Pay Transparency Directive: Gender-Neutral and Objective Pay Systems – Fair Pay Based on Transparent Criteria
Lisa-Lorraine Christ, LL.M.
In our next post in this blog series: Equal pay and pay transparency will be the focus of our next post, where we examine another key element of the Pay Transparency Directive (Directive (EU) 2023/970 of 10 May 2023, hereinafter “the Directive”) – shedding light on the new standards for fair and transparent pay systems.
The Directive seeks to prevent gender-based pay differences for the same or equivalent work. The Directive calls for objective, gender-neutral, and transparent pay structures – which can prove especially challenging in the context of legacy pay structures.
The deadline for transposing the Directive into German law is 7 June 2026; however, its provisions are already considered to constitute minimum requirements. Companies would be well advised to assess whether their pay systems align with these requirements early on, particularly as the criteria are already being cited in equal pay claims (cf. LAG Niedersachsen, Judgement of 10 September 2024 – 10 SLa 221/24).
Blog Series: Equal Pay and Pay Transparency
Pay equity is no longer merely a matter of fairness – it is becoming a statutory requirement. Under the EU Pay Transparency Directive, companies face a new set of requirements – from mandatory reporting to the implementation of transparent pay systems. In this blog series, we highlight what companies need to consider as the Directive takes shape and how to implement pay equity in a legally compliant and strategic manner.
I.
What Are the Criteria for Non-Discriminatory Pay Systems?
Pay systems are often based on a range of factors such as length of service, level of education, specialist skills, or professional experience. Some criteria, however, carry a risk of gender-based discrimination.
Example:
When pay or special bonuses are closely linked to uninterrupted full-time work – this can amount to indirect discrimination against women, who are more likely than male colleagues to have career interruptions due to maternity, parental leave, or part-time arrangements.
The Directive sets out four key gender-neutral criteria: Skills, effort, responsibility and working conditions. These criteria are meant to establish that pay systems are non-discriminatory. In recognition of the fact, that not all factors are equally relevant for every position, employers are given the flexibility to assign weights to these factors accordingly. Simultaneously, additional factors can and should be taken into account, as long as they are relevant to the specific position.
Example:
The competence or level of education must be relevant to the specific position. A law degree, for instance, cannot be taken into account if it has no relevance to the specific job – such as that of a tradesperson.
It remains to be seen whether and how the German legislature will define the criteria. The EU guidelines on gender-neutral job evaluation provide the following definitions for initial orientation – abridged for a high-level overview – definitions:
Skills:
Knowledge, skills, experience, problem-solving and interpersonal skills.
Effort:
Physical, mental, and psychosocial demands of the position.
Responsibility:
Duties in areas such as personnel, materials, data, or budget.
Working conditions:
Circumstances and environmental factors that affect the role.
Many pay systems today take the necessary skills and responsibilities associated with the position into account. However, factors such as working conditions specific to the task or other (objective) demands inherent to the position are often overlooked. There is a need for improvement. This is likely to pose a particular challenge in real-world situations for companies, works councils, and social partners.
Important:
In contrast to the frequently cited interpretations, we find no evidence in the Directive to support the notion that collective agreements could be given preferential treatment – as currently stated in § 4(5), Sentence 1 of the Pay Transparency Act. As it stands, all collective agreements regarding remuneration are as such subject to the requirements outlined above.
Owing to the EU-guaranteed autonomy of collective bargaining (Article 28 of the Charter of Fundamental Rights), it is probable that a classification under a collective agreement will be regarded as evidence of equal work. However, the weight this will carry remains to be seen.
Owing to the EU-guaranteed autonomy of collective bargaining (Article 28 of the Charter of Fundamental Rights), it is probable that a classification under a collective agreement will be regarded as evidence of equal work. However, the weight this will carry remains to be seen.
II.
How Are the Criteria Weighted?
Once the gender-neutral criteria and possible sub-criteria have been defined, each criterion and sub-criterion must be assigned a weight.
Initially, the four main criteria – skills, responsibility, effort, and working conditions – are weighted, for example, at 40 %, 20 %, 20 %, and 20 %; additional criteria may be added. Each sub-criterion is assigned a proportion of the main criterion's total weight. Finally, each position is assigned a score to determine the salary grade. Employers exercise their own discretion in this process – transparency is key.
In a recent regional labour court decision, the court found that the mere assertion that any random criteria were used does not meet the established standard. On the contrary, the employer must demonstrate how he has weighted these criteria against each other (cf. LAG Baden-Württemberg v. 19.6.2024 - 4 Sa 26/23).
III.
Conclusion and Recommended Next Steps
The Directive requires objective and gender-neutral criteria that are clearly defined, weighted, and documented.
Even though the transposition of the Directive in Germany has yet to be completed, conducting a review of existing pay systems in advance and taking the first steps to align them now will benefit you in the long term, avoiding the need for hasty adjustments and, most importantly, minimising any potential discrimination risks. The following points should be carefully considered:
“Due diligence” of the pay structure:
Conduct a review of the current system to identify potential vulnerabilities. Review the existing criteria and weightings to ensure they satisfy the Directive’s standards, with particular emphasis on avoiding discriminatory stereotypes.
Definition of objective, gender-neutral criteria:
Setting clear assessment standards, while ensuring transparency in the weighting of main criteria.
Establishment of a monitoring system:
Systematic monitoring helps ensure the consistent application of criteria and identification of potential discrimination risks.
We’re here to assist with evaluating and implementing any necessary changes to your pay systems.
