Update Equal Pay: No adjustment ‘to the very top’ and reversal of the burden of proof under Section 22 AGG only at ‘50 per cent plus‘

German legislator is (still) leaving legal practice waiting for the draft of the revised Remuneration Transparency Act (Entgelttransparenzgesetz, EntgeltTranspG 2.0) to implement the European Pay Transparancy Directive (2023/970/EU, EUPTD). At the same time, German case law is constantly developing the legal principles for the conditions and amount of the gender-related equal pay claim under the currently applicable EntgeltTranspG 1.0. This Client Alert categorises the judgements issued by the Baden-Württemberg Higher Labour Court on 18 September 2024 (4 Sa 26/23) and 1 October 2024 (2 Sa 14/24) in this regard.

The core parameters of the gender-related equal pay claim – for which case law defines Art. 157 TEU and Sections 3 (1), 7 of the Equal Pay Transparency Act as the basis for the claim – are

(1) the performance of the same or equivalent work by the employee making the claim compared to the relevant employee(s) in the comparison group of the other sex,

(2) a gender-based pay difference in relation to the same/equivalent work, and

(3) the possible justification for the gender-based pay difference.

For parameters (2) and (3), Section 22 General equal Treatment Act (Allgemeines Gleichbehandlungsgesetz, AGG) stipulates a reversal of the burden of proof with regard to the causal connection between the gender-based pay difference and its gender-based unlawfulness. If the employee submitting the claim presents and proves circumstantial evidence that suggests gender-related discrimination, the employer bears the burden of proof that the pay gap is not based on objectively unjustified gender-related reasons.
 

1. Status quo of the core parameters according to the previous case law of the Federal Labour Court: equal and equivalent work, requirements for the indicative effect according to Section 22 AGG, justifications for pay differences

In its previous case law, the German Federal Labour Court (Bundesarbeitsgericht, BAG) has further specified the above-mentioned parameters of the gender-related equal pay claim as follows:

(1) For the same or equivalent work, Section 4 (1) and (2) EntgeltTranspG defines as a starting point that (1) the same work exists when female and male employees carry out the same or similar tasks at different workplaces or successively at the same workplace (Section 4 (1) EntgeltTranspG), and (2) there is equivalent work if female and male employees can be regarded as being in a comparable situation, taking into account a set of factors, whereby the type of work, training requirements and working conditions can be regarded as decisive factors (Section 4 (2) EntgeltTranspG).

The assessment of equivalence is made from the employer's perspective and can be objectified in particular by methods of job evaluation (BAG judgment of 21 January 2021, 8 AZR 488/19). The work of the employees being compared must be considered comparable in terms of the content and specific training and experience requirements, at least with regard to the aforementioned relevant factors; the presence of individual identical factors is not sufficient to establish equivalence.

(2) The assessment of the level of pay and any associated pay gap between the genders must be based on the individual pay components and refers to each pay component (BAG judgment of 25 June 2020, 8 AZR 145/19).

(3) All objective factors that relate to a legitimate aim of the employer and that have nothing to do with gender-based discrimination can be used to justify the gender-based pay gap. In the specific dispute with the employee making the claim, the employer must prove that the pay gap is based solely on these gender-independent reasons.

On the basis of the facts relevant to its decisions to date, the BAG has already recognised the following as permissible criteria for differentiation:

(a) seniority and length of professional experience, which, when viewed in a typified manner, enable the respective employee to perform his work better,

(b) the situation on the labour market, which causes the employer to increase the remuneration in order to offer relevant applicants an incentive to take up employment with the employer; this applies in particular to recruitment difficulties for the specific position.

The specific differentiation criterion must be applied in the specific case and the specific differentiation in pay between the employee making the claim and the respective specific comparable person must be justified (BAG judgment of 16 February 2023, 8 AZR 450/21).

In the opinion of the BAG, the following are not permissible criteria for differentiation – based on the facts relevant to the decision to date:

(a) the negotiating skills of the individual employee in the comparison group, or

(b) the remuneration granted to the respective predecessor of the employee making the claim and the comparison person(s) in the specific position.

(4) The BAG has further specified the reversal of the burden of proof in accordance with § 22 AGG, according to which the employee making the claim can establish the presumption of causality by demonstrating that he or she is doing the same/equivalent work and receives lower pay than the comparable person of the opposite sex (BAG judgment of 16 February 2023, 8 AZR 450/21).

