Occupational Pensions: Deteriorating replacement of a works agreement in the course of a transfer of business

By judgment of 08.02.2017 (4 Sa 34/16) the Regional Labour Court Baden-Württemberg has ruled that an occupational pension scheme can be worsened by a transfer of business in accordance with § 613a of the German Civil Code (BGB) if a works agreement existing at the seller is replaced by a less favorable works agreement existing at the acquirer.

The parties were in dispute about the legal basis for the plaintiff’s occupational pension payments. The plaintiff’s employment relationship was transferred to a new employer (the defendant) in the course of a transformational merger in 2013, which at the same time constituted a transfer of a business according to § 613a BGB. Both the plaintiff’s former employer and his new employer had provided an occupational pension scheme on the basis of a works agreement. At the time of the transfer of business, the occupational pension scheme existing at the new employer was less favorable to the plaintiff than the scheme of his former employer. However, the pension scheme existing at the former employer was replaced by the new employer’s scheme, and, in order to avoid possible disadvantages for the employees, the new employer and its works council concluded a corresponding social plan. The plaintiff argued that he would continue to benefit from the old employer’s pension scheme.

The Regional Labour Court dismissed the plaintiff’s claims and pointed out that the existing pension scheme of the new employer had effectively replaced the former employer’s pension scheme. Since there is no prohibition of deterioration, only the general principles regarding replacement of a works agreement would apply. The Regional Labour Court pointed out that a prohibition of deterioration also cannot be taken from the so-called “Scattolon”-decision of the European Court (6 September 2011 -C-108/10). In this decision, the European Court ruled that if a collective bargaining agreement was replaced by a collective bargaining agreement within the course of a transfer of business, the employees in general may not be subject to any worse working conditions than those before the transfer of business. But, according to the Regional Labour Court, the statements of the European Court are to be understood to be case specific and cannot be used in the present case. When replacing a pension scheme in the course of a transfer of business, only the principles of protection of legitimate expectations and proportionality must be observed. By concluding a social plan, these principles had been observed in the present case. In particular, the harmonization of the pension schemes can be considered as a justification for the legal interventions, the Regional Court pointed out.

The decision raises a very important issue in practice, namely whether or under what conditions a deterioration of a pension scheme in the course of a transfer of business is legally justified. It remains to be seen whether the Federal Labour Court will follow the statements of the Regional Labour Court. Until then there is a certain degree of legal uncertainty remaining.

Act on Uniformity of Collective Agreements (Tarifeinheitsgesetz) in most parts compatible with the German Constitution (Grundgesetz, GG)

The constitutionality of the Act on Uniformity of Collective Agreements has been a widely debated issue since it came into force in July 2015. Just recently – on 11 July 2017 – the German Federal Constitutional Court (Bundesverfassungsgericht, BVerfG) confirmed that the provisions of this Act are compatible with the German Constitution for the most part (docket-numbers: 1 BvR 1571/15, 1 BvR 1477/16, 1 BvR 1043/16, 1 BvR 2883/15, 1 BvR 1588/15).

The Act prescribes that in case of a conflict due to several collective bargaining agreements (CBA) being applicable in one operation (Betrieb) the CBA of the trade union which has fewer members in the company is supplanted. The union whose CBA is supplanted has the right to adopt the CBA of the union which organizes the majority of the employees in the company (Nachzeichnung). To determine which union organizes the majority, the Act provides for court proceedings.

Trade unions organizing specific professions (Berufsgruppengewerkschaften) and sectoral trade unions issued constitutional complaints against the Act claiming a violation of their right to freedom of association (Koaltionsfreiheit) pursuant to art. 9 para. 3 German Constitution.

The Court ruled that the Act’s provisions are for the most part compatible with the Constitution even though it found the provision on supplanting a CBA in case of a conflict to interfere with the right to freedom of association. Regarding any matters resulting from the application of the Act that have not been resolved yet, the court held, that it is for the regular courts to decide about those matters in detail.

However, the Court found the Act to be disproportionate to the extent that it lacks precautions ensuring that the interests of members of particular professional groups or sectors are not unilaterally neglected when existing CBAs are supplanted. In this respect, the legislature has to remedy the situation. Until the Act is recast, a CBA may only be supplanted if it is demonstrated in a plausible manner that the majority trade union has seriously and effectively considered the interest of members of the minority trade union within its CBA. Other than that, the Act remains applicable and new provisions have to be enacted by 31 December 2018.

