Good news for parents? – Interpretation of social plan severance provisions

If, in a social compensation plan, the severance payment calculation is based solely on the gross monthly basic salary of a single reference month, the decisive salary of employees who work part-time in that month during their parental leave, is the gross monthly basic salary which they would have been entitled to under their employment contract if they had not been on parental leave (i.e. if they had not worked part time.
This is what the German Federal Labour Court decided in its judgment of 15 May 2918 – docket number 1 AZR 20/17.

The Court held that the system of the social compensation plan as well as the purpose of the severance payment regulation argued in favour of this interpretation. For example, the parties had expressly excluded individual remuneration components such as bonuses, special payments, premiums and variable elements, which were either dependent on the actual performance of work in the reference month or were made precisely in this month, although the remuneration was to cover work performed over a longer period of time. According to the Court the intention was to prevent the amount of the severance payment from being determined on the basis of “random” payments made in the reference month. At the same time, the Court held that the parties to the social plan agreement (employer and works council) intended to ensure that a temporary suspension of the main contractual obligations under the employment contract would not lead to a reduction in the severance payment. In the view of the Court the reason for the suspension (e.g. parental leave, (family) care time, a claim to continued payment of remuneration under the Continued Remuneration Act or unpaid special leave) was intended to be irrelevant.

An understanding of the social plan regulation to the effect that, in the case of part-time work carried out during parental leave, the reduced gross monthly basic salary in the reference month due to part-time work is relevant for the calculation of the severance payment is considered an unjustified differentiation between employees on “full-time” parental leave and those who additionally work part-time during parental leave. While the former would thus be entitled to a compensation payment based on their contractually agreed gross monthly basic salary, the calculation for the latter would only take the actually paid remuneration into account, which is reduced due to part-time work. In the eyes of the Court this was an unjustified violation of the principle of equal treatment under the German Works Constitution Act (Betriebsverfassungsgesetz, BetrVG).

With this decision the Federal Labour Court strengthens the rights of parents who work part-time while being on parental leave.

Employees Cannot Claim Default Lump Sums for Late Wages

Anyone who fails to pay his debts on time and comes into default of his payment obligations must pay default interest. In addition, the creditor may demand a lump sum for default costs in the amount of EUR 40.00 due to sec. 288 para. 5 of the German Civil Code (Bürgerliches Gesetzbuch, BGB) if the debtor is an entrepreneur. As of the introduction of that regulation by the legislator in 2014, it has been disputed whether sec. 288 (5) of the German Civil Code also applies to employment law situations. A large number of regional labor courts had previously affirmed the application of that regulation and decided that employers which were in default of their payment obligations towards their employees had to pay the default lump sum.

With the latest decision (docket number: 8 AZR 26/18), the Federal Labor Court has now clearly positioned itself – and has spoken out against the applicability of the default lump sum payment in employment law situations.

The Federal Labor Court decision was based on the following case:

The plaintiff worked for the defendant for several years. He filed a claim against the defendant for late payment from May to September 2016. In addition, he demanded three lump sum payments for default on the basis of sec. 288 (5) of the German Civil Code for the months July to September 2016.

The lower courts upheld the action. The Federal Labor Court was of a different opinion.

In the event of an employer’s default of payment of remuneration, the employee is not entitled to a lump sum for default in accordance with sec. 288 (5) of the German Civil Code. This results from sec. 12a  para. 1 sent. 1 of the Labor Court Act (Arbeitsgerichtsgesetz. ArbGG). The regulation states that the parties have no right to claim extrajudicial costs from the opposing party incurred by them in proceedings before the labor court. The Federal Labor Court regards sec. 12a of the Labor Court Act as a special regulation. The regulation not only excludes a claim for reimbursement of procedural costs but also the corresponding material claim for reimbursement of costs. Thus, the claim for the lump sum for default according to sec. 288 (5) of the German Civil Code is also excluded in employment law situations.

The ruling of the Federal Labor Court creates clarity and legal certainty. The EUR 40.00 default lump sum no longer plays a role in employment law.

EU Directive Draft “Whistleblowing”

On 23 April 2018, the European Commission presented its draft directive “proposal for a directive of the European parliament and of the council on the protection of persons reporting on breaches of Union law”.

The proposal is based on the official Council of Europe Recommendation on the protection of whistleblowers of 2014, according to which Member States should have a legal and institutional framework to protect persons who, in the context of their industrial relations, draw attention to violations and threats to the public interest or make information on them public. The central approach and declared objective of the EU Commission’s draft directive is to create a uniform framework to strengthen the protection of whistleblowers at EU level.

