Equal pay for equal work and work of equal value:  the legal foundations of this principle have been enshrined in European and German laws for decades. Lawmakers attempted to strengthen actual enforcement by enacting the German Pay Transparency Act (EntgTranspG) in 2017.  Nevertheless, Equal Pay Day will not take place until March 7 this year—the day until which female employees in Germany work "unpaid" in statistical terms, based on the unadjusted gender pay gap of around 18%.

On February 16, 2023, however, the German Federal Labor Court (Bundesarbeitsgericht – “BAG”) issued another important decision on equal pay, stating, among other things, whether and how unequal pay can be justified by way of exception. The decision (Case No. 8 AZR 450/21) sets further bases for employers in Germany to determine pay, but raises additional questions.

The underlying facts and the procedure to date

According to the press release of the Federal Labor Court, the decision, which is not yet available in full text, is based on the following facts:

The plaintiff was employed by the defendant as a sales representative from March 1, 2017. A basic salary of initially 3,500.00 euros gross was agreed to in the individual contract. From August 1, 2018, her remuneration was based on a company collective agreement with a new classification system. The pay group of the in-house collective agreement relevant for the plaintiff's work provided for a basic pay of EUR 4,140.00 gross. The in-house collective agreement also provided for a capping provision under which the adjustment was not to exceed €120.00/gross in the years 2018 to 2020. On this basis, the defendant paid the plaintiff a basic salary of €3,620.00 gross from August 1, 2018, which was to be further increased in annual steps.

In addition to the plaintiff, two male employees were also employed as sales representatives in the defendant's sales department. While one colleague had already been employed by the defendant since 1985, the other had started working only shortly before the plaintiff, namely on January 1, 2017. The defendant had also initially offered this new employee a basic salary of 3,500.00 euros gross, but the applicant was not prepared to accept the offer at these conditions. He demanded a higher basic salary of EUR 4,500.00 gross for the period until additional performance-related compensation was introduced, i.e., until October 31, 2018. Because the defendant wanted to hire the employee, it agreed on an increase in the basic salary to 4,000.00 euros gross as of July 1, 2018. One of the reasons given by the defendant for this move was that the employee had succeeded a sales employee who had left the company and was better paid.  As of August 1, 2018, the defendant then paid the male employee a basic wage under the collective agreement according to the same pay group as the plaintiff, which amounted to EUR 4,120.00 gross in application of the "capping provision" of the in-house collective agreement.

The plaintiff sued for payment of overdue remuneration from March to October 2017 in the amount of 1,000.00 euros gross per month, overdue remuneration for the month of July 2017 in the amount of 500.00 euros gross per month and overdue remuneration for the period from August 2018 to July 2019 in the amount of 500.00 euros gross per month. In addition, she demanded compensation in the amount of at least 6,000.00 euros.

Both the Dresden Labor Court (judgment of October 4, 2019, 5 Ca 638/19) and the Saxony Regional Labor Court (judgment of September 3, 2021 - 1 Sa 358/19) had rejected the claim with reference to the existence of an objective reason for the unequal pay—i.e., the reason was the defendant’s interest in successfully hiring the employee.

The decision of the Federal Labor Court

The Federal Labor Court, however, has now clearly rejected this justification and found gender-based pay discrimination. The defendant had discriminated against the plaintiff “by paying her a lower basic salary than the male colleague, although the plaintiff and the male colleague did the same work.”

This gives rise to a presumption under § 22 AGG that the different pay indicates gender discrimination, which shifts the burden of proof to the defendant. A claim for an "upward adjustment" therefore follows from Art. 157 TFEU, Sec. 3 (1) and Sec. 7 EntgTranspG. The defendant could not rebut the presumption of § 22 AGG with the fact that the higher basic pay of the male colleague was not based on gender but on the fact that the male colleague had negotiated a higher pay. The Federal Labor Court also rejected the justification that the employee had succeeded a better-paid female employee who had left the company.

