EU Pay Transparency Directive – what companies can expect

On May 10, 2023, the European Parliament and the Council of the European Union adopted “Directive (EU) 2023/970 to strengthen the application of the principle of equal pay for equal work or work of equal value between men and women through pay transparency and enforcement mechanisms”, known as the “EU Pay Transparency Directive”. Member States are required to transpose the Directive into national law by June 7, 2026.

Changes to labor law – these are the key new regulations

For German employers, the Directive entails a concretization and significant tightening of the existing Pay Transparency Act (EntgTranspG) from 2017. The following provides an overview of the provisions and points of criticism of the EntgTranspG.

1.    Extended right to information – relevance already in the application process

The extension of the right to information to applicants is particularly relevant. In future, employers will be obliged to provide comprehensive information on all remuneration-related criteria as early as the application process. In particular, the disclosure of salary ranges for advertised positions is intended to ensure that the application process is gender-neutral and non-discriminatory.

The Directive also strengthens the employee's individual right to information. The requirement for a certain number of colleagues to determine a pay gap is to be abolished in the new regulation. The scope of the entitlement is also being expanded: the Directive stipulates that, in addition to the average gross monthly salary of colleagues, employers must also disclose the criteria used to determine remuneration.

2.    Mandatory review procedure – measures to address wage gaps

In future, mandatory pay assessments will be introduced in companies with 100 or more employees (phased in by 2031). Employers will be required to provide information on the gender pay gap. If there is a pay gap of at least five percent which is not justified by objective and gender-neutral criteria, the company must take measures to eliminate the gap in cooperation with employee representatives.

3.    Reporting obligation on equal pay – comprehensive information

In future, employers with 100 or more employees will be required (gradually phased in by 2031) to produce a Gender Pay Gap Report every three years. The first report is due by June 7, 2027. The report will provide information on gender-specific pay gaps and the distribution of remuneration.

4.    Consequences of violations – sanctions and fines

The Directive stipulates that effective, proportionate, and dissuasive sanctions should apply in the future in the event of violations. The specific form of the sanctions is now up to national legislators. Possible measures include fines based on annual sales or exclusion from public contracts in the event of repeated infringements.

5.    Claims for damages – Simplifications for employees

in future, it will be sufficient for the employee to be potentially affected by pay discrimination in order to assert a claim for damages under the German General Equal Treatment Act (AGG). It will then be up to the employer to prove that the company’s remuneration scheme is gender-neutral.

Claiming damages is to be facilitated as well. In future, for example, employee representatives, equal treatment bodies, and associations will be entitled, with the consent of the employee concerned, to assert or support claims on behalf of the person concerned.

The limitation period for claims, which was previously limited to three years under national law, could be extended in future at the national legislator’s discretion. It is conceivable that the start of the limitation period could be suspended until the end of the employment relationship or the remedy of the infringement.

Outlook—recommended actions for employers

The Pay Transparency Directive imposes far-reaching obligations on employers in Germany. These range from salary disclosures in the recruitment process and employees' rights to information to extensive reporting obligations and possible sanctions for violations.

Employers can already take action now by evaluating their remuneration structures and identifying risks (pre-audits). All remuneration components such as fixed salaries, bonuses, vacation, and company cars are relevant. The provisions of works agreements and collective bargaining agreements should also be taken into account.

It is crucial not only to determine whether pay gaps exist, but also whether they are justified by objective criteria. Unjustified pay gaps should be eliminated and avoided in future through an improved remuneration structure.