2. Legal consequence of the claim for equal pay under Sections 3 (1) and 7 EntgeltTranspG: ‘Adjustment upwards’

On the legal consequences side, the statutory provisions of Sections 3 (1) and 7 EntgeltTranspG initially determine an ‘adjustment upwards’. In this regard, the BAG has (only) established the general legal principle that, if the above-mentioned requirements of Sections 1 (1) and 7 EntgeltTranspG are met, the employee making the claim is to be granted the remuneration that is granted to comparable employees of the other sex in respect of the respective remuneration component. The BAG has not (yet) had the opportunity to explain the legal question of whether this upward adjustment refers to the median of the comparison group (‘adjustment upwards’) or to the highest-paid employee of the opposite sex (‘adjustment to the top’) with the same or equivalent work.

3. Judgements of the Higher Labour Court (Landesarbeitsgericht, LAG) of Baden-Württemberg of 18 September 2024 (4 Sa 26/23) and of 1 October 2024 (2 Sa 14/24): Expansion of the catalogue of specific justifications and the required weighting of the specific justifications in relation to each other; no adjustment ‘to the top’

In its judgements of 18 September 2024 (Fourth Chamber) and 1 October 2024 (Second Chamber), the LAG Baden-Württemberg had the opportunity to further update the legal principles established by the BAG in its previous case law on the requirements for and legal consequences of the claim for equal pay, taking into account the facts of the case relevant to the decision in each case.

The employers who were the defendants in both lawsuits belonged to the same group of companies. They used the same pay system to determine the basic salary. The two female employees filing the lawsuits were each assigned to the third management level below the board of directors/management (management level E3) in the pay system. A large number of male and female employees were assigned to this management level E3. The male employees cited by the plaintiffs in the two lawsuits each achieved a higher basic salary than the respective plaintiff and also than the female comparison group in the median consideration (= salary of the employee placed in the middle (= median) of the group in the ranking) both in the entire comparison group and each individually. In addition, the employers granted their employees at management level E3 variable remuneration (company bonus), a share-based remuneration component (Performance Phantom Share Plan, PPSP) and a capital component for company pension provision (PCO) in addition to their basic salary.

In the lawsuits arising from the claim for equal pay, the plaintiffs sought, among other things, a higher basic salary and the additional granting of phantom shares from the share-based remuneration component. In one legal lawsuit, the plaintiff sought payment of the difference in pay compared to the best-paid male employee in the comparison group. The employers justified the pay gap by stating that the respective male employees had more professional experience and had also performed better than the respective plaintiff in the past.

The LAG Baden-Württemberg partially upheld the equal pay claims in each case and recognised the following further legal principles regarding the prerequisites for the equal pay claim and its amount:

(1) The comparators within the meaning of Section 4 EntgeltTranspG who, on the basis of the same/equivalent work, can be considered as comparators with the employee making the claim may arise, above all, from the remuneration system implemented by the employer. In particular, the remuneration transparency dashboards developed by employers in implementing the requirements of Section 4 EntgeltTranspG come into consideration here. In applying Section 12 (2) EntgeltTranspG, the LAG Baden-Württemberg makes it clear that the group of persons in the same/equivalent job can only be compared to persons in the same employer's company and, in particular, not across regions.

(2) Since each remuneration component can be the subject of a gender-related equal pay claim, the employee making the claim can also include company pension benefits and share-based remuneration components, provided that the relevant remuneration difference is recorded for these in relation to the comparable persons of the other sex.

(3) The employer may also take into account the quality of work/performance of individual employees in the past as justifications for the pay gap. In its judgment, the Fourth Chamber states that if the employer uses several justifications, it must explain how it assesses these in detail and how it weighs them against each other. If the employer is unable to provide such an explanation, the employee making the claim may claim the higher remuneration even if the individual justification has been explained.

(4) The reversal of the burden of proof under Section 22 AGG only applies if there is a high probability of gender-related discrimination based on the evidence presented by the employee making the claim (‘50 per cent plus one’). To do this, all the circumstances of the specific individual case must be taken into account as part of the necessary overall assessment of the facts. According to the overall circumstances, there is a lack of the corresponding circumstantial evidence if it is established that the employee making the claim has specifically chosen a person of the opposite sex who, despite doing the same or equivalent work, is significantly better paid, while this is not the case for the other colleagues of the opposite sex. The reversal of the burden of proof under Section 22 AGG does not apply if countervailing evidence reduces the probability of causality to a maximum of 50%. The LAG Baden-Württemberg correctly states in this regard that the gender-related equal pay claim does not require equal treatment in the absence of objective grounds for differentiation, but only prohibits unjustified gender-related unequal treatment.

