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29.04.2021 | KPMG Law Insights

The new Pay Transparency Act is in force – What is important now for affected companies

The new Pay Transparency Act is in force – What is important now for affected companies

The German Pay Transparency Act (EntgTranspG) came into force on July 6, 2017. The aim of the law is to enforce equal pay for men and women for the same work or work of equal value. The central instrument for this is a right to information for employees. The law also specifies reporting requirements and audit procedures for certain companies.

Reason: Need for action to overcome existing pay differences between women and men

The law is intended – in implementation of the EU Commission’s recommendation of March 7, 2014 to strengthen the principle of equal pay for women and men – to create more transparency about company pay structures and the standards of job evaluation in order to effectively eliminate and prevent pay discrimination.

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

Agreements that violate the prohibition of pay discrimination on the basis of gender are invalid. The EntgTranspG defines three instruments for enforcing the prohibition: (1) an individual right to information; (2) company procedures for reviewing and establishing equal pay; and (3) an obligation to report on equality and equal pay for women and men.

(1) The right to information exists (only) in companies with more than 200 employees at the same employer and for public sector employees in departments with more than 200 employees. It can be claimed for the first time six months after the EntgTranspG comes into force, i.e. on January 6, 2018; thereafter generally every two years. The request for information shall be made in text form; it shall generally be addressed to the works council in the case of employers applying collective bargaining agreements and to the works council itself in the case of other employers. This includes the comparative remuneration and up to two individual remuneration components. The information must be provided within three months. The comparative salary must be stated as the “statistical median extrapolated to full-time equivalents” of the average gross monthly salary. If the employer does not comply with the request for information, it bears the burden of proof in the event of a legal dispute that there has been no violation of the equal pay requirement. However, the reversal of the burden of proof does not apply to employers applying collective bargaining agreements, who also enjoy privileges when it comes to specifying criteria and procedures and determining comparative pay. Employers are obliged to maintain remuneration lists broken down by gender and remuneration components, which the works council may and must request to see in order to fulfill its duties. The employer must ensure that it complies with the data protection requirements and that only the persons entrusted with responding gain knowledge of the data relevant to the information. Therefore, comparative pay need not be reported if the comparative job is performed by fewer than six employees of the opposite sex. If the information reveals (potential) pay discrimination, the EntgTranspG itself does not contain a “pay adjustment claim”. However, such a provision may be derived from § 15 para. 2 AGG, if a disadvantage exists. In this context, companies must take into account the circumstantial effect of “disadvantageous” information pursuant to Section 22 AGG with the consequence of a shift in the burden of proof.

(2) The company audit procedure applies to private employers with more than 500 employees. Although this is voluntary, it is regularly in the interests of the company in terms of its own reputation in the competition for skilled workers. In addition, larger companies in particular will have difficulties in demonstrating compliance with the equal pay principle without an audit procedure. Companies are essentially free to design their own testing procedures, as long as they use “valid statistical methods.” If pay discrimination arises, the employer shall take appropriate measures to eliminate it.

(3) The reporting obligation applies to companies with more than 500 employees that are subject to management reporting requirements. In the report, they shall present measures to promote equality between women and men and their effects, as well as measures to achieve equal pay for women and men. The report must also include gender-disaggregated information on the average total number of employees and the average number of full-time and part-time employees. Companies applying collective bargaining agreements must prepare the report every five years, and all other employers every three years, starting in 2018. The report shall be attached to the management report and published in the Federal Gazette. Incorrect reports can have a negative impact on the auditors’ opinion.

Legal pitfalls and need for adaptation

The EntgTranspG harbors ambiguities – and thus risks for companies.

a) What is “work of equal value”?

The law prohibits pay discrimination for “equal work or work of equal value.” The definition in Section 4 of the EntgTranspG allows for a wide scope of assessment. Accordingly, a totality of factors, such as the type of work, its training requirements or the working conditions, must be taken as a basis. The determination will cause problems especially for companies whose employees primarily perform intellectual work that cannot be assessed exclusively according to objective criteria, and is further complicated in the case of managers. For this reason – and since the right to information also extends to information on the criteria and procedures for determining remuneration – companies should create clearly defined remuneration structures that specify and weight the factors to be taken into account for the respective activities in a gender-independent and transparent manner.

b) Determination of the comparative remuneration

The determination of the comparison group and the sometimes complex calculation of the comparative remuneration will also frequently cause problems. Based on the aforementioned criteria, the employer must identify the comparison activity and the corresponding employee group, calculate the respective average gross monthly wage of the employees belonging to the comparison group, taking into account all wage components, and determine the statistical median. This is the comparative remuneration, which occupies the middle place in an order sorted by amount – which reduces its informative value. The decision as to which employees are included in the comparison group is based on the median. The calculation of the gross monthly salary can also be complicated at times. The calculation bases and procedures as well as the remuneration components should therefore be determined and defined in advance. Not least in order to base each request for information on a similar calculation for reasons of equal treatment.

c) Data protection

After all, an employer has to comply with data protection regulations, which means that the obligation to provide information in particular, but also the audit procedures and reporting obligations, can become a “tightrope act”. Thus, on the one hand, the employer is obligated to provide information with all the elements explained above, but on the other hand, it must maintain the protection of personal data of all persons concerned and ensure that only the persons entrusted with the response gain knowledge of the data necessary for this purpose. For this reason, too, it is important to develop and create at an early stage (1) gender-neutral compensation structures, (2) concepts for regulating the procedure for providing information and the underlying data investigations and evaluations in compliance with data protection regulations, (3) stringent, transparent and data protection-compliant responsibility structures, and (4) clear internal communication strategies that communicate the information procedure and responsibilities to employees in a comprehensible manner.

Conclusion

Affected companies should start now at the latest to develop and promptly implement appropriate concepts and, if necessary, create corresponding compensation structures. If you have any questions regarding the adequate conceptual design and implementation of processes and compensation structures in accordance with the requirements of the EntgTranspG, we will be happy to support you – please contact us!

Process consulting services on the German Pay Transparency Act are provided by KPMG AG Wirtschaftsprüfungsgesellschaft. Please click here.

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