The Pay Transparency Directive - the end of the gender pay gap?

More transparency in pay and compensation in the event of pay discrimination – this is how the EU aims to reduce the adjusted gender pay gap with the Pay Transparency Directive (Directive (EU) 2023/970), which came into force on 6 June 2023.

The directive is required to be transposed into national law by the EU member states by 7 June 2026. For the German legislator, this means amending the Pay Transparency Act, which has been in force since 2017. The responsible federal ministry is currently working on a draft bill.

The following provides an overview of the most important contents of the Directive:

Two pillars of the Directive

The provisions of the Pay Transparency Directive are essentially based on two pillars: The transparency instruments and the legal remedies.

1. Transparency Instruments

The aim of the Directive is to ensure that employers implement remuneration structures that guarantee equal pay for equal work or work of equal value. The main criteria here are set out in Art. 4 para. 4 of the Directive. They include competence, workload, responsibility and working conditions as well as any other factors relevant to the specific job or position. These remuneration structures are used to compare the value of different tasks within the same organisational structure.

The following key requirements must be considered by employers in this context:

a) Transparency for job applicants

In contrast to the provisions of the Pay Transparency Act currently in force in Germany, the EU Directive stipulates that job applicants are entitled to receive information from potential employers during the application process about their starting salary or its range and, if applicable, about the relevant provisions of a collective bargaining agreement applicable to the position, in order to strengthen the position of applicants in salary negotiations. In addition, it is stipulated that employers are not allowed to ask applicants about the level of remuneration in a previous employment relationship. The sanctioning of a violation is left to the national legislator.

b) Information obligations and individual right to information

The Directive also provides for an individual right to information on individual pay levels. Art. 7 of the Directive stipulates that employees have the right to request information on their individual pay levels and on the average pay levels for the group of employees performing equivalent work, broken down by gender. At the same time, employees may not be restrained from disclosing their remuneration in order to be able to compare themselves with other employees. In other words, in future such confidentiality clauses regarding salary will not be effective. In addition, employers must inform their employees annually about their right to such information.

Employers with 50 or more employees must provide their employees with information on the objective and gender-neutral criteria for determining their pay and career development in an easily accessible manner (Art. 6 para. 1). This pay determination can be based on a collective bargaining agreement and/or on elements decided by the employer.

c) Reporting obligations and joint pay assessment

The Directive also introduces a new level of transparency through the introduction of reporting obligations for employers:

Companies with 100 or more employees are obliged to publish gender pay gaps in regular reports on their website or make them publicly available in another way (Art. 9 para. 1). If the pay gap exceeds 5 percent, a joint pay assessment must be carried out with the employee representatives.

2. Legal remedies

In particular, the Directive also strengthens enforcement rights of employees.

If employees are of the view that their rights arising from the principle of equal pay may have been violated, the burden of proof that no pay discrimination has occurred lies with the employer in accordance with Art. 18 of the Directive.

In addition, it is intended that employees who are subject to gender-specific pay discrimination should be entitled to compensation and damages. In addition to the full subsequent payment of the pay difference, compensation for lost opportunities and nonmaterial damage can also be claimed.

Furthermore, the Directive allows EU member states to introduce “effective, proportionate and dissuasive sanctions for breaches” of the Directive, for example in the form of fines, the amount of which depends on the employer's gross annual turnover. It will be left to the member states to determine the specific form of the sanctions.

Further, the limitation periods for asserting claims for equal pay may not be shorter than three years following the implementation of the Directive.

Transposition of the Directive into national law

The Pay Transparency Directive came into force on 6 June 2023 and provides for a three-year implementation period until 2026 for the member states. The German legislator - under the responsibility of the Federal Ministry for Family Affairs, Senior Citizens, Women and Youth under Federal Minister Lisa Paus – must revise the Pay Transparency Act, which has been in force since 2017. To date, the Act already provides for an individual right to information for employees. However, it is currently almost impossible for many employees to assert this claim, as it requires a peer group in the company of at least six people of the opposite sex who perform the same or equivalent work.

Practice advice

The national legislators have until June 2026 to implement the Directive into national law. Therefore, there is currently no specific need for employers to take immediate action. However, as the principle of equal pay for men and women is already incorporated in German law and therefore only a revision of the current law and the Pay Transparency Act will be necessary, long introduction or implementation periods for the revised law are not to be expected, so employers should start to examine which remuneration structures are suitable in their company as soon as possible. The introduction and implementation of these structures can sometimes require lengthy processes. Particularly in cases where changes need to be agreed with the works councils, sufficient time should be allowed.

It is already foreseeable that the disclosure of inequalities associated with the implementation may lead to resentment among the existing workforce. The following aspects should be taken into account:

  1. Employers must disclose the intended pay or pay range before a job interview. However, this regulation is only intended to ensure that employees can make informed decisions about their salary expectations. The explanatory notes to the Directive, on the other hand, explicitly state that this is not intended to restrict the parties' negotiating power to agree on remuneration outside this range.
  2. ‘Remuneration’ within the meaning of the Directive means any remuneration paid directly or indirectly in cash or in kind. This includes, in particular, bonuses, overtime compensation and all elements of remuneration owed by law or under collective bargaining agreements.
  3. There are various ways for employers to fulfil the requirements of the Directive and to establish an understandable pay system based on objective, non-gender-specific criteria. However, the works council generally has a right of co-determination in accordance with Section 87 (1) No. 10 Works Constitution Act (BetrVG).
    1. The implementation of a collective bargaining agreement automatically leads to the disclosure of salary structures in a company. This means that classifications and pay grades are publicly available so that employees, regardless of gender, can retrace what salary they can expect depending on their qualifications.
    2. Companies that are not bound by collective bargaining agreements can introduce a company remuneration system by means of a works agreement.

Latest insights

More Insights
Orange notepad with pencil

Intellectual Property in E-Cigarettes and Vapes in the UAE

Jun 13 2024

Read More
City skyline at dusk

Setting the scene: Hong Kong Privacy Commissioner publishes first comprehensive AI-specific guidance

Jun 13 2024

Read More
Baggage carousel

Travel businesses and trade marks

Jun 13 2024

Read More