40 Euro lump sum compensation in the event of late or incomplete wages

On 22 November 2016, the Labour Court Cologne decided that an employer who pays late or incomplete wages is obliged to pay lump sum compensation in the amount of 40 Euros to the affected employee (Judgement of 22.11.2016 – 12 SA 524/16).

In 2011 the European Parliament and the Council of the European Union passed the Directive 2011/7/EU on combating late payment in commercial transactions. “The aim of this Directive is to combat late payment in commercial transactions, in order to ensure the proper functioning of the internal market, thereby fostering the competitiveness of undertakings and in particular of SMEs. It shall apply to all payments made as remuneration for commercial transactions.” (Art. 1 para. 1 ff. Directive 20111/7/EU).

As of 29 July 2014 the Directive was implemented in German law without limitation by sec. 288 para. 5 German Civil Code. According to sec. 288 para. 5 German Civil Code a creditor is entitled to claim lump sum compensation in the amount of 40 Euros in the event of a debtor’s default. This lump sum payment is due regardless of whether loss or damage, and in any amount, has been incurred by the creditor.

In this case the Labour Court Cologne had to determine whether new sec. 288 para. 5 German Civil Code also applies to arrears of wages. The plaintiff claimed among other things a lump sum compensation of 40 Euros from the defendant, due to late and incomplete payment of his wages. The complaint was based on new sec. 288 para. 5 German Civil Code. The Labour Court decided that the already existing provision on default also applies to wages claims. (Judgement of 22.11.2016 – 12 SA 524/16). Consequently, the employer is obliged to pay a lump sum compensation in the amount of 40 Euros to the employee in the event of late or incomplete payment of wages.

However, the Labour Court Cologne has permitted an appeal to the Federal Labour Court.

Employer’s subsidiary liability for occupational pension payments

By judgement of 20 September 2016 (BAG, docket number 3 AZR 302/15), the Federal Labour Court ruled that an employer is liable for occupational pension payments, where the pension payments have been granted on the basis of a collective agreement and the implementation via an external pension provider could not take place during the vesting period.

The employee had an employment relationship as of October 1988 and was granted a pension promise by the employer. On the basis of the employment contract and according to collective agreements, the employer was obliged to provide for a pension scheme in the shape of direct life insurance via a special external pension provider. As the employer had not been a member of this special external pension provider until March 1991, the employee only could build up a pension entitlement with effect from April 1991. The employee claimed for higher pension payments. The defendant employer argued that he did not want to grant a pension promise without reserve, but only where he became a member of the external pension provider.

The Federal Labour Court considered the claim to be founded. According to the German Occupational Pension Act(Betriebsrentengesetz), an employer is also liable for pension payments where the pension scheme has not been provided by the employer, but by an external pension provider. Under German law, there is a strict differentiation between the basic obligation under employment law and the form/implementation of a pension scheme. Where an employer makes use of an external pension provider, this external pension provider can only be considered as a supporting vehicle. If the pension payments cannot be made by the external pension provider, the employer is obliged to make the payments out of his assets.

The employer’s subsidiary liability for occupational pension payments is a significant principle of German occupational pension law. Currently, there is a draft of a new law aiming to strengthen the system of occupational pensions in Germany. This new law provides (inter alia) the option of a pure defined contribution promise without the employer’s subsidiary liability for the pension payments. This requires that the pure defined contribution promise is implemented on the basis of a collective agreement of the social partners according to German labour law.

Requirements concerning pension adjustments

By judgment of 7 June 2016 (BAG, docket number 3 AZR 193/15), the Federal Labour Court ruled that an employer is allowed to refuse pension adjustments due to economic reasons, where the employer is not able to continue generating a sufficient equity yield rate or has a lack of equity capital.

The parties were in dispute about pension adjustments as at 1 April 2008 and 1 April 2011. The employee, who has received an occupational pension since 1999, was granted a pension promise by the former group parent company. Within the group, several restructuring measures have taken place, whereby all pension obligations have been transferred to another subsidiary company of the group. All subsidiary companies have been subject to yearly bundled pension adjustments as at 1 April, for the first time as at 1 April 2002. As at 1 April 2005, 1 April 2008 and 1 April 2011 no adjustments were made (according to the employer due to economic reasons). As a result, the employee claimed both against the successor company of the former group parent company and the successor company of the former subsidiary company which had taken over the pension obligations.

The Federal Labour Court considered the claims to be unfounded. The successor company of the former group parent company was allowed to refuse adjustments due to economic reasons. According to the Federal Labour Court the economic situation is forward-looking, describing the employer’s future capacity and providing a forecast. As a basis for assessing this forecast, the employer’s economic development in the past is significant, provided that conclusions for the employer’s economic development in the future can be drawn out of this. Where the employer is not able to continue generating a sufficient equity yield rate or has a lack of equity capital, he is allowed to refuse pension adjustments. Regarding the claim against the successor company of the former subsidiary company which had taken over the pension obligations, the relevant requirements have not been fulfilled. According to German Occupational Pension Act (Betriebsrentengesetz), an assumption of debt (with discharging effect) is only permitted under very strict requirements.

