The road to equal pay and pay transparency: What do the EU’s Directive and the recent ruling by the German federal labour court mean for employees and employers?

Dr Eva-Maria Schwarzer
Freshfields Bruckhaus Deringer, Hamburg
eva-maria.schwarzer@freshfields.com

Laura Llangozi
Freshfields Bruckhaus Deringer, Brussels
laura.llangozi@freshfields.com

Introduction

Diversity in the workplace has been a burning employment law topic discussed among the EU institutions and in Member States for some time now. Article 157 of the Treaty on the Functioning of the European Union (TFEU) and the Recast Directive 2006/54/EC on the equal treatment of women and men in matters of employment and occupation, require employers to ensure equal pay for equal work/work of equal value between women and men.

In addition, in 2014 the European Commission (the ‘Commission’) issued Recommendation 2014/124/EU offering Member States a broad range of measures aimed at improving pay transparency, such as enabling employees to request information on pay levels and complementary or variable remuneration, broken down by gender, for categories of employees doing the same work or work of equal value and more.

In the last few years, better enforcement of equal pay through new measures, including an increase in transparency, has been a political priority of Commission President Ursula von der Leyen and the Commission itself, as confirmed by the Commission’s Gender Equality Strategy 2020–2025. In certain industries gender pay gap transparency requirements already exist. For example, the EU Directive 2019/878, also known as the fifth Capital Requirements Directive, requires the remuneration policies of credit institutions and investment firms to be ‘gender neutral’.

Despite the legal framework, the principle of equal pay is not fully implemented and enforced. The gender pay gap in the EU remains at 12.7 per cent, according to the Commission’s 2023 report on gender equality in EU.

Additionally, the principle of equal pay between men and women received wide recognition in Germany through a recent verdict by the German Federal Labour Court (Bundesarbeitsgericht or BAG). On 16 February 2023, the BAG ruled that a female employee is entitled to the same fixed remuneration as her male colleague (8 AZR 450/21). The BAG didn’t accept the employer’s argument that the remuneration was negotiated individually and that the male colleague simply negotiated better.

Though the reasons for the verdict have not yet been published, the verdict is being widely discussed and is likely to have an impact beyond Germany’s borders.

The case

The plaintiff, a female employee, discovered that she was earning less than her male colleague, though they performed the same work and joined the firm around the same time. The female employee argued that she was entitled to the same fixed remuneration as her male colleague and claimed salary arrears from her employer. The employer rejected the claim by stating that the remuneration was negotiated individually and the male employee negotiated a higher salary when being hired. Indeed, the employer offered both employees a monthly salary of €3,500 during the hiring process. While the female employee agreed to the first offer the male colleague negotiated a monthly salary of €4,500.

The first two instances rejected the female employee’s claim. The Regional Labour Court of Saxony (3 March 2021, 1 Sa 358/19) argued that the higher salary was justified by objective reasons that were not linked to the gender of the job applicant. The employer agreed to the higher salary for recruitment purposes.

The case was taken to the BAG, which ruled in favour of the female employee on the basis of EU and German legislation. According to the BAG, the female employee was entitled to the same fixed remuneration as her male colleague under Article 157 of the TFEU, and Section 3(1) and Section 7 of the German Pay Transparency Act (Entgelttransparenzgesetz or EntgTranspG). The fact that the female employee received a lower salary gave rise to the presumption under Section 22 of the German General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz or AGG) that there was discrimination on the basis of gender. The employer could not confute the presumption. In particular, the BAG was of the opinion that the employer could not claim that the male employee: simply negotiated better when joining the firm and/or succeeded a female colleague, who was paid better.

According to Section 3(1) of the EntgTranspG, an employee may not be directly or indirectly discriminated against regarding remuneration for equivalent work based on the employee’s gender. Under Section 7 of the EntgTranspG, the employer may also not agree on lower remuneration for equivalent work based on the employee’s gender. If a party provides circumstantial evidence suggesting discrimination, the other party bears the burden of proof that they did not violate any laws that protect against discrimination (Section 22 of the AGG).

The views on the ruling differ. While some claim that it was not surprising and consistent with the German laws on equal treatment, others are critical, suggesting that employers are being left with no leeway for individual negotiations and are, thus, disadvantaged when hiring new personnel.