In parts the decision was not adopted unanimously, as two members of the Court submitted a separate opinion, stating that the legislature’s mean of supplanting a concluded CBA is too severe and criticizing the decision to delegate the regulation of fundamental rights issues to the regular courts.

Even though the judgement appears to be a big swing against small trade unions, their existence seems not to be at risk, as the Court emphasized that the Act does not interfere with the small unions’ right to strike. However, the ruling has encountered much criticism among experts especially with regards to leaving it up to the regular courts to decide about fundamental matters that arise from the application of the Act. It will most likely take several years and a significant number of legal disputes, putting further strain on the labor jurisdiction, to finally provide the legal certainty that was initially expected to come with this judgment.

Occupational Pensions: Clause of general terms and conditions according to which only a “present” wife of an employee is entitled to survivors’ benefits can constitute inadmissible disadvantage

By judgment of 21.02.2017 (3 AZR 297/15) the Federal Labor Court has ruled that a clause in general terms and conditions according to which only a “present” wife of an employee is entitled to a survivor’s pension constitutes an unreasonable disadvantage for the employee and therefore is invalid according to § 307 para (1) sentence 1 of German Civil Code (BGB). However, if the pension promise had been granted before 1 January 2002, this would lead to claims only if the marriage had already existed during the employment relationship.

The plaintiff was employed by his former employer from 1 February 1974 until 31 October 1986. The insolvency proceedings with the former employer were opened on 31 October 1986. On 1 July 1983, the plaintiff was granted a pension promise that included general terms and conditions according to which the “present” wife should receive a lifelong survivor’s pension under the condition that they did not divorce. When the pension promise was granted, the plaintiff was married to his first wife. This marriage ended in divorce as of 31 December 2004, after the plaintiff had left the employment relationship. On 8 April 2006 the plaintiff married again. The plaintiff claimed that his second wife, to whom he was married at the time of his death, would be entitled to a survivor’s pension.

The Federal Labor Court dismissed the plaintiff’s claim. The employer is not obliged to pay a survivor’s pension to the wife who is married to the plaintiff at the time of the insured event. This results from the interpretation of the pension promise, according to which the word “present” only applies to the wife who was married to the employee at the time the pension promise was granted (1 July 1983).

Since the provisions regarding general terms and conditions are applicable to the pension promise, and the pension promise is to be considered as an atypical pension promise because typically a certain category of persons who are in a close relationship to the employee are entitled to a survivor’s pension, the “present” restriction constitutes an unreasonable disadvantage and therefore is inadmissible according to § 307 para (1) sentence 1 of German Civil Code. However, this does not result in any claim by the plaintiff’s second wife. Instead, a supplementary interpretation of the pension promise is to be made, since removing the word “present” would be an unreasonable hardship for the employer because he would have to face all risks arising from future marriages regarding survivor’s pension claims. Since an examination of the laws with respect to general terms and conditions had not yet been required by law at the time when the pension promise was granted (1983), it has to be interpreted in such a way that only the wife to whom the plaintiff was married at the time when the pension promise was granted would be entitled to a survivor’s pension.

The Federal Labor Court’s decision shows that an infringement under § 307 para (1) sentence 1 German Civil Code does not necessarily lead to claims. Instead, a supplementary interpretation of the contract may show that the employer is not liable, since otherwise there would be an unreasonable hardship for the employer. Moreover, the decission shows how important it is to have clear and comprehensible provisions regarding survivor’s pension.

Rail Cartel: Which court is competent for recovery claims against a former manager?

This is the first case in Germany in which a company has claimed for recovery from a former manager because he (allegedly) was responsible for the company infringing competion law. The decision of the Federal Labour Court (Bundesarbeitsgericht) was thus eagerly awaited.

By judgment of 29 June 2017 (docket number 8 AZR 189/15), the Federal Labour Court annulled the former judgment and referred it back to the court of appeal in order to make further determinations. According to the published press release it could not be excluded that a decision cannot be made without without prior clarification of competion law. In this case, the civil courts (chambers specialised in competion law), not the labour courts, would be solely competent.

Between 2001 and 2011, manufacturers of train rails participated in a range of bid-rigging (Angebotsabsprachen) and market sharing agreements which harmed railway infrastructure operators. The defendant was a manager with responsibilities in human resources, finance, IT and control between 1999 and 2011. The Plaintiff and the defendant disagree whether the manager was actively involved in, or at least aware of, anti-competitive activity. The plaintiff claimed recovery in the amount of EUR 191,000,000.

