Greater Transparency for greater Wage Equality
What should companies be doing to achieve greater equality of salaries and income for men and women in light of the new draft legislation from the Federal Ministry for Family Affairs, Senior Citizens, Women and Youth?
What should companies be doing to achieve greater equality of salaries and income for men and women in light of the new draft legislation from the Federal Ministry for Family Affairs, Senior Citizens, Women and Youth? hkp.com spoke to hkp/// group experts Isabel Jahn and David Voggeser.
In recent months we have seen some changes to the original draft of the legislation on more wage equality for men and women. What is the current state of play?
Isabel Jahn: The original draft legislation for greater wage equality between men and women drawn up by the Federal Ministry for Family Affairs has now turned into draft legislation promoting the transparency of compensation structures – or the Pay Transparency Act for short. This was approved by the Federal Cabinet on January 11, 2017 and should enter into force in July 2017.
What specifically do companies need to do as of July 2017?
Isabel Jahn: The Act obligates companies with more than 200 employees to answer questions from individual employees about compensation components. Private employers with more than 500 employees are also requested to carry out regular checks on equal pay. Companies of this size, which are obligated under the German Commercial Code to generate a "Lagebericht" ("status report"), also have to produce a report on equal pay every three or five years to be included with the status report.
David Voggeser: So, the draft legislation covers three core areas: the right of individual employees to receive information about compensation, a request for companies to design and implement operational audit procedures, and a reporting obligation with regard to actions to promote equality between men and women and their impact on equal pay.
Does the Act only apply to private companies?
Isabel Jahn: Although some parts of the draft legislation explicitly refer to private employers, the Act is also intended to apply to public-sector workers. Time will tell which employees actually make use of their right to receive information – aberrations, whether intentional or not, can occur in any organization.
Let's look at the requirements in detail. First, the individual right to information.
David Voggeser: People working in companies with more than 200 employees will be able to ask their works council or employer for information about the compensation of employees of the opposite gender. Companies that pay their staff under collective wage agreements can decide whether the right to information applies collectively or whether they should meet the obligation on an individual basis.
Isabel Jahn: To protect personal data, the request for information only has to be answered if there is a comparison group of no less than six people of the opposite gender. So, it remains to be seen whether the right to information can in reality be exercised equally by men and by women.
David Voggeser: Be that as it may, the right of employees to information covers both the criteria and process for determining their own compensation and also information about the compensation of the comparison group. The employee has to request the information in writing and the request must refer to individuals carrying out the same or equivalent tasks.
What does "equivalent" mean in this context?
David Voggeser: Equivalency is defined in terms of the type of task, the level of training required and the working conditions, for example.
Isabel Jahn: Employees can request information about the monthly gross compensation and up to two specific compensation components. The company must calculate the statistical median of the monthly compensation of at least six employees of the opposite gender, on the basis of full-time equivalents. Personal data must be protected.
What is the timeframe for responding to requests?
Isabel Jahn: In the case of employers not bound by collective wage agreements, the employer and the works council must provide written information within three months of receiving the request.
What happens if the employer fails to meet this deadline or to provide the information requested at all?
Isabel Jahn: If an employer fails to comply with the obligation to provide information, in the case of an equal pay claim they are responsible for providing evidence that they have not violated the Pay Transparency Act. This also applies if the works council is unable to provide such information due to the fault of the employer.
And if discrimination is found exist, what then?
David Voggeser: Then the employer must correct the situation without undue delay. However, the current draft legislation does not state precisely how long they have in which to do this, nor how a mistake made by the company in the past should be dealt with retrospectively.
Does the employee then have a right to claim compensation for lost compensation?
David Voggeser: This is exactly the question we would expect to be asked in such situations. But as far as we are ware there is no clear answer yet.
The second pillar of the new Act is the new operational audit procedure.
David Voggeser: According to the current draft legislation, employers with more than 500 employees are required to check that the relevant compensation regulations, various compensation components and their application is in line with the Act. Employee representatives must be involved in this process.