By means of this judgment, the Federal Labour Court confirmed its previous view concerning pension adjustment and assumption of debt with discharging effect. Under German law, an employer planning to transfer pension obligations must evaluate precisely whether all (compulsory) regulations of German Occupational Pension Act are fulfilled.

No laptop for works council

It depends on the specific circumstances of the individual case whether a works council with eleven members, which is already provided with two personal computers, can claim to be provided with an additional laptop.

The defendant runs a freight company with 350 employees. Its works council, which has eleven members, already works with two internet-enabled computers. The works council’s request for an additional laptop was rejected by the Labour Court (Arbeitsgericht). The works council appealed the Labour Court’s decision.

According to sec. 40 para 2 of the Works Constitution Act (BetrVG) the employer is obliged to provide required material resources as well as information and communication equipment for the work council’s day-to-day-management. The Higher Labour Court in Hessen (Landesarbeitsgericht Hessen; docket no: 16 TaBV 219/15) stated on 25 July 2016 that the works council’s request must be assessed in relation to the actual circumstances in the business establishment. The court stated that a weighing of interests must take place, taking into account not only whether the requested material resource serves the works council’s statutory tasks, but also the employer’s interests (including financial aspects). The court rejected the claim at the basis of no evident reason was shown that two desktop computers are not sufficient for the works council’s activities. That would only be the case if more than two works council’s members had to usually work at a computer at once. Furthermore, at the defendant’s company the provision of laptops is not common. In addition, the court considered that the employer is willing to provide the works council a laptop in specific cases for a certain period, e.g. meetings of the works council and that the costs of the provision of a laptop would be significantly higher than the provision of a desktop computer.


Dismissal of Severely Disabled Employees Only Valid After Participation of Representatives

Employees who suffer from a severe disability may no longer have their employment contracts terminated by their employer unless such dismissal proposal saw participation by the Severely Disabled Employees Council. This strengthening of the rights of severely disabled employees became valid on 30 December 2016, as the German Social Security Code IX (SGB IX) saw a change to section 95. At first glance, the change only remains valid until 1 January 2018, yet a major reform of the Social Security Code IX leads to the preservation of the newly introduced principle in section 178.

Employers thus need to be prepared for different legal consequences in the case of dismissals issued without allowing for the participation of the Severely Disabled Employees Council. Prior to the change, failure to arrange a hearing of this council had no consequences for the employer, which stripped the council of an important role. By voiding any such dismissal made without prior hearing in accordance with section 134 of the German Civil Code, the federal legislature supports the council’s rights in representing severely disabled employees.

In order to avoid negative consequences such as lawsuits and the delay of necessary business decisions, employers are strongly advised that any dismissal be made only after having discussed the subject matter with the council. Other ways in which a severely disabled employee may leave a company remain unchanged, such as reaching a mutual agreement or a termination of employment issued by the employee himself.

A demand for parental leave by telefax does not meet the statutory condition of being in writing

On 10 May 2016, the Federal Labour Court ruled that sending a telefax does not meet the formal prerequisites for a valid demand for parental leave (BAG, docket number 9 AZR 145/15).

The plaintiff was employed by the defendant from January 2012. The defendant regularly employed not more than ten employees. After the birth of her daughter on 23 May 2013 the plaintiff sent a telefax to the defendant with the subject matter “parental leave”. The defendant terminated the employment contract with notice on 15 November 2013 and with effect from 15 December 2013. The plaintiff asserted that she validly demanded parental leave. As a consequence, the termination would be invalid pursuant sec. 18 para. 1 sent. 1 BEEG (Federal Parental Allowance and Parental Leave Act). The defendant would at least show contradictory conduct if he claimed formal invalidity of the demand whilst not reacting to her absence from work for over four months.

The Federal Labour Court ruled that the termination was valid because the plaintiff had not validly requested to go on parental leave which would have led to a prohibition of termination at that time.

The Federal Labour Court founded its decision in part on the protective purpose of sec. 16 para. sent. 1 BEEG. The written form in line with sec. 126 para. 1 BGB (Civil Code), which requires the signature of the person who initially issued the document, ensures that the recipient is able to clearly identify this person. Due to the extensive consequences of parental leave (e.g. no claim for remuneration for this period of time) this prerequisite also serves as a warning function for the employee according to the Federal Labour Court. Moreover, the defendant did not show contradictory conduct because he unsuccessfully asked the plaintiff for the date of birth of her child. Without this information the defendant could not calculate the end of the employment prohibition and determine when he could demand the plaintiff’s service again.