The broader EU context: The directive on pay transparency

The abovementioned German ruling is aligned with the EU’s directive 2021/0050, known as the directive on pay transparency (the ‘Directive’), initially published on 4 March 2021, was adopted on 24 April and will come into force once it is published in the official journal of the EU. The Directive aims to strengthen the principle of equal pay through pay transparency and enforcement mechanisms.

The Directive goes beyond most of the current rules in the EU Member States. It includes a broad definition of ‘pay’, which covers not just salary but ‘any other consideration, whether in cash or in kind, which the workers receive directly or indirectly’.

In addition, it sets out information rights for employee candidates already at the employment stage. The Directive aims to strengthen the right to equal pay by giving workers access to the necessary information on pay enabling them to evaluate whether or not they are subject to discrimination. While the employers in scope of the rules will have to provide information about pay levels in the vacancy notices and candidates are entitled to ask for pay transparency, there will be no obligation for them to disclose previous pay history. The Directive also bans pay secrecy agreements.

It further sets out rules on average pay levels for the same work during employment. While ‘pay’ is clearly defined, ‘work of equal value’ will be judged based on objective criteria (eg, education, professional and training requirements, skills, effort and responsibilities, etc), as well as on the guidelines deriving from case law of the Court of Justice of European Union. Member States will have the flexibility to choose the appropriate tools or guidelines at the national level and may develop them themselves or leave this to the relevant social partners.

The Directive also aims to strengthen the rights of employees who are being discriminated against. Under the local law, employees are not only entitled to the same pay but also to pay in arrears and compensation for legal fees. Furthermore, the burden of proof is shifted to the employers, which will enhance the likelihood of success for employees in court.

To offer redress, in addition to existing individual cases (as in the German case), the Directive also provides for collective claims on equal pay. Full compensation will be provided for the victims of discrimination and remedies will be implemented that address structural discrimination or bias in organisations. The Directive also provides also for non-judicial proceedings (ie, conciliation or proceedings before an equality body) that can be followed before bringing a case to the court. However, it specifies that these proceedings should only be optional and not an obligation that may hinder access to justice.

Employers will be required to publish information on the pay gap between female and male workers in their organisation, depending on their headcount. For instance, employers with at least 250 employees will have to report annually, whereas employers with 150 to 249 employees will have to report every three years. From the fifth year of transposition of the Directive in each Member State, employers in that Member State hiring between 100 and 149 employees will also have to report every three years. This provision is even more stringent than the initial one proposed by the Commission, which set out reporting obligations solely for companies with at least 250 employees. It means that global employers should closely follow the transposition of the Directive in the jurisdiction where they have between 100 and 149 employees, in order to ensure that they meet their obligations when the reporting requirements arise.

Moreover, for internal purposes, employers also need to provide information on the pay gap between female and male employees by categories of workers doing the same work or work of equal value. Where the external pay reporting reveals a gender pay gap of at least five per cent, which the employer cannot justify on objective gender-neutral factors, the employer will have to carry out a joint pay assessment with workers’ representatives.

Minimum standards on pay transparency

The rights and obligations listed above will set out common minimum standards across Member States, where the current landscape is still fragmented. The proposal for a directive also sets out similar standards to the existing UK regime, even though the latter is more rigid.

Even though some Member States (such as Austria, France, Germany and Italy) already have laws that require reporting on gender pay, they will still need to strengthen the rights of employees to meet the envisaged minimum standards in the Directive.

For instance, workers will be able to request access to information directly, whereas they are currently relying on information rights that have to be enforced through the works council. While some Member States have a system of sanctions in place, in case of a breach of reporting requirements (eg, in Italy, where administrative fines and the temporary suspension of social security relief, if any, apply), the Directive also gives workers the right to claim full compensation in the case of gender pay discrimination.

In light of these legislative and judicial trends, employers are well advised to implement a clear and transparent salary structure now, in order to be prepared when the Directive becomes binding on them. Otherwise, employers will risk legal disputes, high pay in arrears, as well as negative press. Differences in pay should, therefore, solely be based on objective criteria, such as educational background, professional experience and years of service, etc.

Although the implementation of any EU directive takes some time and Member States first have to transpose the directive into their local law, it is foreseeable that the rights of employees to equal pay will be strengthened.