The new law to promote transparency in pay structures – implications for affected companies

On January 11, 2017, the German Federal Cabinet passed the Act to Promote the Transparency of Pay Structures (Entgelttransparenzgesetz – EntgTranspG). The law provides for an obligation to provide information for companies with more than 200 employees and an obligation to report on equality and equal pay for companies with more than 500 employees. In addition, the latter are required to regularly review their pay regulations and various pay components with the help of company audit procedures.

1. cause: need for action to overcome existing pay differences between women and men

The draft law implements the EU Commission’s recommendation of March 7, 2014 on strengthening the principle of equal pay for women and men through greater transparency, according to which member states are to promote greater transparency on company pay structures and job evaluation benchmarks in order to effectively eliminate and prevent pay discrimination. The law is intended to enforce the requirement of equal pay for men and women for the same work or work of equal value. According to the latest data collected by the Federal Statistical Office, the statistical pay gap between women and men is currently around 21 percent, while the “adjusted” pay gap is still 7 percent. The EntgTranspG is intended to improve the existing legal framework for the enforcement of equal pay. The government draft was dealt with in the Bundesrat on February 10, 2017 without objections and will now be forwarded to the Bundestag. The EntgTranspG is expected to come into force before the end of 2017.

2. essential contents: Right to information, reporting requirements and introduction of company audit procedures.

The EntgTranspG includes the following key points:

(1) Definition of essential principles and terms, in particular the statutory prohibition of pay discrimination on the grounds of gender – agreements that violate this are invalid;
(2) Introduction of an individual right to information for all employees in companies with more than 200 employees, with strengthening of the works council.
in the exercise of the right to information;
(3) Require private employers with more than 500 employees to establish operational procedures to review
and the establishment of equal pay, and
(4) Introduction of a reporting obligation on equality and equal pay for women and men for companies.
with generally at least 500 employees that are required to prepare management reports in accordance with the German Commercial Code.

3. what concrete effects does the EntgTranspG have for the companies concerned – strategic and operational adjustments?

With regard to the individual right to information, the employer or, if the employer is bound by or applies a collective agreement, the works council is obliged to provide information on the company criteria and procedures for determining remuneration upon written request. Furthermore, employees have the right to know how this pay compares to comparable jobs. In principle, the employee can assert the right to information every two years, for the first time six calendar months after the law comes into force. If the employer fails to fulfill this obligation to provide information, it shall bear the burden of proof in a legal dispute that there has been no violation of the equal pay principle. Since the obligation to provide information extends not only to the criteria and procedure for determining remuneration, but also to the comparative remuneration, companies should develop strategies at an early stage, in particular on the following points:

(1) Form and concrete determination of the data basis for the information in compliance with data protection regulations;
(2) Establish internal responsibilities for such requests;
(3) Develop an internal communication strategy to inform employees about the contacts, the disclosure process, and the company’s stance on promoting equal pay.

With regard to the introduction of a company audit procedure, which is to regularly review the pay regulations and the various pay components paid as well as their application for compliance with the equal pay requirement, the legislator uses the wording “are requested”. Initially, this could be understood to mean that de facto no consequences would be expected from non-compliance with the law. However, larger companies in particular will need auditing procedures to demonstrate compliance with the equal pay requirement. In addition, the introduction of audit procedures signals that the company is committed to a fair pay structure, which can be a decisive factor in the competition for skilled workers. The employer is generally free to choose the testing and evaluation system as long as it uses “sound statistical methods.” The works council shall be informed about the planning of the procedure and shall be provided with the necessary documents. Employees shall be informed of the results. Here, too, companies should develop a concept with the following four key parameters at an early stage:

(1) Design of the test procedure (analysis and evaluation methodology);
(2) Provision of personnel data in compliance with data protection;
(3) Involvement of the works council;
(4) Communication strategy towards employees.

As far as the reporting obligation is concerned, companies must report regularly (employers bound by or applying collective agreements every five years, all other employers every three years) on their measures for gender equality and equal pay in the annex to the management report. This disclosure requirement is supplemented by employment and compensation information disaggregated by gender. The report is to be prepared for the first time in the first year after the law comes into force, i.e. probably in 2018. Since the reporting obligation goes hand in hand with the preparation and disclosure of the management report, close coordination between the reporting department and the human resources department as well as with the auditors is essential. Companies must ensure that the information is in line with the basic communication strategy and the measures actually implemented. Failure to report could have implications for the issuance of an unqualified audit opinion, as is the case with the corporate governance statement pursuant to Section 289a HGB.

4. outlook and conclusion

It remains to be seen whether the bill will be finally implemented in this form. Affected companies should develop an implementation concept by the time the law comes into force at the latest and implement it at the beginning of 2018 if possible. Companies should be aware that failure to provide information or incorrect reporting can have legal consequences, particularly in the case of violations of the Data Protection Act or the German Commercial Code (HGB), but above all can have a lasting negative impact on the company’s image. It therefore makes sense to address the provisions of the EntgTranspG at an early stage and to define responsibilities for implementing the required implications. If you have any questions regarding the adequate conceptual design and implementation of processes in accordance with the requirements of the EntgTranspG, we will be happy to provide support – please contact us!

Advice on identifying risks and implementing secure processes is provided with the support of the Governance & Assurance Team of KPMG AG Wirtschaftsprüfungsgesellschaft.