No cake for company pensioner

The Labour Court Cologne (Arbeitsgericht, ArbG, Köln, November 24, 2016 – 11 Ca 3589/16) has dismissed the claim of several company pensioners against their former employer, a local food producer. The pensioners claimed a Christmas allowance in the amount of € 105 and a marzipan cake. The pensioners alleged that all company pensioners received those benefits in previous years and thus, they now have a legal claim to those benefits in the future due to an established company practice. The Labour Court Cologne, however, did not agree. Instead the Labour Court has ruled that no company practice was established in the past. Not all company pensioners received the cake and the Christmas allowance in the past. Also the company made it clear in their letter which was sent to the company pensioners each year that both the cake and the allowance are voluntary benefits and granting such benefits shall not constitute a legal entitlement for the future.

The decision again stresses that employers are well advised whenever they want to grant their employees additional benefits – regardless of their value or nature – to only grant such benefits with the express reservation that they are voluntary without creating any future rights to the benefits.

Federal Labor Court rulings to watch in 2017 (edition Jan – March)

Already in the first quarter of the New Year Germany’s Federal Labor Court will deliver a number of judgments important for advisors and practitioners alike:

Time Credits for works council members?

(- docket no 7 AZR 224/15 – expected for 18 January 2017- )

Although members of a works council act in an honorary role they are entitled to time off for works council duties which are necessary during working hours. But does this extend to time credits in a flexible working time scheme? The Federal Labor Court has to decide in particular whether the mandatory rest of 11-hours between two work days applies before works council meetings and how works council work shall be converted into working time credits.

The appealed judgement of the Higher Labor Court Hamm negated the application of the rest period and ordered a time credit for participation in a works council meeting outside official shift hours. The Federal Labor Court will have to review the whole system of working time and release rules for works council members to answer the questions posed by this difficult case.

Compensation for discrimination of severely handicapped

(- docket no 8 AZR 736/15 – expected for 26 January 2017- )

German anti-discrimination rules will be clarified in a ruling on compensation for discrimination by denying a handicapped part timer increased regular working hours. All other employees who had applied for more working hours were considered. The handicapped employee argued that the raise of working hours was not granted because of his disability which would violate the General Equal Treatment Act. The Higher Labor Court Hesse had ruled in favor of the plaintiff, even though the employer claimed business reasons for his decision.

Corporate bonus payments

 (- docket no 10 AZR 144/16 – expected for 22 February 2017- )

The highest German labor court will as well decide soon whether a term in an employment agreement, which grants a corporate bonus only after four years continued employment, violates German unfair contract term laws (sec. 307 para. 1 Civil Code). The plaintiff argued that the Agreement constitutes an unreasonable disadvantage and is therefore void. The defendant however states that the corporate bonus was intended for corporate success and not for the personal performance. He further argues that the waiting period reflects the basic idea of tying bonus compensation to the sustainability of corporate success, as provided mandatorily for executives in sec. 87 para. 1 Stock Corporation Act. The Federal Court’s decision will give important guidance for future drafting of bonus schemes.

Does employment protection apply in a family household?

 (- docket no 2 AZR 500/16 – expected for 2 March 2017- )

In March 2017 the Federal Labor Court will have to debate about employment protection rights of a housekeeper working in a “private” family house which however employs in total 15 people in various assistant roles. The housekeeper appeals against his dismissal on the grounds that a family house with more than 10 full time employees is an operation within the meaning of sec. 23 para. 1 Employment Protection Act. Moreover, the exclusion of employees from a family house from the scope of the Employment Protection Act is said to infringe the principle of equal treatment, art. 3 German Constitution. The defendant obviously disagrees, and with him the local and regional labor courts which so far have dismissed the claim.

Non-competition clause

 (- docket no 10 AZR 448/15 – expected for 22 March 2017- )

In a case originating from 2014 the appellant claims compensation for a post-contractual non-competition clause which had been agreed upon in the employment agreement. It did however not provide for compensation, which according to sec. 74 Commercial Code is a mandatory requirement of valid non-compete terms. The agreement ended with a standard clause which read that invalid provisions should be replaced with the closest possible valid provision. According to the plaintiff the lack of compensation could be supplemented in consideration of this severability clause. The defendants however consider that the non-competition clause is void due to the lack of compensation, and that it would be contrary to the requirement of written form if a compensation term was added under the severability clause.

Removing of interfering workers

 (- docket no 2 AZR 551/16 – expected for 28 March 2017- )

If an employee troubles operating peace at a site, the works council may request from the employer to dismiss or at least to transfer such employee elsewhere, sec. 104 Works Council Act.

