Equal Pay – Equal Work, Equal Pay? The New EU Pay Transparency Directive

"It actually should be a matter of course." Both women and men in Germany say this equally. And yet, according to statistical surveys by the German Federal Anti-Discrimination Agency, significant pay gaps remain. With the EU Pay Transparency Directive (EU-EntgTrans-RL), the EU now intends to finally close the gender pay gap across Europe. To achieve this, it is resorting to far-reaching new regulations that entail a high implementation effort for employers, an overview of which is provided below:

I. Current Legal Situation under the Nationally Applicable German Pay Transparency Act (EntgTransG)

The German Pay Transparency Act (EntgTranspG) applicable in the Federal Republic of Germany was introduced in Germany in 2017 to reduce gender-based pay differences and promote equality between women and men.

The law obliges employers with at least 200 employees to disclose their remuneration structures so that employees can understand whether they are being paid fairly and without discrimination. In summary, the law provides for three instruments to avoid gender-based disadvantage:

1. Individual Right to Information for Employees

Employers with more than 200 employees must explain to their staff the criteria used to determine remuneration.

2. Review and Ensuring Equal Pay

Companies with more than 500 employees are encouraged to check whether their remuneration structures meet the requirements of the principle of equal pay.

3. Reporting Obligation for Large Companies

Employers who employ more than 500 people and are required to publish a management report under the German Commercial Code (HGB) must regularly prepare a report on the status of equality and equal pay.

4. Small and Medium-sized Enterprises Still Largely Exempt

Companies with fewer than 200 employees are exempt from the currently applicable German Pay Transparency Act. This particularly benefits small and medium-sized enterprises.

II. New Regulations of the EU Pay Transparency Directive

However, the EU already strengthened the principle of "equal pay for equal work" in May 2023 with the Pay Transparency Directive. The purpose of the directive is to make unjustified pay differences visible and to counteract them. From June 7, 2026, all member states of the European Union are obliged to transpose the requirements of the EU Directive on pay transparency into national law.

Because the EU legal requirements of the Pay Transparency Directive go far beyond the regulations of the current German EntgTranspG, the national legislator will have to adapt the German EntgTransG from 2017.

This will also create a need for action for employers shortly. They will have to comply with stricter obligations. The tightening also affects smaller and medium-sized enterprises that have not previously fallen under the legal scope of the still applicable German EntgTransG. A specific draft law is not yet available but is expected for early 2026.

In overview, the following changes will result:

1. Which employers will the new regulations apply to?

From June 7, 2026, employers with at least 100 employees will in any case be obliged to implement certain measures.

These include, in particular, information obligations in the application process, expanded rights to information, reporting obligations, and claims for compensation in the event of gender-specific pay discrimination. To make it easier for employees to enforce fair remuneration, the burden of proof for non-discriminatory payment is to legally pass to the employer in the future. The various instruments of the Pay Transparency Directive are intended to contribute to making remuneration structures more comprehensible and further reducing pay discrimination.

Companies with more than 100 employees must also regularly prepare and publish reports on the gender pay gap. This allows pay differences between women and men to be disclosed, and the corresponding reports are to be transmitted to the competent authority. If the pay report reveals a difference of more than five percent between the average remunerations of women and men, the company is obliged to react: together with the employee representation, a pay assessment must be carried out to investigate the causes of the pay differences and define measures to eliminate the pay gap.

Individual obligations even affect all employers regardless of the number of employees. However, the legislator can create national simplifications and exceptions here. To what extent this will happen remains to be seen.

2. What will change with regard to application procedures?

Applicants will have a right to be informed about the initial pay for the position in question, based on objective, gender-neutral criteria, or its range, or about any relevant collective bargaining provisions. This is intended to ensure sound and transparent negotiations regarding pay.

Employers should therefore determine the objective, gender-neutral criteria for the salary or salary range and their weighting relative to each other before the start of the application process. This should enable sound and transparent negotiations about the salary. This can be provided, for example, in the job advertisement or before the interview. To avoid making the information accessible to competing companies, it is recommended to communicate the salary, for example, in the invitation to the interview.

Note: The contractual autonomy of the parties remains, so that salaries outside this range can also be negotiated. However, employers must document and prove which objective reasons justify the deviations. Such reasons may lie in the level of education, professional experience, acute personnel shortage, or a lack of comparability of tasks.

Employers ensure that job advertisements and job titles are gender-neutral and that hiring procedures are conducted in a non-discriminatory manner. Applicants may not be asked about the development of their salary in previous or current employment relationships.

