Pay compliance in 2026: Companies need to be aware of these new obligations

"Pay compliance" is the defining employment compliance law issue in 2026. National legislators are required to transpose the EU Pay Transparency Directive (Directive (EU) 2023/970) into German law by 7 June 2026. Anyone who witnessed the introduction of the GDPR can imagine the upcoming workload for companies. Even though the German draft law is still pending, the need for action is already clear in view of the directive requirements that need to be implemented.

We have summarised the key points of Directive (EU) 2023/970 for practical application so that you know today where you need to start in terms of recruiting and pay structures. An analysis of the draft law will follow as part of our new “Pay compliance series”.

The most important changes:

• Comprehensive transparency obligation
• No more thresholds for extensive information requirements
• Regular reporting obligations for companies with 100 or more employees
• New liability risks due to easing of the burden of proof and sanction mechanisms
• Strengthening of co-determination rights and new pay assessment procedure

Transparency requirement

What must employers disclose?

Employers must provide employees with information on the criteria used to pay, pay levels and pay developments. This information must be made available to all employees without request.

What does this mean for employers?

Indirectly, this means that employers must first define objective and gender-neutral criteria, which they then use and document and use for determining pay, pay levels and pay developments. When pay decisions are not documented in a comprehensible manner and objective reasons for gender-specific pay differences can no longer be recapitulated in the event of a legal dispute, it is very likely that the employer will lose the case.

Are there any exceptions?

Smaller companies with up to 50 employees can be partially exempted from these obligations by the German legislature. The considerations of the Directive provide that ready-to-use templates may also be provided as mitigation measures or that information on pay trends need only be provided at the request of employees.

Key changes at a glance

• Applicable to all employers in the public and private sectors
• Transparency obligation regarding criteria for determining pay, pay levels and pay developments
• Increased documentation requirements

Benchmark

What criteria are permissible for evaluating equal and equivalent work?

The directive specifies the definition of equivalent work and lists the following criteria that may be taken into account:

• Skills
• Effort
• Responsibility and
• Working conditions

The central focus of the directive lies in the broad definition of what constitutes comparable work. Further differentiation criteria are possible as long as they are objective and gender-neutral. It is still unclear how the German legislator will transpose the specified criteria into German law, for example with subcategories or clear definitions. It would be welcome if the new law contained clear guidelines that employers could use as a basis for their decisions.

What should be documented?

In future, companies must be able to transparently demonstrate the criteria and objective assessment they have used to identify comparable positions as comparable, the specific composition of the pay components determined and the specific reasons for any (developed) pay differences. Significant documentation processes will be necessary in order to meet these requirements in future.

Key changes at a glance

• Specification of permissible criteria
• Significantly higher documentation requirements

Right to information

Who can request information?

In future, all employees in all companies will be entitled to information. There will no longer be any thresholds. Employees also include managing directors, provided that they qualify as employees under EU law on the basis of their work being subject to instructions, as is usually the case (see LG Bochum v. 02.12.2025 – 17 O 56/24).

Who must disclose which data?

Employees will be able to request more detailed information in future. This includes a breakdown by gender and individual pay components. Differences in individual pay components (e.g. bonuses) will thus be quickly apparent.

Instead of the previous median of the comparison group, the mean value, i.e. the average pay level of the comparison group, must be disclosed. The average pay level shows the arithmetic middle of all payments but can give a distorted picture of the usual pay, for example in the case of very unevenly distributed remuneration. This is because if one person earns significantly more than the rest of the comparison group, the average pay level of the entire comparison group increases "on paper".

It remains unclear what scope the right to information will have. When assessing equal or equivalent work, the EU Directive refers to the "single source" that determines the pay conditions. This means that employees can be in a comparable situation even if they do not work for the same employer. This is particularly relevant for corporations, for example, if pay conditions are determined by the corporate management. This aspect depends on the implementation by the German legislature.

How quickly must employers respond?

If employees request information, it must be provided within a maximum period of two months. Currently, employers still have three months to comply.

What does the annual information obligation entail?

Employers must inform employees annually about their right to information and the necessary steps to assert it.

Key changes at a glance

• More comprehensive information and change in the benchmark
• Shortening of the deadline
• Annual obligation to provide information

Reporting on pay gap

When and how often do companies have to report?

The obligation to report on the gender pay gap will be gradually extended to companies with 100 or more employees (instead of 500 as previously). The following data is relevant:

• Companies with 250 or more employees: annual reporting from 7 June 2027
• Companies with 150 or more employees: reporting every three years from 7 June 2027
• Companies with 100 or more employees: reporting every three years (after a transition period) from 2031

Why do companies face reputational risks?

In future, the reports will have to be submitted to a government supervisory body, which will collect and publish them. This not only increases liability and sanction risks, but also the risk of reputational damage.

How much effort does reporting involve?

Reports must contain extensive information that goes far beyond the previous requirements. The associated effort will increase significantly and also present companies with data protection challenges. Not least because employees, employee representatives and supervisory authorities are to be given the additional right to request supplementary explanations and clarifications.

Key changes at a glance

• Significantly lower thresholds
• Higher reporting frequency
• Extensive transparency requirements
• Publication requirements

Recruiting

What should be considered in the application process?

Employers must provide information about the starting salary or salary range for the position in question in good time. This can be done in a job advertisement or in an interview, as long as it is done before any negotiations begin.

Employers will no longer be allowed to ask about previous earnings. Negotiations outside the specified salary range remain possible.

Key changes at a glance

• Timely notification of starting salary or salary range
• No questions about previous salary

Liability

What sanctions are possible?

A new feature is the risk of sanctions for violating rights and obligations in connection with the principle of equal pay. Member States must introduce fines based on gross annual turnover or total pay in order to ensure that they have a deterrent effect. Exclusion from public contracts is also envisaged as a possible sanction. It is expected that the German legislator will follow the liability regime of the GDPR.

Are there any payment risks?

Employees can already demand compensation for outstanding pay and compensation for unjustified unequal treatment. It is possible that existing options for damages will be expanded and specified in more detail.

Why is there a higher litigation risk for employers?

The assertion of claims for damages is to be simplified by a stricter reversal of the burden of proof. According to this, it should be sufficient for employees to substantiate facts that suggest the existence of direct or indirect discrimination, e.g. if they receive a significantly lower salary than comparable colleagues of the opposite sex. Such a reversal of the burden of proof is also provided for under the current legal situation. Based on current case law of the Federal Labour Court, a reversal of the burden of proof already applies to employees in the context of a so-called pair comparison (Paarvergleich), see: https://www.noerr.com/en/insights/federal-labour-court-on-pay-transparency-and-equal-pay-why-the-new-ruling-puts-companies-under-pressure. It will be interesting to see whether the legislator will adopt further regulations in this regard.

Key changes at a glance

• State sanction mechanisms
• Reversal of the burden of proof to simplify claims for damages

Conclusion and outlook

Even though the German draft law has not yet been published, it is now time to set the course for the implementation of the EU requirements. Further delay will only lead to increased loss of time, money and nerves. We are moving towards a legal reality in which pay structures must be objectified and documented down to the last detail. This means an immense amount of analytical and bureaucratic effort. Those who take action now can eliminate risks at an early stage and secure a competitive advantage.

We will provide you with further details on the topic of pay compliance here and analyze the expected draft legislation for practical purposes as soon as it is available.