In the case scheduled for 28 March 2017 the plaintiff was subject to this seldom applied procedure. The works council had asked the employer to dismiss the plaintiff or to transfer her to another site. The employer initially denied to do so, but the works council enforced its application and therefore the employer extraordinarily terminated the employment agreement, with the approval of the works council, with immediate effect. The plaintiff challenged this dismissal, stating that there was neither a reason for the extraordinary nor for a precautionary normal dismissal, which was issued as well. She claimed that the procedure under Section 104 Works Council Act would not create any new grounds for termination and also that the earlier court decision obtained by the works council had no prejudicial effect. The Regional Labor Court Dusseldorf ruled that the instant dismissal was invalid, but upheld the ordinary notice given.

This overview and selection of upcoming caselaw from the Federal Labor Court proves that German employment law is very case driven. Close attention to the rulings of the court is mandatory for every employment law practitioner, whether directly in business or in an advisory role.

Release of documents when leaving the company

The State Labor Court of Rhineland-Palatinate (Landesarbeitsgericht Rheinland-Pfalz)  decided on 01.09.2016 (5 Sa 139/16) that the defendant is obliged, according to her employment contract, to hand over all operational working materials and documents, as well as copies and recordings, to the plaintiff when leaving the company.

The plaintiff runs an enterprise which trades in rice and legumes. The defendant was employed since 01.09.2013 with the plaintiff as a sales manager for the business unit “Business for Prepackage” (“Abpackgeschäft”). She also received power of attorney. Among other things, the employment contract provided that: “With the withdrawal of the employee, the employee has to hand over all operational working materials and documents as well as any copies and recordings to the employer. The employee has no claim to retention.” On 11.04.2015 the plaintiff was informed by one of her rice suppliers from Bangkok about a delivery inquiry of the until then unknown N Ltd. The plaintiff’s research established that this limited company was established by the defendant as sole shareholder  and manager on the 22.12.2014 with the business purpose of “bottling and wholesale with edible oils and fat & rice and legumes”. In the course of her research, the plaintiff discovered a business start-up concept of the N Ltd on the company network on 12.04.2014 which was developed and documented by the defendant and an consultant. Moreover, the plaintiff found out that the defendant had connected an external memory medium on 09.04.2015, presumably an USB-Stick, to her personal computer and transferred 11,892 records. On 20.02.2015 the plaintiff terminated the employment agreement without notice. The defendant (as plaintiff) defends herself against this termination in a lawsuit regarding protection against dismissal. The plaintiff applied for an interim order prohibiting the defendant from using any business data or disclosing it to a third party.

The Labour Court (Arbeitsgericht) partially granted the order but rejected the claim for compensation. The State Labour Court (Landesarbeitsgericht) upheld this decision. It is not important that there is no decision on the action for dismissal protection yet. The defendant left the company immediately after the termination without notice on 20.04.2015. The plaintiff has a right to recover possession under the employment contract as well as according to sec. 667 of the Civil Code (Bürgerliches Gesetzbuch). The plaintiff may at any time demand that written or electronic recordings be returned or destroyed, and also has a claim to removal  of information according to sec. 8 para. 1 sentence 1 of the German Fair Trade Practices Act (Gesetz gegen den unlauteren Wettbewerb – UWG). The employee has no claim for retention with regard to written or electronic recordings.

Attendance premiums may set off minimum wage entitlement

Attendance premiums paid in addition to the hourly wage may be used to satisfy an employee’s minimum wage entitlement (judgment by the Higher Regional Labour Court Mecklenburg-Vorpommern dated 22 November 2016, docket number: 5 Sa 298/15).

In the case at hand, the employee was entitled to a remuneration based on an hourly wage as well as an “attendance premium”. Following the implementation of the German Minimum Wage Act, the employer redistributed parts of the attendance premium which lead to an increased hourly wage to meet minimum wage requirements but also lead to a reduced payment of the attendance premium. The employee demanded payment of the full amount of the attendance premium in addition to an hourly wage of EUR 8.50 gross.

The court rejected the employee’s claim. According to the court, the employer had satisfied the employee’s entitlement to payment of the attendance premium by splitting the premium into two parts, one being part of the monthly wage and the other being paid out separately. The court reasoned that the employer was entitled to use part of the attendance premium to satisfy the minimum wage entitlement. As a general rule, all payments which aim to compensate employees for their work may be used to fulfill the minimum wage requirement. If a payment aims to remunerate the same type of work which is also remunerated by payment of the minimum wage (“functional equivalence”) the payment may be used to satisfy the minimum wage requirement. In the case at hand, the court held that the purpose of an attendance premium was to encourage employee attendance and keep disruptions at a minimum. As such, the court recognized that the premium ultimately had the same objective as the salary payment, i.e. to remunerate employees for their work. Therefore, the employer was entitled to set off the entitlement to the attendance premium against payment of the increased hourly wage.

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