3. What information obligations will apply during the ongoing employment relationship?

From June 7, 2026, employers are obliged to inform their employees about the objective and gender-neutral criteria for determining their pay, their pay levels, and their pay development, Art. 6 EU Pay Transparency Directive.

The EU Directive does not regulate exactly how and at what intervals the information is to be provided. Member states may exempt employers with fewer than 50 employees from the obligation in connection with pay development.

Note: The German legislator therefore still has a degree of discretion here, and the amendments to the German EntgTransG must be awaited before the exact scope of the information obligations is fixed.

4. What individual rights to information will the individual employee have?

Every employee, even in companies that employ only one worker, will have a right to receive written information about their individual pay level and about the average pay levels, Art. 7 para. 1 EU Pay Transparency Directive. The information must be broken down by gender and groups of employees performing the same or equivalent work.

Employers will be obliged to inform their employees annually about this right to information and the manner in which it can be asserted. Requests for information must be answered within two months. Confidentiality clauses in employment contracts, under which employees are contractually obliged to maintain secrecy about the level of their salary, will be prohibited by law.

Note: The current German EntgTranspG still relies on the statistical median as a reference for determining pay. According to the new EU Pay Transparency Directive, the average pay level is decisive. For this, the sum of all individual values is divided by the number of individual values. For comparison, all comparable employees must be included. This requires the formation of comparison groups. Employees thus receive information not only about the pay level of comparable employees of the other gender but also of their own gender. A breakdown by pay components will also likely be required.

5. Which periodic reporting obligations will be established and tightened?

The circle of obligated employers will be drawn larger. Previously, only employers with generally more than 500 employees were obliged to prepare a management report. According to Art. 9 para. 1 to 4 EU Pay Transparency Directive, employers with at least 100 employees will also be subject to significantly more far-reaching reporting obligations in the future.

The scope of the reporting obligation will also be expanded. Previously, there was only an obligation to set out measures to promote equality and ensure equal pay, the average total number of employees, and full-time and part-time employees. In the future, the following information must be provided:

• the gender pay gap
• the gender pay gap for supplementary or variable pay components
• the median gender pay gap
• the median gender pay gap for supplementary or variable pay components
• the proportion of employees receiving supplementary or variable pay components
• the proportion of employees in each pay quartile
• the gender pay gap between employees, broken down by basic wage or salary and by supplementary or variable pay components.

The accuracy of the information must be confirmed by the employer's management level after consulting an existing employee representation, Art. 9 para. 6 EU Pay Transparency Directive.

The deadlines for initial reporting and the intervals for periodic reporting depend on the size of the company:

• Employers with 250 or more employees must provide the information in relation to the previous calendar year by June 7, 2027, and in each subsequent year.
• Employers with 150 to 249 employees must provide the information according to paragraph 1 in relation to the previous calendar year by June 7, 2027, and every three years thereafter.
• Employers with 100 to 149 employees must provide the information according to paragraph 1 in relation to the previous calendar year by June 7, 2031, and every three years thereafter.

Companies with fewer than 100 employees may be required by the member states to also provide information on pay, Art. 9 para. 5 EU Pay Transparency Directive.

The information must be provided to employees, the employee representation, the labor inspection authorities, and equality bodies, as well as the monitoring body designated by the national legislator. Currently, the reports must be disclosed in the German Company Register (Unternehmensregister).

Note: There may be overlaps with other reporting obligations, e.g., ESG reporting obligations under the Corporate Sustainability Reporting Directive ("CSRD") and the European Sustainability Reporting Standards ("ESRS"). Employers should check their reporting obligations and, if necessary, standardize or coordinate overlapping processes.

6. What obligations apply in the event of identified pay gaps?

Employers with 100 or more employees must carry out a joint pay assessment with any existing employee representation following their report, provided that a pay gap of at least 5% results in an employee group and the gap is not justified or is eliminated within six months, Art. 10 EU Pay Transparency Directive.

The aim of the regulation is to identify, correct, and prevent pay differences between female and male employees that are not justified by objective and gender-neutral criteria.

This is likely to lead to an expansion of the co-determination rights of the German Works Council (Betriebsrat). Previously, Section 17 para. 1 of the German EntgTranspG provided for a company review only for operations with more than 500 employees.

After completing a joint pay assessment, employers are obliged, together with employee representations, to provide a remedy in the case of unjustified pay differences. This can be done by adjusting pay upwards or downwards. However, an adjustment downwards is only possible if (contractual) rights of the previously favored employees do not stand in the way or they cooperate by mutual agreement.