The previous courts rejected the claim and held that a fine imposed against a company may not be recovered from an individual. They argue that it would undermine legislative intent to fine individuals and companies separately if a company is able to recover its fine from an individual. However, this issue is considered fundamental and thus the appeal to the Federal Labour Court was permitted.

The company’s recovery claim therefore remains a possibility. The case will be referred back to the court of appeal and it will be several months until a decision can be made. If the labour courts are not competent, the case will have to be re-examined by the civil courts.

Change of jurisdiction of the Federal Labour Court of Germany: Consequence of unauthorized instructions

Of central importance in German labour law is the right of the employer to issue instructions to employees with regard to the content, location and time of the work (sec 106 of the German Trade Regulation Act “Gewerbeordnung”). If admissible instructions are given, the employee is obliged to follow them. If he does not follow them,  this is a breach of duty which, in individual cases, may  lead to termination.

The situation is problematic, however, when the employer issues an (allegedly) inadmissible instruction. Inadmissibility may result from a number of factors: violation of laws, of collective agreements, work agreements, or the principles of fair discretion.

So far, the jurisprudence, (esp. the 5th Senate of the Federal Labour Court) which has been strongly criticized in the literature, called for the employee to comply with these instructions, unless the admissibility has been established. An impermissible instruction must also be followed. A refusal is therefore automatically a breach of duty, which could be punished with termination. This is now to be changed according to the 10th Senate of the Federal Labour Court (docket number 10 AZR 330/16): A breach of duty is only established if the instruction subsequently proves to be lawful. Unlawful instructions must not be followed.

This leads to new problems as long as the lawfulness of the instruction has not been clarified by the court. If the employee does not comply with the instruction and it later proves to be legal, he is still in breach of duty. The employee therefore continues to be at high risk if he does not follow the instruction. However, the situation also changes for the employer. The employer must now prove that an instruction was lawful – only then is there an obligation to observe it.  For the employer,  therefore, there is a higher requirement for examination than according to the current situation.

The consequences of this jurisprudence are still difficult to foresee since different senates of the Federal Labor Court now have different views. Should the 5th Senate uphold the present legal view, a so-called Grand Panel (“Großer Senat”) in the Federal Labor Court with representatives of all ten senates would decide on this. Pending a binding decision – which can take several years – there remains considerable uncertainty on the part of both employees and employers.

Special case of termination protection: Third parties’ pressure to terminate an employee

The German right of termination is known to be quite strict. A reason for termination is always necessary. It is herefore surprising that such a reason exists even if third parties exert pressure on the employer to terminate the contract (“Druckkündigung”). The basics are presented below. By judgment of 15.12.2016 ( docket number 2 AZR 431/15), the Federal Labour Court of Germany (“Bundesarbeitsgericht”) has now further developed the information and defence duties of the employer before he terminates the contract.

The employee was convicted of child abuse. There was no relation to the activity of the company. When the employee came to work, other employees and workers from third-party companies working on the site refused to do their work as long as the employee concerned was staying in the terminal. The employer terminated the contract.

The Federal Labour Court considered the dismissal inadmissible. The employer must first try to avoid the pressure exerted. He must protect his employee and do everything he can to make the employees or third parties aware of their threats. It is necessary for the employer to point out the unlawfulness of the workforce’s actions and to threaten labour law measures for further infringements. A pressure termination is only possible if this is unsuccessful. This obligation on the employer applies even if the reason for the pressure is a crime committed by the worker outside working hours.

However, these strict guidelines  only apply where  there are no behavioural, personal or operational reasons which justify the termination, so the reason for the termination lies solely in the pressure of third parties. This is different to the case where there is actually a reason for dismissal (eg theft). Here the termination is not based on pressure, but on the misconduct. The strict conditions therefore do not apply.

A termination due to the pressure of third parties is thus possible as ultima ratio (last resort). However, it must always be ascertained whether the pressure can be eliminated by other means.

Bogus self-employment – right to paid leave without any time limit?

According to the Advocate General’s opinion to the European Court of Justice (dated 8 June 2017, C-214/16, C. King v The Sash Window Workshop Ltd and Richard Dollar) the right to paid holiday carries over until the worker has an opportunity to exercise his right to paid leave. On termination of the employment relationship, the worker can claim an allowance in lieu of paid annual leave that has not been taken up until the date on which the employer made available to the worker an adequate facility for the exercise of the right to paid annual leave.

