Equal pay is not negotiable – Reasons for the Federal Labor Court’s equal pay ruling are now available

The original article in German language was published by “Der Betrieb” on 11 July 2023.

A decision by the Federal Labor Court in February of this year caused a great stir. There was talk of a drumbeat from Erfurt and of women benefiting from the negotiating skills of men. What had happened? An employer had advertised the same position twice at a gross salary of EUR3,500. A woman got the job for this salary, a man demanded EUR4,500 instead and got it. The woman subsequently demanded the difference from the employer as compensation for the alleged discrimination on the grounds of gender. Germany’s highest labor court ruled in her favor. The written reasons for the ruling are now available, allowing a detailed assessment.

Pursuant to Section 7 of the German Pay Transparency Act (Entgelttransparenzgesetz), in accordance with the requirements of European law, lower pay may not be agreed or paid for the same or equivalent work on the grounds of the employee’s gender than for an employee of the other gender. Conversely, Section 3 prohibits direct or indirect discrimination on the grounds of gender with regard to all pay components and pay conditions for the same work or work of equal value.

It was obvious that the plaintiff had a lower salary than her colleague. It had to be clarified whether this discrimination occurred “because of gender”. The plaintiff was assisted in this by the burden of proof provision in Section 22 of the General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz). If, in the case in question, the employee proves circumstantial evidence suggesting discrimination on the grounds of gender, the burden of proof is reversed. The difference in pay in the specific case meant that the employer would have had to prove that the difference in pay was precisely not based on gender. In the present case, the employer obviously failed in doing so, as the Federal Labor Court expressly states. The ruling is therefore exclusively a case-by-case decision based on the burden of proof rule and does not establish any new legal principles, no drumbeat, no downfall of the West, as is sometimes proclaimed.

The court did not accept the employer’s arguments to refute the gender-based discrimination. The Federal Labor Court convincingly refuted the reference to contractual freedom. If the individual agreement with a male employee on a higher salary leads to the presumption of discrimination, then the same fact – individual agreement – cannot lead to the rebuttal of this presumption. There is nothing to add to this! The argument that the position could not have been filled for less money was also unsuccessful. It is true that labor market-related aspects can be suitable to justify a different payment. However, the employer’s presentation was obviously too “thin”. Moreover, the employer’s appeal to the better qualifications of the male applicant, also a suitable differentiation criterion in principle, was raised too late in the proceedings. Other aspects that did not play a role in these proceedings, but can in principle justify different treatment, are seniority as well as performance and competence. In this case, however, a blanket reprimand will not suffice. The courts expect a detailed and extensive explanation of the reasons. The real lesson from the Federal Labor Court’s decision for employers is therefore also to document personnel decisions and their circumstances cleanly and comprehensively, of course taking into account the requirements for gender-neutral pay. If the employer had adhered to this in the case decided, then it might have been able to provide evidence to the contrary.

If the European Union has its way, such a case should soon no longer occur anyway. The “Pay Transparency Directive”, which came into force at the beginning of June and must be transposed into national law within three years, brings with it a host of new obligations for pay transparency. For example, employers will in future be obliged to disclose the intended salary or salary range when advertising a job or at the latest at the start of the interview. In our case, if the employer had indicated a range of EUR3,500 to EUR4,500, the difference in negotiating skills would probably not be assessed as gender-based discrimination.

The background to the EU Pay Transparency Directive is the recognition that a lack of transparency about pay systems and pay is a major cause of the gender pay gap. For this reason, the member states are also required to prevent contractual regulations that are intended to prevent employees from exchanging information about their salaries. Obligations to maintain secrecy about one’s own salary will soon be a thing of the past. And another bad habit of some employers will be buried with the directive. It will no longer be permissible to ask about previous pay. This is to be welcomed. Pay should be based on job-related characteristics, not on how well or poorly one was paid at one’s last employer.

The adjusted gender pay gap in Germany is still 6%. The causes of this gap cannot be determined more precisely. The decision of the Federal Labor Court discussed here, which concerned a specific individual case, contributes to closing the pay gap, as does the EU Pay Transparency Directive. Employers should examine their pay systems for gender neutrality and neatly document personnel decisions, including those concerning pay determination.