An EU-wide uniform standard for the protection of whistleblowers does not exist yet. Only ten Member States have enshrined comprehensive and sufficient protection for whistleblowers in law, Germany is not one of them.

For some of the legal areas mentioned in the draft directive, German law already contains requirements, e.g. for the financial services sector (§ 4 d FinDAG) or for reporting violations in connection with money laundering and terrorist financing (§ 6 V AMLA). There are also regulations for cases of discrimination (Sections 13, 27 I AGG) or in the area of occupational safety (Section 17 ArbSchG) beyond the objective scope of application of the proposed directive. However, a general legal regulation is still lacking.

According to the draft directive, a minimum level of protection is to be guaranteed in future on the basis of EU-wide minimum standards.

However, these are only minimum standards, as the limited scope for only certain areas shows.

In contrast, the concept of the whistleblower to be protected is interpreted broadly. In addition to employees in the private or public sector, shareholders, management bodies, unpaid interns, volunteers and suppliers should also benefit from the planned rules.

The whistleblower does not have to act with the intention of protecting the general “public interest” when providing the information.

One of the main points of the draft directive is the obligation for companies to introduce an internal procedure for dealing with whistleblower reports (whistleblower system). This affects companies with more than 50 employees or annual sales of more than 10 million euros.

Within the framework of this whistleblower system, a responsible reporting office must be appointed, which is to be organised either internally or externally. The identity of the whistleblower must be treated confidentially and protected from access by unauthorised persons.

A three-stage escalation procedure is prescribed for employees. Accordingly, whistleblowers must first report violations of the law to the internal whistleblower in order to allow the company to investigate possible grievances itself. If the company does not respond to the information within three months, the whistleblower can approach the competent authorities at the second stage. Here, too, there is a three-month deadline for re-registration. If no suitable measures are taken on the first two levels, the whistleblower can finally approach the public, e.g. via journalists and media, on the third level.

The employer is to be prohibited from taking personal retaliatory measures against the whistle-blower (e.g. indemnity, termination, negative performance assessment), provided that the whistle-blower has followed the prescribed procedure. The employer must bear the burden of proof.

The draft directive has yet to be adopted by the Heads of State and Government. If this happens, the draft directive already provides a deadline for transposition into national law by the member states by 15 May 2021.

Companies should therefore begin to deal with the introduction of the whistleblower system.

 

Legal Useability of Recordings from Open Video Surveillance

By its decision of 23 August 2018 the Federal Labor Court (docket number 2 AZR 133/18) facilitated video surveillance at the workplace. Legally and openly created recordings do not have to be deleted by the employer within a few days. According to the Federal Labor Court, they can be evaluated several months later.

Under data protection law employers are in principle entitled to use video cameras to publicly monitor accessible sales areas in order to protect themselves against criminal offences. The purpose of such video surveillance does not have to be exclusively to prevent crimes committed by customers. Rather, the employer can also pursue the purpose of protecting himself from criminal offences committed by employees. In such cases, video surveillance must be disclosed or made visible, usually by information signs. In addition, the employer must delete the video material as soon as possible. Section 4 para. 5 of the Federal Data Protection Act (Bundesdatenschutzgesetz, BDSG) states that data shall be deleted immediately if it is no longer necessary to achieve the purpose or if legitimate interests of the parties concerned are affected.

In the particular case, the plaintiff worked in a small shop with open video surveillance installed by the defendant. According to the defendant, a shortage of tobacco products was found in the third quarter of 2016. A random analysis of the video recordings conducted in August 2016 had shown that the plaintiff had not deposited the funds collected on two days in February 2016 in the cash register. Therefore, the defendant terminated the employment relationship for good cause. The affected employee succeeded before the local labor court with her claim for wrongful dismissal. Also the Labor Court of Appeal in Hamm (docket number 2 Sa 192/17) ruled that the findings from the video surveillance were subject to a prohibition on exploitation due to Section 4 para. 5 of the BDSG, as the defendant should have deleted the video sequences immediately, in any case at least before 1 August 2016.

The Federal Labor Court surprisingly overruled the decision and made quite a turnaround compared to earlier decisions with similar situations where usually, as a rule of thumb, material was to be deleted after the expiration of 1-2 days due to the legal principle of data economy.

