The Remuneration Transparency Act has come into force

18.07.2017 – The Act to Encourage Transparency of Pay Structures of 30 June 2017 (German: Entgelttransparenzgesetz, abbreviated to EntgTranspG) came into force on 6 July 2017 following its announcement in the Federal Law Gazette. The aim of the statute, according to Section 1 of the Remuneration Transparency Act, is to enforce the requirement that men and women receive equal pay for identical or equivalent work. We would like to inform you about the fundamental provisions contained within this statute.

1. Requirement of equal remuneration

The underlying principle and fundamental assumption of this law is the requirement for equal remuneration laid out in Section 7 of the Remuneration Transparency Act, which stipulates that lower remuneration must not be agreed with, or paid to, a person on the basis of their gender, compared to an employee of the other gender who performs identical or equivalent work. (Section 7 of the Remuneration Transparency Act). Conversely, this also means that it is forbidden to discriminate against a gender, directly or indirectly, in relation to any and all remuneration components or conditions for identical or equivalent work (Prohibition of discrimination in remuneration, Section 3, Remuneration Transparency Act).

The legislature is therefore basing its legislation on the constitutionally codified principle of equality for men and women, which is contained in Article 3, paragraph 2 of the German Constitution, and on the prohibition of gender discrimination under the General Equal Treatment Act (German: Allgemeines Gleichbehandlungsgesetz, abbreviated to AGG), which the Remuneration Transparency Act explicitly refers to on several occasions.

As with the General Equal Treatment Act, the question will arise, when applying the law, as to what constitutes indirect discrimination in remuneration, i. e. where “seemingly” neutral provisions, criteria or procedures actually discriminate against the relevant gender “in a noteworthy manner”, in the absence of objective justification for this discrimination (Section 3, paragraph 3 of the Remuneration Transparency Act).

There will also be issues regarding interpretation, when it comes to assessing what is deemed to be “equivalent work”. Here, the legislature outlines an “equivalent work” situation, with a full set of underlying factors, including the type of work, education requirements and working conditions.

When applying a company remuneration system, it is essential to apply basic criteria that are objective, global, non-discriminatory and transparent. Remuneration structures under collective agreements are assumed to be compliant – this is an assumption which users of non-collectively negotiated remuneration systems cannot rely upon (Section 4 of the Remuneration Transparency Act).

2. Personal right to information

In companies that ordinarily have over 200 employees with the same employer (mutatis mutandis to public-sector employees), employees have a right to information that allows them to determine whether the requirement for equal remuneration is satisfied. Claims under this right may only be made beginning six calendar months after the Act comes into force.

The right to information relates to the ability to verify that the remuneration structures of the employer are non-discriminatory and not, as the short form of the Act’s name might suggest, to a comparison of individual employees against employees of the other gender (on the contrary – if the comparable function is being performed by fewer than six employees of the other gender, this comparable remuneration need not be reported). The individual who requests this information is required to name the identical or equivalent function (comparable function) where this is reasonable, while the information provided may cover not only the average monthly gross remuneration but also up to two individual remuneration components. Once information has been provided, it generally does not need to be provided again until a period of two years has elapsed.

The employer’s obligation to provide information encompasses disclosures on the criteria and procedures applied to the calculating of remuneration as well as information on comparable remuneration. The comparable remuneration must be specified as the statistical median of the monthly gross remuneration, extrapolated to full-time equivalents and in the form of the specified remuneration components for each calendar year (Section 10 et seq. of the Remuneration Transparency Act). The legislature left open the possibility of incorporating pay increases resulting from many years of service to the relevant company. Because the assessment of equivalence relates to function, there may be differences in individual cases that appear to document discrimination but are indeed objectively justified.

If an employer, who is not bound by or chooses not to apply collectively negotiated agreements, fails to comply with their obligation to provide information, the burden of proof lies with the employer in the event of a dispute, meaning that they must demonstrate that they have not violated the law (reversal of the burden of proof). If the employer provides the information and the individual who requests the information identifies what they believe to be discrimination, the only course of action for this individual is to decide whether they wish to commence litigation against the employer under the General Equal Treatment Act on the basis of discriminatory pay. The legislature has not granted the individual who requests the information any further entitlements under the Remuneration Transparency Act.

There are special provisions for companies under co-determination (governing in particular the right of works councils to view gross wage lists broken down by gender) and for employers bound by collective agreements.

3. Internal audit procedure

Private employers that ordinarily have more than 500 employees are “encouraged” regularly to apply internal audit procedures in order to review their pay structures and the various remuneration components, as well as their application, in order to monitor compliance with the requirement for equal remuneration (Section 17 et seq. Remuneration Transparency Act). Such an audit procedure consists of data collection, analysis and reporting the results. When conducting the audit procedure, the participation rights of the company’s interest group representatives must be respected. The results of the internal audit procedure “may be published within the company”.

The purpose of these provisions is to establish internal company transparency and to enable companies to monitor themselves. However, the legislature does not impose a legal obligation or even a sanction pertaining to the internal audit procedure.

In practical terms, employers subject to co-determination are particularly likely to consider this option, as are employers who wish to communicate openly with their employees about their compliance with the requirement for equal remuneration.

4. Remuneration report

Employers who ordinarily have more than 500 employees and are required to prepare a management report in accordance with Sections 264 and 289 of the German Commercial Code are required to prepare a report on equal treatment and equal pay from 2018 onwards. (Section 21 et seq. Remuneration Transparency Act). The report will contain the following:

  • average total number of employees, broken down by gender,,
  • average number of part-time and full-time employees, broken down by gender,
  • action taken to encourage equal treatment of women and men, as well as the effect of this action,
  • action taken to ensure that women and men receive equal remuneration,
  • or alternatively, an explanation justifying why such action has not been taken.

Employers who are bound by or choose to apply collectively negotiated agreements must prepare this report every five years, while all other employers must prepare it every three years. The reporting period will be the previous five or the previous three years respectively.

The report must be attached to the next management report and published in the Federal Gazette.

5. Conclusion

According to recent statistical analyses, the “unadjusted” pay gap between men and women in Germany is around 21 % (East: 8 %, West: 23 %). The “adjusted” pay gap was still at 7 % in 2016 (looking at the same formal qualifications, other equivalent features of the job and professional background). It is this gap that the new Remuneration Transparency Act aims to narrow. It is certainly debatable whether this can be achieved via this new statute.

The requirement for equal remuneration reinforces the provisions of the pre-existing General Equal Treatment Act and the principle behind it (on equal pay) should be welcomed unreservedly by every German employer.

However, alongside increased transparency of company pay structures, the legislature has introduced a potentially substantial administrative workload for the affected employers. The legislature believes that companies who ordinarily have 200 or 500 employees can be reasonably expected to bear this workload. Smaller employers are not required to provide information on company remuneration structures, nor are they compelled to conduct internal audits. The remuneration report to be attached to the management report establishes increased transparency of action taken internally, which encourages equal treatment (as is already regularly required within the scope of public tendering procedures).

Please note that this general information does not in any way constitute legal advice for specific cases. Additionally, we recommend that you seek further legal advice for specific questions.