Isabel Jahn: Companies are free to choose what methodology and approach they use here, as long as they use valid statistical methods. The audit procedure must always include a review of the current situation, an analysis and a final report. A summary of the results may be published internally.
The operational audit procedure is not mandatory, however. Does the legislation really have teeth?
David Voggeser: In my opinion it does. The procedure is the prerequisite for successful fulfillment of the reporting duty. It makes good sense for companies to carry out the procedure regularly so that up-to-date information is available in the case of requests.
Isabel Jahn: If any discrimination is identified, the employer is responsible for taking suitable action to deal with it.
The third pillar of the new legislation is the report on equality and equal pay…
Isabel Jahn: In the current draft legislation, companies that are obligated to produce a "Lagebericht" or "status report" under the German Commercial Code must also produce a report on equality and equal pay. That report must indicate the actions taken by the company to promote equality between men and women and to achieve equal pay, as well as the impact of those actions. If the company has not taken any actions, it must provide the reasons for this in the report.
David Voggeser: Companies bound by collective wage agreements must issue a report every five years, all other companies every three years, attaching it to the status report. In addition, they must indicate the average values for all employees and for full-time and part-time employees broken down by gender.
How should companies be preparing for the new Act coming into force?
Isabel Jahn: If the current draft legislation comes into force in July 2017 as is planned, companies will have to take certain steps. First, they need to be clear what categories of documents and obligations apply to them. Do they need to meet all the requirements or just some of them? What requirements apply to them?
David Voggeser: Once they have sorted that out, they need to check whether they have the necessary systems and data in place to identify which activities are considered "equivalent". That sounds obvious, but in large or complex organizations it is far from self-evident. The same goes for the ability to evaluate data on salaries, gender, length of service, information about tasks performed, working-time models, etc. For some companies this will be a major challenge.
What sort of companies are you thinking about there?
David Voggeser: Companies that do not have a grading system or which only have a partial system in place will find it very difficult to meet the deadlines with reasonable effort and at reasonable expense.
Isabel Jahn: As a former HR director of a bank, I know how important it will be to have a consistent internal steering system for meeting the requirements. Companies that still lack a grading system are very likely to introduce one now. There is no more effective instrument for reacting to the requirements of the new Act.
How exactly do grading systems help when it comes to the new Pay Transparency Act?
David Voggeser: In a grading system, functions within the company are assigned values on the basis of certain criteria. If an individual requests information on pay, these values can help determine which functions are equivalent – or demonstrate that the functions for which the information is requested are not, in fact, equivalent.
What should companies do if they already know that they have pay inequalities based on gender, or suspect that such discrimination exists within their organization?
Isabel Jahn: We recommend taking a proactive, objective approach involving the people responsible inside the firm as soon as possible. But I don't believe that widespread action is likely to be necessary. Especially in companies with collective wage agreements, everything should be OK as long as people are on the right pay grade according to the regulations. For other employees and for executives, too, I don't believe that intentional gender-specific discrimination exists.
What actions for promoting equality between men and women and achieving equal pay do you think companies should take?
Isabel Jahn: In the future, it will be even more important to create suitable compensation systems for each company and draw up guidelines for enabling compensation decisions that are impartial and yet nuanced at the same time. Equal pay does not mean that everyone earns the same. It must still be possible for people to earn different amounts within pay bands on the basis of clear criteria.
David Voggeser: It is definitely a good thing that the individuals responsible for making such decisions within the company are made more aware of potential inequalities, however unintentional they may be. Everyone believes that things are OK, but there is still room for improvement in certain areas. In our experience, having reliable comparison data, good analyses and a culture of checks and balances produces the best results.
What is the current position of companies? Are they taking the new legislation and what it may mean for them seriously?
David Voggeser: We see the whole spectrum of reactions – from totally cool to seriously worried. For a long time, it was unclear whether the legislation was actually going to materialize or not. Now companies are generally approaching us with requests for more detailed explanations of the text of the draft legislation.
Isabel Jahn: And in some cases we are going even further, analyzing the situation with regard to compensation for specific functional groups…