According to the Federal Labor Court, the storage of video sequences from a legitimate open video surveillance showing intentional actions of an employee to the detriment of the employer’s property is allowed, as long as punishment for the breach of duty is possible under employment law. In particular, the defendant was not obliged to analyze the surveillance material immediately. He was allowed to wait until he saw a valid reason to do so. The analysis of the video material conducted approximately six months after the recording did not conflict with Section 4 para. 5 of the Federal Data Protection Act and therefore did also not conflict with the general right of privacy of the employee protected by Article 2 para.1 in conjunction with Article 1 para. 1 of the German Constitutional Law (Grundgesetz, GG).

Imminent invalidity of limitation periods

In a Judgment dated 18 September 2018 the Federal Labour Court ruled that limitation periods, which do not exclude a claim for the Minimum Wage (Mindestlohn) according to the Minimum Wage Act (Mindestlohngesetz), are invalid. This results in the ineffectiveness of thousands of limitation periods in employment contracts.
In Germany, limitation periods within which a claim must be asserted are commonly agreed in employment contracts. These generally amount to three months and are therefore considerably lower than the limitation periods provided by law. However, the exclusion periods may be invalid, because employment contracts are subject to the terms and conditions control (AGB- Kontrolle).
This means that every clause in the contract needs to be controlled regarding its effectiveness.
Among other things contract clauses are invalid, if there is disproportionate disadvantage to the contracting party. Such a disadvantage also exists if the clause is not clear and understandable or violates fundamental principles of a legal regulation. There is no validity preserving interpretation of the clause. If the clause is incomplete or does not include or exclude necessary contents, then the whole clause is void.
Against this background, the Federal Labour Court ruled that limitation periods that do not explicitly exclude the Minimum Wage guaranteed by law are invalid. The Minimum Wage Act requires that agreements restricting the assertion of the Minimum Wage are not effective. So far, there was disagreement between the Higher Regional Labour Courts, as to how to deal with this legal regulation in terms of the control of general terms and conditions (AGB- Kontrolle). Now the Federal Labour Court has finally decided the dispute. This applies at least to contracts concluded from 31 December 2014, as the Minimum Wage Act entered into force on 1 January 2015. As a consequence the claims, which may in principle be subject to an limitation period, are governed by the limitation period by law in the event of invalidity of the clause. This is, depending on the nature of the claim, regularly at least three years.
It is to be expected that due to the same reasoning in the future further non-excluded claims will lead to the invalidity of the limitation period. Companies should therefore urgently revise their employment contracts and include an appropriate clause. Such a clause could be formulated as following:
§ XXX limitation period
I. Claims from the employment contract need to be asserted in writing (textual form) to the other party within three months from the due date. If the respondent does not respond or does not acknowledge the claim, the claimant needs to bring an action within three further months.
II. All rights that are not claimed in due time in accordance with paragraph I expire without replacement.
III. This does not apply to claims for the Minimum Wage, for pensions, for property rights (such as surrender claims, for violations of personal rights, for employment, for the removal of a warning letter from the personal file, for classification, regarding activity as a works council member as well as claims due to liability for intent or gross negligence. For these claims, the limitation period provided by law applies.

No co-determination rights of the works council for stock options issued by a foreign parent company

In a judgment dated 3 August 2017, the Higher Regional Labour Court of Hessen has held that a works council’s co-determination rights do not extend to stock option plans by an employer’s foreign parent company (docket number 5 TaBV 23/17).

 

Under German law, works councils have a co-determination right regarding remuneration principles. In this case, the foreign parent company decided annually and independently from the local employing entity whether stock options were to be granted, which employees would receive these stock options and, if so, how many. Local employment documents of the German employees did not include any reference to the stock option award as part of their remuneration, and the German employing entity did not have any influence on the award process. The local works council claimed a co-determination right with regard to the award process based on the implementation of remuneration principles.

 

The Higher Regional Labour Court rejected this claim, stating that co-determination rights of the works council only applied if the employer had at least a certain amount of freedom to make an independent decision. Merely executing binding guidelines or decisions is not sufficient to trigger co-determination rights. Since the local employing entity had no say in the stock option award process, e.g., through a right to make proposals, there was no room for negotiations with the works council.

 

An appeal against this decision has been lodged with the Federal Labour Court under the docket number 1 ABR 57/17.

