Change in shareholders does not trigger ARD-implementing legislation

The Federal Labour Court has clarified that sec. 613a of the German Civil Code, which implements the Acquired Rights Directive into German law, does not apply in case of a change of shareholders (judgment of the Federal Labour Court dated 23 March 2017, docket number 8 AZR 89/15).

The parties had been in dispute about the correct amount of salary due to the employee. The employee’s contract included a provision according to which the provisions of a collective bargaining agreement were to apply “in their relevant form applicable from time to time.” The employing company had been sold to a different shareholder in 2002 and subsequently argued that following the decision of the European Court of Justice in Alemo-Herron (C-426/11), it would only be bound by the provisions of the collective bargaining agreement which were in place at the time it was acquired. While the impact of a transfer of business on clauses such as the one above is still unclear and cases regarding this issues are pending with the European Court of Justice, the Federal Labour Court highlighted that a share acquisition does not fall within the scope of the Acquired Rights Directive and, therefore, a transfer of business had not taken place. The employee was therefore entitled to remuneration as provided in the current form of the collective bargaining agreement.

Works council’s request to dismiss an employee qualifies as an urgent operational reason for dismissal

Under German law, the works council can request that an employer dismisses or reassigns an employee if the employee has violated the law or has grossly violated principles set forth in sec. 75 of the Works Constitution Act, such as by showing racist or xenophobic behavior in the workplace. If the employer does not comply with this request, the works council may apply for a court order instructing the employer to dismiss or reassign the employee.

In a judgment dated 28 March 2017 (docket number 2 AZR 551/16), the Federal Labour Court held that a court order instructing the employer to dismiss an employee qualifies as an urgent operational reason, which will justify the employee’s dismissal in subsequent unfair dismissal litigation. In this case, the works council had obtained a court order for dismissal, which the employer had complied with. While the order was not sufficient to justify an immediate termination for cause, the employee’s unfair dismissal litigation brought against the termination with notice was unsuccessful in all instances, as the court order was held to have a binding effect.

Non-compete clauses – No Compensation for Abstention – Severability Clause

Non-compete provisions valid for the period after an employment relationship has ended are invalid unless the agreement provides for a compensation payment of 50% of the employee’s former salary during the entire duration of the post-contractual non-compete obligation. This decision by the German Federal Employment Court (docket no. 10 AZR 448/15, dated March 22, 2017) was made after a plaintiff filed a claim for monthly compensation for abstention after she had her employment contract terminated.

The employment contract itself contained a paragraph in which the parties had agreed on a non-compete for a period of two years after the end of the employment relationship. During that period, the employee would not be allowed to work with any company that competes directly or indirectly with the employer. Failure to comply would result in an obligation on the employee to pay a fine of EUR 10,000.00. The agreement did not provide for a compensation payment. The contract’s collateral clauses contained a severability clause which required the parties to the contract to replace invalid provisions with valid provisions that resemble the original intentions of the parties as closely as possible.

Having abided by the non-compete provision, the plaintiff claimed retroactive payment of monthly compensation for abstention from competition. While both the Employment Court and the State Employment Court granted the claim, the Federal Employment Court denied the claim. Non-compete clauses containing no provision for abstention compensation are invalid and do not entitle any contractual party to any claim. As the court held, both parties are interested in knowing whether or not such a clause is valid at the beginning of the post-contractual period. Such knowledge cannot be gained on any side by looking at the contract alone; instead, legal assessments are required.

A severability clause may not alter the invalidity of the original contractual clause, rendering the non-compete provision valid. As the clause was invalid from the beginning, it did not entitle the plaintiff to any compensation for abstention. By issuing this decision, the Federal Employment Court made clear that commonly-used severability clauses which alter an invalid prohibitory non-compete clause into a valid clause connected with a claim for compensation are also invalid.

