A recent decision by the German Federal Labor Court (case no. 8 AZR 450/21) has brought significant attention to the issue of equal pay. In the case, published last week, the employer had offered a male and a female candidate the same base salary. The male candidate requested a higher base salary, which the company accepted. The female colleague hired shortly thereafter did not request a higher salary but additional unpaid leave, which she in turn received. The female colleague also had a more favorable commission plan than her male colleague.

Nevertheless, she successfully claimed an equally high base salary as her male colleague received. The court based this on European law (Article 157 of the Treaty on the Functioning of the European Union (TFUE)) and Sec. 3 para. 1 and Sec. 7 of the German Act on Pay Transparency (Entgelttransparenzgesetz). It also awarded compensation for discrimination.

The decision is significant for several reasons: 

1. The court held that each salary component needs to be compared individually. Other remuneration elements cannot be taken into account, there is no overall comparison. Thus, it considered the fact that the female employee received a lower base salary but had a better commission which her male colleague, to be irrelevant. The same applied to the right for regular unpaid leave. 
2. The court clarified the justifications it is willing to accept for different salaries paid to female and male employees:

Negotiation skills:

• Contractual freedom generally cannot justify pay disparities.
• The court deemed it irrelevant that the company initially offered both candidates the same salary and the male colleague had then negotiated an increase.
• However, this may be different if the female candidate had known about the offer her male colleague had received and had still preferred other benefits. 

Job market:

• If the company can demonstrate that market conditions necessitated a higher salary to fill an open position, a difference in pay may be justified.
• This requires proof that no other equally suitable candidates were willing to take the position for a lower salary. 

Qualifications:

• Different qualifications or longer professional experience may justify different pay, provided they are relevant to the concrete position. 

Performance:

• Differences in performance may justify differences in salary raises. 
• However, performance cannot justify different salaries at the start of the employment, as the performance is visible only during the course of the employment. 

In light of this ruling, employers should consider the following recommendations:

• Implement a transparent salary system based on objective criteria, ensuring that positions with equal work or equal value receive equal pay. Codetermination rights of works councils need to be observed. 
• Where the salary system includes salary bands, document the decision on the placement of candidates / employees within the salary bands. Such decision should be based on qualifications, relevant experience, and performance. 
• A higher salary within the salary bands or even above the salary bands may be justified by the job market. In such case, employers need to document that no other equally suitable candidates were willing to take the position for a lower salary. 
• Where employees request individual benefits, provide transparency about the salary system and document if they choose to accept lower salaries in exchange for other benefits

It is worth noting that the legal grounds for the claim were gender-based. If the salary discrepancy had affected two individuals of the same gender, the court's arguments would have been more difficult to make. However, the principle of equal treatment applies also regardless of gender. This may justify similar outcomes in cases without gender issues.

Ultimately, this decision underscores the need for companies to have a clear pay strategy in place. Not all companies currently do. Determining the value of positions and appropriate compensation is a complex process.

With the European pay transparency directive just adopted and set to take effect in three years in Germany, now is a good time for companies to initiate this process.