Addressing applicants “who are about to graduate”, asking for “very good German and English language skills” as well as a description of being a “young, dynamic company” is in general non-discriminatory

On 23 November 2017 the Federal Labour Court (Bundesarbeitsgericht, BAG) ruled in two parallel proceedings, each with the same plaintiff, on compensation claims for an alleged infringement of the principle of non-discrimination under the General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz, AGG) on the basis of two job advertisements. The first position required a completed degree, or that the applicant was about to graduate, as well as very good German and English language skills (docket number 8 AZR 372/16). The second position was advertised by a company that described itself as being “young, dynamic” (docket number 8 AZR 604/16). The defendants rejected the applications made by the plaintiff. As a result the plaintiff brought claims for compensation, inter alia, due to discrimination on grounds of age and ethnic origin. In support of this the plaintiff referred to the wording of the job advertisements.

The Federal Labour Court stated that applicants who consider themselves wronged because of a breach of the principle of equal treatment satisfy the burden of proof if they can present evidence that indicates, with overwhelming probability, that a disadvantage has occurred due to the reasons stated in sec. 1 General Equal Treatment Act.

Advertising a position which is contrary to the principle of non-discrimination, may justify the finding that an unsuccessful applicant was disadvantaged in the selection procedure and it is then down to the employer to refute the allegation. In the present cases however, no such evidence was provided.

“Being about to graduate” (8 AZR 372/16) and “young, dynamic company” (8 AZR 604/16)

It was held that “being about to graduate” did not refer to an exact age and it was not to be understood as a requirement that only addressed young applicants. According to the Federal Labour Court, older people would not have been seriously discouraged from submitting their applications and thus, it did not suggest discrimination because of age. The same applied to the company’s statement that it is ‘a young, dynamic company’ as this was held to be enterprise-related information that did not refer to the workforce or the desired applicants. However, it was suggested that this decision could be different if the company was, in fact, an old business or the terminology referred to a specific “team” and not the company as a whole.

“Very good German and English language skills” (8 AZR 372/16)

The Federal Labour Court elaborated that the request for the applicant to have very good knowledge of the German and English language was an expression of entrepreneurial freedom and not discrimination because of ethnic origin. It was not evident that this requirement was a mere pretext and the demand for two languages counters an inseparable connection with a particular ethnic group. The Court referred to its ruling of 15 December 2016 (docket number 8 AZR 418/15) and clarified that the case would be different if the job advertisement was exclusively and directly related to a native language, e.g. “German as mother tongue”. The mother tongue is connected to a linguistic area and to the ethnic origin of the person. This is different to other language skills as they can be taught and be evaluated in tests.

Practical implications

These judgements demonstrate that although the applicant generally has a favourable burden of proof, unsubstantiated allegations cannot give rise to a presumption to the detriment of the employer. A job advertisement is interpreted according to its objective content, whereby the court will take into account what the average applicant is likely to understand. The employer can rely on this objective interpretation. To survive on the market the employer can stipulate professional requirements. As long as there is no evidence that the demand for specific qualifications is merely an excuse, this does not constitute discrimination, e.g. because of ethnic origin. However, employers should avoid asking applicants to have a specific “mother tongue” language.

Current case law of the Federal Labour Court on forfeiture periods

In June 2018, the Federal Labour Court (Bundesarbeitsgericht, BAG) dealt intensively with forfeiture periods. The judgments addressed:

  • The date when the deadline starts to run (07 June 2018; docket number 8 AZR 96/17);
  • The suspension due to settlement negotiations (20 June 2018; docket number 5 AZR 262/17); and
  • The entitlement for statutory minimum wage during the period of incapacity for work despite forfeiture periods under tariffs (20 June 2018; docket number 5 AZR 377/17).

Start of the deadline run (8 AZR 96/17)

In this case, which concerned the disappearance of an unpaid car, the Court held that an employee could successfully invoke a contractual forfeiture period, meaning that all claims arising out of the employment were to expire within three months of their due date, unless they were previously asserted in writing against the other party. The Court ruled that the employer’s decision to sue the customer in court marks the beginning of the forfeiture period. In this case, nothing else could arise with regards to the employer’s duty to limit eventual damages as far as possible or the employer`s contractual accessory obligation, as in the absence of prospects of success, priority claims against the customer were not required.

Suspension of a forfeiture period due to settlement negotiations (5 AZR 262/17)

The Court stated that a forfeiture period due to settlement negotiations can be suspended under sec. 203 sent. 1 Civil Code (Bürgerliches Gesetzbuch, BGB), as long as the parties conduct pre-trial settlement negotiations. In addition, pursuant to sec. 209 Civil Code, the period during which the settlement negotiations take place, should not be included in the forfeiture period. In this case, the defendant rejected the claim, but stressed that he was willing to find a mutual solution.