Reverse discrimination – permissible privileged treatment of working experience with the same employer

Being one of the four fundamental freedoms of the European Union’s internal market, the free movement of persons as defined by Art. 45 TFEU (AEUV) grants all citizens of the member states the right to work cross-border as well as protecting them from any discrimination compared to domestic workers. If a national provision is incompatible with one of the four freedoms it must be disapplied. However, according to the Court of Justice of the European Union (CJEU) these freedoms only apply in cases with a foreign connection. The consequence may be that national regulations might not apply to foreigners due to incompatibility with European law, yet residents of a member state might not be able to refer to these freedoms, if the issue does not show any foreign connection. This phenomenon is called reverse discrimination.

According to these principles the federal labour court (Bundesarbeitsgericht, BAG) ruled (23 February 2017 – docket number: 6 AZR 843/15) that a national Collective Bargaining Agreement (CBA) which prioritized working experience gained at the employer in comparison to equivalent times at other employers when it came to grouping employees, did not violate the European regulation on free movement as stated in Art. 45 TFEU and Art. 7 of the EU Regulation 492/2011.

In this case the plaintiff had been employed as a kindergarten teacher by the defendant state since 2014 and received remuneration in accordance with the remuneration grade of the respective CBA she was assigned to. Prior to this employment the plaintiff had been employed by different employers in Germany since 1997. She held that the section of the CBA, according to which an employee was assigned to a higher remuneration grade if he had working experience with the same employer compared to the equivalent time worked at other employers, was a violation of the right of free movement and therefore she was entitled to higher remuneration.

The federal labour court ruled that in cases where employees have only worked in Germany and have not gained any qualifications in other member states of the European Union, the section of the CBA does not show a sufficient foreign connection. In accordance with the rulings of the CJEU the scope of the European regulations on free movement is not opened up in such cases. Furthermore, there are no national provisions preventing the privileged treatment of professional experience with the same employer. Therefore the plaintiff was not entitled to higher remuneration.

Boon and bane of social media

Employers often encourage their employees to create social media profiles with platforms like XING or LinkedIn since they will also benefit from the marketing effects. However, using social media may also cause substantial internal conflicts. Such a conflict was recently subject to a ruling by the Regional Labor Court of Cologne (Landesarbeitsgericht Köln, LAG) on 7 February 2017 (docket number: 12 Sa 745/16). The court ruled that the fact of changing your occupational status to “freelancer” in your XING profile alone, may not justify a termination without cause due to unauthorized competitive business activities.

 

The plaintiff and defendant – a tax consultancy firm – mutually agreed a termination agreement with several months of a phasing-out period (Auslauffrist). Just before the end of the employment relationship the defendant noticed that the plaintiff had changed the occupational status of his private XING profile to “freelancer”. The defendant saw this as an unauthorized competitive business activity and therefore issued a termination without cause. Since the social network XING is predominately used for business purposes, the defendant assumed that the plaintiff was actively promoting his freelance activity in competition to the defendant and wanted to steal clients.

 

The court found that the termination was void. Although employees are principally prohibited from acting in competition to the employer during the entire time the employment relationship is in place, they are allowed to take actions that enable them to compete with the employer once the employment relationship has ended. Therefore, activities are only considered as prohibited competitive behavior if the employee actively promotes his competitive occupation towards the outside world. According to the court, the mere incorrect statement of being currently occupied as “freelancer” without any additional special circumstances, was insufficient to cross the line to prohibited competitive behavior. Another decisive factor was that the name of the defendant was still listed as current activity and that the plaintiff did not state that he was looking for any freelancing clients on his profile.

Federal Labor Court has tightened legal requirements concerning a special procedure regarding the calculation of vested pension entitlements (so-called “insurance contract solution” (“versicherungsvertragliche Lösung”))

By judgment of 19 Mai 2016 (BAG, docket number 3 AZR 794/14), the Federal Labor Court has ruled that an employer’s choice in favor of the so-called “insurance contract solution” – which is a special procedure for calculating vested pension entitlements – requires in every single case a new corresponding declaration to the employee and the insurance company, regardless of whether such declarations have already been made in the past on the basis of a works agreement or a collective insurance contract.

