Case Study: One step ahead in pay transparency with pre-audits

Background and Context

Many companies are currently exempt from the reporting obligation under the German Pay Transparency Act, as it applies only to employers with more than 500 employees. However, the EU Pay Transparency Directive, effective June 7, 2026, will require companies with 150 or more employees to submit pay equity reports by June 7, 2027. Gradually, also companies with 100 or more employees will be affected.

Audit Methodology

Our approach is based on both the existing German Pay Transparency Act and the forthcoming European Directive. The key steps include:

1. Role Segregation

We begin by categorizing all employee roles based on role titles.

2. Gender Segregation

In a next step, employees in each role are separated into two groups: female and male. This foundational segregation is critical for analyzing pay equity within each role.

3. Calculation of Average Gross Remuneration

Within each gender group, we calculate the average gross remuneration for all roles. This includes fixed salaries as well as variable components such as bonuses and commissions or company pension schemes, if applicable.

4. Gender-Based Pay Comparison

We compare the average gross remuneration of male and female employees within each role. The threshold for acceptable pay disparity is set at 5%, in alignment with the European Pay Transparency Directive. Disparities exceeding this threshold are flagged for further examination.

5. Objective Justification Analysis

For pay disparities exceeding 5%, we assess whether they can be justified by objective and legitimate criteria. Under current German law, justifications may include labor market conditions, employee performance, or results achieved, provided that the principle of proportionality is respected. Recent rulings, such as the February 2023 decision by the German Federal Labor Court, are considered. For instance, the court determines that superior negotiating skills do not constitute a valid justification, whereas differences based on length of service might be permissible if proportionate.

6. Individual and Group-Level Analysis

We also examine individual employee remuneration to identify cases where an employee’s gross remuneration significantly falls below the average of their opposite-gender group.

Where disparities exceed the 5% threshold, we conduct a detailed analysis to determine whether objective reasons justify the difference.
The audits do not assess intra-group pay differences (e.g., disparities among female employees or among male employees).

Observations and Recommendations

The audits highlight areas where pay adjustments may be required to meet the standards set by the European Directive. We provide recommendations for addressing unjustified pay disparities, including:

Establishing internal benchmarks for pay equity.

Implementing structured compensation review processes.

Providing guidelines for future pay-setting practices to ensure compliance with proportionality and justification principles.

Our findings equip the client with a clear roadmap to navigate both current and forthcoming pay transparency obligations, ensuring compliance and promoting workplace equity.

3 Questions to Dr. Sabine Vianden

Dr. Sabine Vianden is a distinguished expert in pay transparency and equal pay regulations and joined Littler’s Hamburg office in 2021. She advises both domestic and international clients across a wide range of industries. She holds a doctorate in law, with her dissertation focusing on “Equal Pay for Equal Work and Work of equal value,” a subject that has become increasingly pivotal in the context of European and German pay equity legislation. Her expertise positions her as a subject matter expert on pay transparency, making her a sought-after advisor for organizations navigating complex compliance requirements and implementing equitable pay structures.

1) Why is pay transparency an important issue?

In 2021, male employees in the EU27 earned, on average, 12.7% more per hour than their female counterparts. This disparity translates to women effectively earning about a month and a half less in salary annually. The situation in Germany is even more pronounced: as of 2023, women earned approximately 18% less per hour than men, based on men’s average gross hourly wages.

In Germany, one’s own pay and that of colleagues is still a taboo subject in many industries and female employees simply do not know what their colleagues earn and are therefore unable to assert any pay claims that may exist. In 2017, the German legislator created a right to information for employees in companies with more than 200 employees with the German Pay Transparency Act. Since then, they have been able to find out what colleagues in their peer group earn, provided this group consists of at least 6 employees.

2) What do you expect from the new EU directive?

EU member states have until June 2026 to transpose the provisions of the Pay Transparency Directive into national law. For Germany, it goes beyond what is regulated in the current law. Among other things, it specifies which criteria must be used as a basis if we have a system of job classification or pay determination in the company. Specifically, these are: skills, workload, responsibilities and the working conditions of the job. In addition, the right to information is to be extended to the initiation of the employment relationship so that also applicants can gain knowledge of the remuneration structures. For companies or external recruiters, on the other hand, the right to information (e.g. on remuneration in previous jobs) is to be reduced. In future, employers should also actively work to ensure that employees are informed of their rights to information. Last but not least, the mandatory gender pay gap report for companies with more than 100 employees, which will gradually be required, will pose major challenges for many companies if the required data is not known. And the consequences of non-compliance, such as fines, should not be neglected either.

3) What advice do you have for co-determined German operations addressing works councils' information rights on non-discriminatory pay?

We recommend that co-determined companies proactively manage the issue of non-discriminatory pay by engaging in a structured analysis with external experts. This approach allows employers to identify and address potential pay disparities internally before having to provide data to the works council. Employers can thus better understand where issues might exist, develop arguments to justify certain pay differences (if legally permissible), and gain time to resolve any instances of discrimination. This ensures that when data is eventually shared with the works council, it is done on the employer’s terms, minimizing the risk of unnecessary unrest or time pressure. In contrast, if a co-determined German employer analyzes pay data itself, the works council may demand real-time access to raw data under Section 80(2) of the German Works Constitution Act (BetrVG) which may lead to significant operational challenges. In summary, collaborating with experts puts the employer in control of the process and timeline, avoiding potential disruptions and ensuring compliance with legal requirements in a more strategic and manageable way.