New developments concerning equal pay in Germany

To implement the principle of equal pay for men and women, the German legislator created the Pay Transparency Act (Entgelttransparenzgesetz) in 2017. Since the Pay Transparency Act came into force, employers are - if they exceed the relevant threshold of usually 500 employees - obliged to create a report on pay. In addition, women in companies with generally more than 200 employees have a right to be informed, upon request, of the criteria and procedures used to determine salaries and the so-called median salary of their male colleagues who perform the same or at least a comparable job. In companies with a works council, such claims for information shall be addressed to the works council.

Pay transparency act: no explicit entitlement to adjustment of salary

The Pay Transparency Act itself does not contain an express legal basis for claims regarding the adjustment of the salary in the case of unjustified pay differences and pay transparency lawsuits are relatively scarce. Therefore, the Pay Transparency Act has predominantly been viewed as an unsuitable instrument for achieving pay equality. In particular, it was argued that a salary comparison based on a median salary is not conclusive because the underlying data does not contain any information about the average remuneration of one's own gender and that of the other gender. The position of one's own salary in comparison to colleagues of one's own gender does not have to be disclosed.

However, a number of recent decisions by the German Federal Labour Court (Bundesarbeitsgericht) have brought new momentum to the discussion on transparent pay structures.

Lower pay as an indication of discrimination on the basis of gender

In the case decided by the Federal Labour Court (21 January 2021 - 8 AZR 488/19) concerning the Pay Transparency Act, a female head of department had filed a lawsuit, because her remuneration was 8 percent below the median remuneration of her reference group (male heads of department). This difference in salary became apparent from the information provided by the employer upon request of the employee. The employee then sued for payment of the differential amount between the median salary she had been informed of and the salary she received.

The first instance court concluded that a pay difference could be based on a wide variety of circumstances, such as the length of service with the company, and that it could not be concluded that the pay difference was actually due to gender discrimination. However, the Federal Labour Court did not follow this opinion. It ruled that the difference in pay established the rebuttable presumption that the plaintiff was discriminated against because of her gender. As the employer was unable to present a transparent compensation system showing justification for the different treatment, the plaintiff's remuneration must now be adjusted retroactively.

In practice, this ruling might have far-reaching consequences. Employers now - in case of equal pay claims - bear the burden of proof that they are not compensating female employees differently than male employees in the same or comparable positions only because of their gender. Consequently, employers should establish an objective, transparent compensation system. From now on, justifying a difference in pay between male and female employees on the basis of factors (such as length of service) not clearly regulated in such a compensation system will probably no longer be sufficient to reject the accusation of gender discrimination.

Equal pay for freelancers

In addition, the Federal Labour Court (25 June 2020 - 8 AZR 145/19), has recently also ruled on the scope of application of the Pay Transparency Act. In the case, an editor employed as a freelancer by a public television station had asserted a request for information, which her employer had rejected with reference to the non-applicability of the Pay Transparency Act.

In this case, the Federal Labour Court ruled that the Pay Transparency Act applies not only to employees, but also to similar categories of workers ("quasi-subordinate") - which also includes independent freelancers - if interpreted in the light of EU law.

According to this ruling, employers should review not only the compensation systems of their own employees, but also the compensation systems for personnel without employee status (ie "quasi-subordinate" workers such as freelancers) to ensure that these systems are designed objectively and transparently.

It has not yet been decided, however, whether (third-party) managing directors without shareholder position are also entitled to information and remuneration adjustment claims. As the Pay Transparency Act implements the EU Equal Treatment Directive, the rulings of the European Court of Justice, which qualify third-party managing directors as employees, would have to be considered.

Disclosure of remuneration lists to the works council

Questions of equal pay are not just a matter of concern for employers and employees. Pursuant to the Pay Transparency Act and the right of co-determination in matters of company compensation structures (Section 87 (1) No. 10 Betriebsverfassungsgesetz), the works council has mandatory co-determination rights. Consequently, the works council must in principle be granted the right to access remuneration lists.

However, as the Federal Labour Court ruled in another decision (29 September 2020 - 1 ABR 32/19) in line with its previous case law, the right to access renumeration lists does not imply a right to permanent transfer of these lists. This had been demanded by the works council in the underlying case. Since the Federal Labour Court emphasized that the right of inspection requires a current connection to a request for information, the works council cannot demand access to remuneration lists at any time, detached from a concrete request for information and without a time limit. Employers can thus decline such requests from the works council in the future.

Practical relevance of the decisions

After years of silence regarding the Pay Transparency Act, recent rulings have shown that the issue of pay transparency has gained significant relevance in Germany. Employers should therefore review compensation systems and, if necessary, establish compliance.