When granting a pension promise through a direct life insurance (Direktversicherung) or a captive pension insurance (Pensionskasse), an employer can choose the so-called “insurance contract solution” according to the German Occupational Pension Act (Betriebsrentengesetz). By doing so, a future pension payment arising from a vested pension entitlement can be limited to a certain amount (= pension payment claimable on the basis of the life insurance contract). This requires a corresponding declaration to both the employee and the insurance company (at the latest within 3 month following termination of employment). An employer’s choice in favor of the “insurance contract solution” used to be a part of the pension scheme/promise itself and as such did not have to be declared again at the time of termination of employment. In the present case the Federal Labor Court had to determine whether this was sufficient.

The Federal Labor Court declared the previous practice inadmissible. An employer’s choice in favor of the “insurance contract solution” can still be made prior to termination of employment, but this requires a close/specific factual and temporal relation between the employer’s declaration and the imminent termination of employment. In addition, it is necessary for the employer to make his declaration on an individual basis and not – as in this case – on the basis of a works agreement. The judgement has far-reaching consequences and will give rise to the need for action by all employers concerned.

No discrimination of disabled people in case of reduction of occupational pensions because of prematurely claiming

By judgment of 13 October 2016 (BAG, docket number 3 AZR 439/15), the Federal Labour Court ruled that a reduction of occupational pension payments due to prematurely claiming prior to reaching the fixed retirement age as provided for in the pension plan does not constitute discrimination on grounds of disability according to the German General Law on equal treatment (Allgemeines Gleichbehandlungsgesetzt – AGG). 

The employee, classified as disabled, was in an employment relationship until April 2013. From May 2013, the employee received both a statutory old age pension payment for disabled people from the German Statutory Pension Insurance and an occupational pension payment from the employer. The occupational pension payment was subject to a reduction, which was a result of an amendment of the pension plan, according to which an employee’s occupational pension payment is reduced by 0.4 percent for every month of claiming prematurely.

The Federal Labour Court ruled that there is no discrimination against the employee linked to his disability, because the fixed retirement age and the corresponding provisions in the pension plan concerning a reduction of occupational pension payments have been introduced for all employees, not differentiating between disabled employees and non-disabled employees. The employee is treated in the same way as each employee in a comparable case, regardless of his disability. The occupational pension payments of non-disabled people will also be reduced when claiming prematurely. The employee also cannot rely on the fact that from experience disabled employees tend to retire earlier than non-disabled employees, because the longer an employee works, the higher is their performance. Considering an occupational pension payment as a benefit for an employee’s performance, the situations differ significantly from one another and therefore cannot be subject to discrimination.

When creating a pension plan, employers always have to take into consideration the prohibition on discrimination according to the German General Law on equal treatment. Regarding this, there are many questions still open and unclear, for example whether it is possible to exclude employees from pension entitlements because of disability in certain cases. Relevant jurisdiction has to be monitored carefully.

An incapacitated employee should be given extended time to give a statement prior to a termination on spec

According to a decision of the state labour court of Berlin-Brandenburg, an employee must be given extended time to give a statement regarding a termination on spec, if they are unable to work due to ongoing sickness over a long period of time (docket number: 10 Sa 378/16).

The severely disabled employee worked as an accountant for the defendant. An accounting review highlighted inconsistencies regarding a cheque for the sum of 3,000.00 EUR, which had been cashed by the employee. This raised suspicions of embezzlement and the employee was asked to give a written statement within one week, by April 7. Due to ongoing sickness, the employee was in a rehabilitation clinic at the time of the request. On April 7, she asked for an extension of the deadline and simultaneously indicated her willingness to resolve the problem. The employer declined her request for an extension and terminated the employment agreement on spec without, alternatively with cause. Additionally he terminated without, alternatively with cause due to the employee’s actions.

According to the decision of the state labour court, the termination of the employment contract was invalid. The integration office only agreed to a termination on spec. The termination on spec was invalid as the employee had not had opportunity to give her statement, which is a prerequisite for the termination’s validity. It said that the employer does not have to prolong the timeframe for the employee’s statement, if it can be sure that there will be no statement in the near future. Here, however, the employer should have prolonged the deadline in light of the employee’s correspondence on April 7. The employer was aware of the employee’s sickness and there were no signs that she was unwilling to resolve the problem. Further, the employee was not entitled to continued remuneration and was not due to return to work imminently. Therefore, the employer had no reason to act immediately, as there was no risk of repetition.