Note: Employers should preempt a company pay assessment and check now whether there are differences of at least 5% in the average pay level between the genders within at least one employee group with equivalent work. If such differences exist, employers should check if and by what the salary differences are justified. Objectively unjustified differences should be reduced as quickly as possible.

The results of this pay assessment must also be made available by the employer to the employees and the employee representatives. The employer must communicate them to the monitoring body to be designated by the legislator. Employers shall make the information available upon request from the labor inspection authority and the equality body.

7. What changes will be necessary with regard to employment contracts?

The EU legislator also wants to enforce pay equality by ensuring that claims from the EU Pay Transparency Directive are not subject to short-term forfeiture. Limitation periods for claims for equal pay must not be shorter than three years, Art. 21 EU Pay Transparency Directive. Thus, these claims may not be covered by contractual or collective bargaining forfeiture clauses.

Note: Forfeiture clauses contained in German employment contracts may need to be adapted accordingly against this background to avoid invalidity.

8. Support during Implementation

Pursuant to Art. 11 EU Pay Transparency Directive, member states must offer support to employers with fewer than 250 employees and the relevant employee representatives in the form of technical assistance and training to facilitate compliance with the obligations set out in this Directive.

Note: How the national legislator designs this state support remains to be seen. Employers should not rely on state aid being available in time and to a sufficient extent, but rather ensure active compliance in good time themselves.

9. What consequences are threatened in the event of violations?

If employers do not implement the provisions of the Pay Transparency Directive correctly or in time, this can have significant legal consequences. The EU Pay Transparency Directive specifically prescribes to the legislator which sanctions are to be transposed into national law.

Employers who do not act in time and sufficiently risk being exposed to high salary back payments and salary adjustments. Once an unjustified pay inequality has been established in court, employees can generally claim the salary difference for the past three years.

Art. 16 EU Pay Transparency Directive obliges the legislator to ensure that employees who have suffered damage due to the violation of rights or obligations in connection with the principle of equal pay have the right to claim and receive full compensation or full satisfaction for this damage.

In German labor court proceedings, the burden of proof that no direct or indirect pay discrimination exists will shift to the employer in accordance with the requirements of Art. 18 of the EU Pay Transparency Directive. The employer must then be able to prove compliance with the German EntgTransG or the EU Directive. They must prove that they are meeting their information and reporting obligations and that existing salary differences are objectively justified.

The legislator is also tasked in Art. 23 EU Pay Transparency Directive with regulating dissuasive sanctions to be imposed in the event of violations of rights and obligations in connection with the principle of equal pay. Here, the legislator will likely establish substantial fines.

III. Legal Tips

The requirements of the EU Pay Transparency Directive are far-reaching and incisive. Employers should prepare for the coming change in the law early; the implementation effort will be considerable.

• Employers must review and update their job advertisements and application procedures. Existing employment contract templates must also be reviewed and updated if necessary.
• Already existing remuneration systems must be reviewed systematically and in good time and, if necessary, adapted to the EU legal requirements. This applies both with regard to the structures of the monthly fixed remuneration and with regard to the design of variable remuneration systems. Performance-based pay may take on even greater importance in the rewarding of work performance in the future.
• Company remuneration systems must also be reviewed and, if necessary, revised in cooperation with the employee representation in accordance with the requirements of the EU Directive and must comply with the requirements of a non-discriminatory pay structure.
• If no objective remuneration structures yet exist in the company, objective criteria for pay must be established. Businesses with employee representation must involve them in determining the criteria, as there is a right of co-determination in matters of company wage structure, especially the establishment of remuneration principles.
• In all of this, it must be ensured that there are no gender-specific differences between same and equivalent activities; any salary differences must always be objectively justified. The objective reasons must be well documented. Refuting unequal treatment due to gender can succeed if the employer explains, for example, how criteria such as work quality, professional experience, or even professional affiliation are evaluated and weighted relative to each other in detail.
• Managers and human resources department employees should be trained in non-discriminatory pay structures in good time and on an ongoing basis.
• Finally, employers who employ fewer employees than required for the application of the new EU Pay Transparency Directive should also keep an eye on the legal changes. Even today, the case law of the German Federal Labor Court (BAG) derives a reversal of the burden of proof from the general regulation of Section 22 of the German General Act on Equal Treatment (AGG) in equal pay lawsuits (BAG, Judgment of Jan 21, 2021, 8 AZR 488/19). It cannot be ruled out that in the future, case law applying such general regulations will take into account the assessments of the EU Pay Transparency Directive and interpret the procedural obligations of employers more broadly.