Mr King worked for the defendant as a self-employed salesman for 13 years between 1999 and 2012. He was paid only by way of commission. The contract was silent on the question of paid annual leave and Mr King assumed that as a self-employed person he had no right to paid holiday. After his dismissal in 2012 he instituted proceedings in the UK Employment Tribunal which decided among other things that Mr King was a “worker” and that he was entitled to paid holidays for the whole 13 year period. Part of the claim for paid holiday was for holiday to which Mr King was entitled but did not in fact take.

The Advocate General held that the employer has to implement the facility for the exercise of the right to paid holiday. If the employee does not have the opportunity to exercise the right it does not expire unless the employer implements such facility. Consequently, if an adequate facility for the exercise of the right was never provided, then an allowance in lieu is to cover the full period of employment until termination of the employment relationship.

The EU jurisdiction concerning the limitation and expiry of the right, e.g. in the case of long term sickness (Schultz-Hoff, C-350/06), is not relevant as it assumed that the right already existed. Therefore, it concerned the conditions for the entitlement to and granting of paid annual leave. The opportunity to exercise the right, however, is a pre-condition for that.

If the European Court of Justice (ECJ) follows the Advocate General’s opinion, customers or employers take the serious economic risk for being sued for holiday entitlements or allowance in lieu on termination. In the case of bogus self-employment the claim will always refer to the whole length of the contractual relationship as holiday entitlement is never a part of such contract. This will also have an impact on the amount of back payment of social security contributions as paid holiday entitlement is part of the remuneration of an employee. The distinction between employment and self-employed activities is once again in focus.

Problems of holiday calculation when changing working days

The Federal Labour Court of Germany (Bundesarbeitsgericht) ruled on 24 February 2017 (docket number 9 AZR 7/16)  how to calculate  annual  holiday when an employee changes from a part-time to a full-time job.

Calculating the number of days’ holiday after an increase or decrease in working days is one of the most complicated topics in German vacation law. In general two situations are possible:

 

  • Reduction of the weekly work days; or
  • Increase of the weekly work days.

 

Both are problematic. If there is a reduction or an increase just in the daily working hours, then – under German law, which calculates the vacation in days – the number of days’ holiday remains the same.

Within these two scenarios two options are possible:

 

  • The employee already took all of the holiday; or
  • Some holiday is left over.

 

Both the Federal Labour Court of Germany and the European Court of Justice emphasize that the vacation has to be calculated separately for full- and part-time periods. During part-time work the vacation is reduced pro rata temporis. There will never be a reduction or increase in already accrued leave.

The following principles apply in the case of leave which has not yet been claimed: If an employee works for 6 months at 3 days a week and then changes to 5 days per week, and the annual holiday for full-time work is 30 days, then he will get 10 days plus 15 days for the whole year. The same happens if he previously worked 5 days a week and changed to 3 days a week. This leads to the fact that in the second case the time off work is longer than in the first case (more than eight weeks compared to five weeks as the week is now shorter), but this is expressly accepted by the jurisprudence.

The Federal Labor Court has now decided a case where the employee had already taken the entire leave before the change in working days. Here the employee worked 4 days per week for 8 months before she switched to full-time. Her annual vacation was 30 days for full-time work. During her part-time working period she took the entire annual leave of 24 days (30 x 4/5). After the change she claimed a further 2 days leave for the full time period. This was rightly denied by the court, as the entire annual leave had already been taken. Additional holidays are therefore not to be granted.

A calculation with respect to the individual time sections is only to be carried out if the holiday has not yet been claimed. The decisive factor is always the time of the claim. Conversely, this also means that a change from full-time to part-time does not compensate for excessive leave. As a result, it produces fair and accurate results, provided caution is taken in the calculation.

New Act on Remuneration Transparency

Following up our blog post from December 19, 2016 where we reported about a legislative proposal to promote equal pay between women and men, the Remuneration Transparency Act has now entered into force.

Arguing that women still earn 7 % less than men even if statistics account for women frequently working part-time, less often climbing up the career ladder and rather working in social professions with lower salaries, the German Government felt that at least larger employers (beyond 200 employed persons) should be held responsible for their actions in this context. To close the gender pay gap the two legislative chambers of Germany have now adopted the Remuneration Transparency Act (Entgelttransparenzgesetz).

For employers it is worth taking a closer look at least at three new requirements that may impact them in the future:

• employee’s individual right to information about comparable colleagues’ pay,
• request to establish internal control procedures at company level and
• obligations to publish reports on equality and equal pay.