Generally, a hearing of an employee should take place within one week after learning about any suspicious facts. However, certain situations, such as an employee’s sickness, may lead to an extension of the timeframe. The period can therefore vary from case to case, and factors to take into account include the employee’s right to remuneration, or continued remuneration, and their willingness to resolve the problem.

Dismissal Protection Act not applicable to managing directors despite employee status

While recent EU law developments on the potential employee status of managing directors (cf. ECJ, June 9, 2015, docket no. C-229/14 – Balkaya) and decisions of the German Federal Labour Court regarding the procedural issue of giving managing directors access to the Labour Courts under certain circumstances have somewhat blurred the dividing lines between managing directors and employees, a recent decision of the Higher Labour Court of Berlin-Brandenburg seems to bring some clarity to the issue.

It has been a fundamental principle of German employment law that all protective laws and regulations relevant for employees do not apply to the contractual relationship between a company and a managing director. However, former managing directors have repeatedly challenged this principle, e.g. in an attempt to gain protection under the Dismissal Protection Act (Kündigungsschutzgesetz, KSchG), while Sec. 14 para. 1 of the Dismissal Protection Act expressly states that employee-specific dismissal protection does not apply to members of a representative body of the company.

In its decision of August 25, 2016 (docket number: 21 Sa 1493/15 21 Sa 575/16) the Higher Labour Court Berlin-Brandenburg clarified that Sec. 14 para. 1 of the Dismissal Protection Act refers to the formal position of managing director, irrespective of the nature of the underlying contractual situation.

The plaintiff argued that he was only formally appointed managing director but actually worked as a normal employee during the entire relationship to the defendant, so that he should benefit from the provisions of the Dismissal Protection Act which provides for strong dismissal protection after six months of employment and in operations of more than 10 employees.

The court decided that Sec. 14 para. 1 of the Dismissal Protection Act was applicable as this provision refers to the formal position of managing directors. The termination therefore did not have to be socially justified according to the strict rules of the Dismissal Protection Act. The law only refers to the function as a representative body and the legal representative power as such at the time of termination. According to the court this was not only confirmed by the wording of the provision but also by the provision’s systematic context. Also, the content and rationale of the provision indicate that only the function as a representative body is relevant as the provision aims at achieving a balance between corporate and contractual law and at making it possible to terminate representative bodies without being bound by dismissal protection.

The decision has been appealed and it remains to be seen whether the Federal Labour Court will confirm or overrule and grant more protection to (former) managing directors by applying the Dismissal Protection Act.

Increase of Working also for Disabled Employees!?

On 26 January 2017, the Federal State Labour Court (Bundesarbeitsgericht) ruled that a disabled part-time employee may not claim damages for discrimination where his employer did not offer him an increase in weekly working hours, unlike his colleagues (docket number: 8 AZR 736/15).

In the case at hand, the employer, a courier service provider, employed 16 part-time employees. Due to the acquisition of a new customer the employer was able to offer additional working hours, which the employer offered to 14 employees. He excluded a new joiner as well as the disabled plaintiff, who claimed an increase in his weekly working hours as well as a compensation due to the alleged discriminatory behaviour of his employer.

The claim for the increase in weekly working hours is not covered by the German anti-discrimination rules (AGG – Allgemeines Gleichbehandlungsgesetz). The AGG only provides financial compensation for discriminatory behaviour. Moreover, the Federal Labour Court declined the employee´s reference to the legislative evidence rules. According to sec 22 AGG the discriminating party has to refute the assumption of discriminatory behaviour if the plaintiff provided evidence which leads to a “predominant likelihood” of discrimination. From the judge´s perspective it was only “possible” that the employee had not been offered the increase in working hours for a discriminatory reason, but the causal connection between the employee´s disability and the employer´s decision was not “likely” as required by German anti-discrimination regulations.

This recent decision gives a clear signal to employers. An employee who can refer to an attribute protected by AGG cannot claim any unequal treatment only by referring to this attribute, but will need sufficient evidence which indicates a predominant likelihood that the treatment was discriminatory.

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