Federal Labour Court strengthens equal pay for all employees

The German Pay Transparency Act (EntTranspG) was supposed to reduce the gender pay gap. The Act has not met this expectation so far and it has been of very limited relevance since it came into force on July 6, 2017. However, two recent decisions of the German Federal Labour Court breathe fresh life into the Act and could encourage female employees who are paid less than their male colleagues to file discrimination claims. These decisions should also prompt employers to examine whether their remuneration systems are fully legally compliant.

Different remuneration indicates discrimination

The Federal Labour Court (ruling dated January 21, 2021, Case No. 8 AZR 488/19) firstly improved the legal position of (usually) female employees who earn less than comparable male colleagues by shifting the burden of proof for the justification of any equal treatment to the employer. According to the Federal Labour Court, employees must firstly prove that the comparative salary (so-called median salary) of their colleagues of the other gender who perform the same or equivalent work is higher. Employees in an undertaking with more than 200 employees can obtain information regarding the median salary easily as they have a right to information according to Section 10 of the EntTranspG.

If the remuneration of the (usually) female employee is below the median remuneration of her male colleagues who perform the same or equivalent work, this indicates discrimination on the grounds of gender. The burden of proof now lies with the employer, which must present and, if necessary, prove that the difference in remuneration is based on a gender-independent difference, i.e. that it is justified by objective reasons that have nothing to do with discrimination on the basis of gender. As an exception to the rule, a differentiation in remuneration can only be based on criteria and factors which, as a result, affect women more adversely than men if they are due to the nature of the work and are related to the legitimate needs and objectives of the company.

Negotiating skills not an objective differentiation criterion

In addition to objective reasons, such as qualifications and professional experience, employers also referred to the individual negotiating skills of applicants as a permissible differentiation criterion. This seems plausible, since an individually higher negotiated salary can be justified according to the basic principle of private autonomy. At first glance, the underlying interest of the company in attracting employees represents a gender-independent, purely objective criterion.

On the other hand, studies show that women are on average more reserved in negotiations and less demanding than their male colleagues. This fact might have been decisive for the Federal Labor Court when it ruled on February 16, 2023 (Case No. 8 AZR 450/21) that the negotiating skills of the male applicant were not sufficient to justify unequal treatment.

Forecast for the future

This decision is so far only available as a press release. However, it clearly follows from the press release that the fact that a higher salary was negotiated individually is not an objective criterion for justifying salary differences.

The decision thus restricts the scope for individual salary negotiations and will further promote fixed remuneration systems that are based exclusively on objective criteria such as applicants' professional experience and qualifications. It remains open, at least on the basis of the press release, to what extent employers may take into account soft skills of applicants in salary negotiations by offering them higher compensation. The press release also leaves open the question of whether paying employees sign-on bonuses is still admissible. Such sign-on bonuses do count as remuneration. However, they are likely to be objectively justified if they compensate for financial disadvantages suffered by newly hired employees as a result of leaving their old employer.