Let’s look at the three main issues in more detail:

  1. First, women and men working for employers with more than 200 employees will have an individual right to information in order to compare their proper remuneration with the one of colleagues of the opposite sex performing an equal or equivalent activity. This right to information does not allow employees however to obtain information about the exact pay of individual co-employees. It can only be asked for the criteria and procedures used for the wage-setting and the average gross monthly salary of a comparison group of at least 6 co-employees. In principle a written request may be made every two years, with an initial waiting period of six months after adoption of the Act. The employer has to respond in writing three months after receipt of the request. If he refuses to provide the required information, the employer bears the burden of proof in the event of a legal action. While the Act does not provide direct sanctions for noncompliance employees can however claim compensation of unduly denied payments on the basis of existing antidiscrimination rules (sec. 15 Equal Treatment Act / AGG).
  2. Employers with more than 500 employees are moreover strongly encouraged to establish operational control procedures to verify regularly that payment structures comply with the requirement of equal pay. Even if this is not a strict legal obligation the provision may gain practical relevance as the omission to establish control procedures could become part of the evidence battle for potential claimants.
  3. Employers with more than 500 employees, who are further required to publish a status report (Lagebericht) under the German Commercial Code, are obliged to combine their status report with a public report on equal pay. This report shall provide every three or five years (depending on whether the employer is bound by or applies a collective wage agreement) which measures were adopted to promote gender equality and equal pay during the last reference period and their impact. The first report has to be published within one year after the Act has come into force and shall only cover the preceding year.

The enforcement of the duties under this new piece of legislation does not provide for the usual administrative penalties. Instead, enforcement is delegated to employees who find a powerful tool to monitor their employer’s compliance with the fundamental principle of equal pay. They enjoy the reversed burden of proof if the company does not provide the necessary data or reports. It remains to be seen whether the works council bodies, which are widespread in Germany, put equal pay back on their agenda. Works councils have a general duty to ensure their company’s compliance with the law which would enable them to request reports and review information provided to individuals. Therefore it is recommended to quickly adapt relevant company structures to comply with the new requirements.

Written by Jannik Thiel and Bernd Borgmann

Ramadan – Impact on the employment relationship?

Ramadan is a challenge for both employers and employees alike, e.g. if employees do not perform as usual because of their daily fasting.

The ever-changing period of the fasting month falls between 27 May and 24 June this year. For a month Muslims abstain from eating food between five o’clock in the morning and nine o’clock in the evening. This creates challenges and it cannot be ruled out that strict fasting during the day and nocturnal eating and celebrations affect the usual efficiency and good performance of employees.

In principle, every employee enjoys freedom of worship. This is also reflected by the jurisprudence of the Federal Labor Court. Smaller mistakes or minor disturbances such as lack of concentration must be accepted by the employer. If, however, the employee carries out activities which involve particular risks or normal operational processes are considerably disrupted because of the fasting, the employer may have to consider potential measures or even a termination as the last resort. As a form of compromise, fasting may have to be postponed, which, as an aside, is an option that is recognized in certain circumstances for cases of illness or pregnancy.
In general, employers should plan ahead and, if possible seek to accommodate performance fluctuations in projects which are sensitive to quality or with regard to timing. If, however, the employee cannot be replaced, the employer may require that the fasting be postponed until after the expiry of a project deadline. This is in line with the principle of mutual consideration in the employment relationship. If the employee is not willing to agree to this, termination may be permitted in individual cases. Note, however, that mere adherence to the fasting period alone will not of itself justify a person-related termination of the employment relationship.
Should the physical strain connected to strict fasting temporarily impede an employee from performing their usual work, the employer may be required to temporarily assign other tasks to the employee instead of issuing a warning or considering a termination. In principle, this applies equally to small businesses, where the conflict between work obligations and freedom of religion can possibly lead to greater difficulty. While an employee may in certain circumstances be justified in disregarding the employer’s directions to carry out certain tasks without being in breach of his contractual duties, the employer, in turn, would be justified in withholding pay to the corresponding extent or for the corresponding period of time. An employer might also consider allocating different working hours during the fasting month.
According to the principle of equal treatment, individual employees may not be given unjustified preferential treatment. At the same time, the Equal Treatment Act prohibits discrimination against individual employees on account of their religion. In this complex situation, employers should actively engage with the employees concerned in an attempt to meet the special needs of Muslim employees.

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