Entitlement to statutory minimum wage despite tariff forfeiture period (5 AZR 377/17)

The Court also considered whether an employee would be entitled to continued remuneration where they are away from work due to sickness. The Court held that the entitlement to continued remuneration pursuant to sec. 3 para. 1 Continuation of Remuneration Act (Entgeltfortzahlungsgesetz, EFZG), in spite of its indispensability according to sec. 12 Continuation of Remuneration Act, may still be subject to a tariff forfeiture period. However, such a regulation will be ineffective under sec. 3 sent. 1 Act for the Regulation of a General Minimum Wage (Mindestlohngesetz, MiLoG), insofar as it also covers the statutory minimum wage, as the employee must be paid the statutory minimum wage during their incapacity to work.

Conclusion

The purpose of forfeiture periods is to provide the contractual partner with certainty as to when or whether he should expect further claims. Typically, it will be the employer who benefits from forfeiture periods as, in most cases, it is the employee who brings a claim against the employer. However, the ruling on the ‘start of the deadline run’ demonstrates that the employer must also ensure that (damage) claims are brought within the forfeiture period, ie. as soon as an objective view deems that some damage has occurred.

It still remains unclear whether forfeiture periods must expressly exclude statutory minimum wage claims in order to be effective. This long-awaited clarification was gallantly circumvented by the Federal Labour Court by calling on the suspension due to settlement negotiations. Also, the ruling on tariff forfeiture periods cannot be used in this respect, because tariff agreements are treated completely different than employment clauses. For the time being, employers should therefore include an express exemption for essential entitlements, such as the statutory minimum wage, in their forfeiture periods in order to avoid the entire forfeiture clause being null and void.

Transitional payment prior to retirement to be considered as an occupational pension

By judgment of 20.03.2018 (3 AZR 277/16) the Federal Labour Court has ruled that a transitional payment (taking into account pension payments) that is granted to a former employee during the first six months after their retirement is to be deemed to be an occupational pension and is, therefore, covered by the German Pension Insurance Association (Pensionssicherungsverein).

The former employee (plaintiff) was granted a transitional payment on the basis of a works agreement by his former employer, which was insolvent at the time when the payment was due. According to that agreement, the transitional payment was intended to be granted for a period of six months, provided that the employee retired from the employer immediately after his active period of employment ended.

As of January 2015, the plaintiff received an occupational pension. Due to his employer’s insolvency, this occupational pension was granted by the German Pension Insurance Association. The plaintiff claimed that the German Pension Insurance Association was obliged to pay the transitional payment as well, since, in his opinion, it was to be considered as an occupational pension according to German law. In the German Pension Insurance Association’s view the transitional payment was not to be classified as a pension benefit as defined by German occupational pension law.

The Federal Labour Court rejected the German Pension Insurance Association’s view and upheld the plaintiff’s claim, according to which the German Pension Insurance Association is now obliged to pay the transitional payment. The court argued that the transitional payment is referable to a risk as defined in the German Occupational Pension Act (“old age”). The terms of the payment require that the employee reaches retirement age; the payment  is not being made for the purpose of improving the plaintiff’s financial situation until he retires, but solely to improve his standard of living after retirement. As a result, the transitional payment is to be classified as a pension benefit.

The classification of such payments, commonly referred to as “transitional payments” (“Übergangszahlungen”), is often unclear. It always requires an in-depth analysis of the purpose that is intended by the payment. If the payment is referable to a risk as defined in the German Occupational Pension Act, it is to be considered as an occupational pension and will therefore be covered by the German Pension Insurance Association. This is not the case if, for example, the payment is only made until the employee reaches retirement or is compensation for the period until the employee has found a new job.

Minimum wage increase

The statutory minimum wage increases: to 9.19 euros on 1 January 2019 and to 9.35 euros per hour on 1 January 2020. This has been decided by the minimum wage commission. The increase is higher than expected.

The minimum wage is currently 8.84 euros gross per hour. Every two years, the Minimum Wage Commission (which consists of representatives of employers, unions and science) advises on adjusting the amount. . In doing so, it examines the level of the minimum wage that is suitable for contributing to an adequate minimum protection of employees, to enable fair and efficient conditions of competition, and not to jeopardize employment. Orientation is provided by general CBA developments.

Increase of 5.8 percent: According to the Commission’s proposal, the statutory minimum wage will rise by a total of 51 cents or 5.8 percent to 9.35 euros over the next two years. With this proposal the Commission goes beyond the expected increase. Looking at average increases of the past two years at CBA level, as suggested by the Commission’s Statutes for the normal case, it would have increased to EUR 9.19 per hour.

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