In addition to the supplementary payment of the remuneration, the Federal Labor Court also ordered the defendant to pay compensation in accordance with Section 15 (2) AGG, which at EUR 2,000.00 was significantly lower than requested.

Previous case law, current legal situation

For decades, lawsuits on the subject of equal pay were the exception in Germany. Since the entry into force of the Pay Transparency Act, however, the Federal Labor Court has already ruled several times on, among other things, the presumption of the median pay (BAG, ruling dated January 21, 2021 - 8 AZR 488/19)¹ and on the scope of the right to information (BAG, ruling dated June 25, 2020 - 8 AZR 145/19).

Pursuant to Section 7 of the EntgTranspG, remuneration for the same work or work of equal value may not be agreed to or paid at a lower rate for one gender than that paid to an employee of the opposite gender on account of gender alone.  Direct discrimination on the grounds of gender with regard to pay is inadmissible in any case. Indirect discrimination with regard to pay may be justified under Section 4 (3) EntgTranspG, however, if this is objectively justified by a legitimate purpose and the means of achieving this objective are appropriate and necessary. In particular, criteria related to the labor market, performance and work results can justify a difference in pay, provided the principle of proportionality is observed. The fact that a colleague supposedly negotiated "better" or was hired to replace a better-paid colleague does not meet these requirements according to the new case law.

So far, there has been no clear statement by the highest court in this regard. In the 1993 Enderby case, the ECJ merely stated that the question of whether a shortage of applicants and the need to offer a higher salary in order to fill the position could constitute a justification was to be assessed by the national courts (ECJ, judgment of October 27, 1993 - C-127/92). Measured against these fingerprints, however, the new decision of the Federal Labor Court is not very surprising. A deficiency is generally only considered a justification in the case of equivalent activities; after all, identical activities would always be subject to the same deficiency. In the present case, judging by the press release, the Federal Labor Court assumed an equal activity (the lower court had still assumed an equivalent activity). In addition, the defendant did not show that there was such a shortage that it was forced to pay the plaintiff's colleague higher wages because otherwise it would not have been able to fill the position adequately.

Consequences for employers and open questions

What is clear, according to this press release, is that the mere fact that a male colleague has demanded higher pay is not sufficient to justify higher pay compared to a female colleague who performs the same work or work of equal value. This would, of course, also apply in the reverse scenario. Furthermore, it can be assumed that the decision of the Federal Labor Court would not have been different if the plaintiff had been hired first and not, as here, only after her colleague. The consequence is therefore that even in the case of differing salary negotiations there is in principle an obligation to equalize pay. In our view, however, the following questions have not been conclusively clarified:

• Does the presumption of validity become diluted if there are longer intervals between the hires, possibly including the criterion of length of service? This is supported by the fact that the Federal Labor Court apparently only assumed unjustified unequal treatment in relation to the colleague hired immediately before the plaintiff, but not in relation to the colleague with around 30 years of service.
• After every successful salary negotiation, do employers also have to raise the wages of colleagues with the same and equivalent work? This can generally be assumed subject to the aforementioned restrictions.
• What effects does the decision have on collectively agreed wages? This is likely to be particularly relevant in companies that are bound by several collective agreements of different trade unions. Here, the upstream question will already arise as to which standards can be used to determine equivalence.

Conclusion and outlook

For further details—also with regard to the distribution of the burden of proof—it is necessary to wait for the detailed reasons for the ruling. Until then, employers should already pay careful attention to the reasons why certain employees are ultimately paid more during salary negotiations. Negotiating skills alone do not justify higher compensation. Related arguments are likely to include "This person is a special talent—we would not be competitive with the lower compensation" or "This person has special qualifications." In these cases, it is often the case that the activity is not the same or equivalent. If the special skills or qualifications are decisive for performing the activity, it is already a higher-value activity and justification is not required. If this is not the case, higher compensation per se is not an option. Remuneration incentives can be set here in accordance with the law by differentiating between performance- and results-based remuneration components.