5) Against this background, the gender-related equal pay claim is based on the amount of the pay difference between the current pay of the employee making the claim and the median pay of the comparable persons of the other sex. If the current remuneration is below the median remuneration of the comparable persons of the same sex, the claim is reduced to the remuneration difference between the median remunerations of the comparable persons of the two sexes – in this case, the remuneration difference between the current remuneration and the median remuneration of the comparable persons of the same sex is not to be taken into account, since this remuneration difference cannot be based on gender-related reasons. The assessment must be carried out separately for each calendar year, since the group of persons in the comparison group can change due to corresponding additions and subtractions and therefore also the specific comparison person on the median of the comparison group.

The Second Chamber of the LAG Baden-Württemberg has allowed an appeal against the judgment of 1 October 2024 – this is pending before the BAG (under the case number 8 AZR 300/24) and the BAG will therefore have to deal primarily with the legal principles established by the Second Chamber regarding the distribution of the burden of proof under Section 22 AGG and the amount of the gender-related equal pay claim in accordance with the above paragraphs (4) and (5).

4. Classification of the further legal principles of the LAG Baden-Württemberg – and how they are dealt with in legal practice

The further legal principles established by the LAG Baden-Württemberg in the judgments are partly clarifying and mostly helpful for legal practice:

The clarifications regarding the scope of the claim in relation to each individual remuneration component and regarding the use of the Remuneration Transparency Dashboard (or comparable software tools implemented by the employer to implement the EntgeltTranspG) to verify and document the comparison of persons with the same equal work in accordance with Section 4 of the EntgeltTranspG in accordance with the above Sections 3. (1) and (2), employers are sensitised to the need for a complete and consistent recording of all remuneration components in the software tools used.

The comprehensive system of the individual reasons required for the justifications and their weighting in relation to each other sensitises legal practice to the careful documentation of the individual remuneration decisions, which, in addition to the determination of relevant justifications and their weighting in relation to each other, also requires a consistent process in which the employer must ensure that the stakeholders involved in the specific determination and definition of remuneration for the individual workplace (in particular the relevant managers/decision-makers) adhere to the prescribed system and actually prepare the necessary documentation. This applies in particular to the determination of pay for positions that, from an employment law perspective, are based exclusively on individual agreements and for which the employer, in accordance with the implemented pay system, determines pay ranges with associated scope for assessment for the specific determination.

The legal principles established by the Second Chamber of the LAG Baden-Württemberg in its judgment of 2 October 2024 are helpful in practice. These principles relate to the requirements for the predominance of gender-related discrimination in accordance with Section 22 of the German Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz, AGG) and for determining the respective median value of the gender-related comparison groups as a quantitative yardstick for the pay gap and the associated gender-related equal pay claim in accordance with the above Sections 3 (4) and (5).

5. Outlook: Legal update of the requirements and amount of the gender-related equal pay claim through the EntgeltTranspG 2.0

The implementation of the substantive requirements of the Pay Transparency Directive through the EntgeltTranspG 2.0 will significantly expand the individual requirements and the amount of the gender-related equal pay claim. Of the extensions to the individual legal requirements (see the synopsis in the presentation for our webcast on 29 November 2023: https://www2.deloitte.com/content/dam /Deloitte/dl/Documents/legal/Deloitte%20Legal%20Webcast%20Update%2029.11.2023.pdf) the following regulations are worthwhile mentioning in this context

• No local and/or company-related restriction (any longer) of the group of comparators with the same/equivalent work: Under the EntgeltTranspG 2.0, all employees whose remuneration is based on a single source will be comparable.

•  Average pay instead of median pay in the comparison group: The size of the pay gap will be assessed based on the average pay in the comparison group. In practice, this will in many cases lead to a greater levelling of the relevant pay figures.
  
  

We will continue to follow the further development of the legislative process of the EntgeltTranspG 2.0 and its implementation in practice, as well as other legal developments regarding equal pay, especially in case law, in our Client Alerts.

Published: December 2024