same or identical work. This is rarely the case. If the work is not the same, comparability can exist only on the basis of equivalent work.

The evaluation of whether equivalent work is shown to exist poses considerable problems due to abstract statutory requirements. Equivalent work is shown to exist if employees can be regarded as being 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, the actual objective factors of the work must be considered, including:

  • work type;
  • education and training requirements; and
  • working conditions.

It is true that this definition can be applied to any industry and profession due to its abstract nature, but it is precisely this abstract nature that makes it difficult to determine with legal certainty whether work is equivalent. In particular, it is not set out how the assessment factors are to be weighted. Further, it is not defined what degree of difference is necessary or sufficient to deny that work performed by different employees is equivalent.

Owing to this vague definition and the ensuing legal uncertainty, a convincing and reliable argument for or against the comparability of employees is indispensable.

Comparable remuneration

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, by using the term 'comparable remuneration', the act does not mean the average remuneration (arithmetical mean) that employees of the opposite sex receive for the same or equivalent work. Adding the salaries of the peer group and then dividing the total by the number of peer group members does not result in the information that the Pay Transparency Act requires.

What is to be communicated instead is the so-called 'statistical median' of the average monthly gross remuneration received by the peer group in the course of a calendar year. This is the remuneration of the employee that takes the middle position when the remuneration received by the peer group members is listed by amount in descending order and thus constitutes the mean value. Thus, if the number of members belonging to the peer group is odd, 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 medium range regarding the salary amount.

Calculating this median poses practical problems for the legal practitioner. Simplifications apply to employers bound by or applying collective bargaining agreements that may refer to the relevant 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 received by all employees in this peer group.

Formalities and deadlines

Employees must assert their request for information in text form. In companies not bound by and not applying collective bargaining agreements, the employer must provide the information in text form within three months of receipt of the request for information. However, for companies bound by and applying collective bargaining agreements there are no formalities or deadlines to be met. Nevertheless, it appears advisable to apply the requirements for companies not bound by collective bargaining agreements as a guideline for evidentiary purposes and to avoid court disputes.

Failure to provide information

For employers not bound by and not applying collective bargaining agreements, Section 15(5) of the Pay Transparency Act establishes that in the event that the employer fails to satisfy the request for information, the employer bears the burden of proof in the case of dispute that no violation of the principle of equal pay exists. This also applies if the works council was unable to provide the information for reasons regarding why the employer is responsible. The lawmakers do not provide for a reversal of the burden of proof for companies bound by or applying collective bargaining agreements.

For further information on this topic please contact Anke Kuhn, Henrike Seifert, Viktoria Afanasjew or Stefan Handermann at CMS Hasche Sigle by telephone (+49 221 7716 195) or email (anke.kuhn@cms-hs.com, henrike.seifert@cms-hs.com, viktoria.afanasjew@cms-hs.com or stefan.handermann@cms-hs.com). The CMS Hasche Sigle website can be accessed at www.cms-hs.com.

Endnotes

(1) According to the Federal Statistical Office, in 2016 the adjusted gender pay gap was approximately 6% to 7%.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.