I INTRODUCTION

In Germany, the relations between employers and employees are extensively regulated by statutory law at the federal level. Employees enjoy a comparatively high level of protection. Generally, statutory rules are binding. Contractual modifications to the employee’s disadvantage are usually not permitted if made by way of agreement with an individual employee. European law also plays an increasingly important role in German employment and labour law. Case law and legal precedent are also of major importance. Various aspects of employment relationships can also be regulated by collective bargaining agreements (i.e., agreements concluded between an employers’ association or a single employer and a union) and works agreements (i.e., agreements concluded between an employer and a works council). Finally, individual employment contracts can contain provisions that override statutory labour law, collective bargaining agreements or works agreements if they are more favourable to employees.

Labour and employment law-related disputes are subject to the jurisdiction of the labour courts.

A number of government agencies are competent for or connected with the enforcement of employment law, for example, authorities monitoring compliance with statutory law in the field of occupational health and safety (e.g., workplace safety, working time, etc.).

II YEAR IN REVIEW

i Amendment of the statute on temporary employees

In November 2016, a new statute on temporary employees (the Temporary Employment Act) was passed, and will enter into force on 1 April 2017. Under the new statute, the maximum term for the provision of temporary employees from an employment agency to a client is limited to 18 months. If this term is exceeded, an employment relationship between the client and the leased employee will be deemed to exist. However, the leased employee may object to this legal presumption. After nine months, at the latest, leased employees are entitled to the same remuneration as the client pays its regular employees in comparable positions. Moreover, the client is prohibited from deploying leased employees during a strike at its premises. Under the new statute it is also clarified that with regard to thresholds for co-determination at the client’s company (see Section X), leased employees are counted as regular employees.

ii Flexibility of the statutory pension

In October 2016, a new statute was passed that aims to increase flexibility of the statutory pension. From 1 July 2017, employees who have not reached the statutory retirement age may combine part-time work and partial retirement. From 1 January 2017, employees who have reached the statutory retirement age and continue their employment may choose to pay social security contributions to the statutory pension fund and, thereby, increase their pension entitlements.

Iii SIGNIFICANT CASES

i Transfer of business

One decision of the Federal Labour Court (decision of 19 November 2015, Case No. 8 AZR 773/14) indicates that the one-month period during which employees affected by a transfer of business have to object to the transfer of their employment relationships may start to run after the employees have received ‘basic information’ on the transfer of business.

The plaintiff was employed with the defendant who transferred its business to a third party (V) with effect of 1 September 2007. V informed the plaintiff on the transfer of business. During a further lawsuit it was decided that this notification letter did not comply with the statutory requirements under Section 613a, paragraph 5 of the German Civil Code. The plaintiff did not object to the transfer. With effect of 1 December 2008, V transferred the business to a further party (T), who together with V informed the plaintiff of the transfer of business. In November 2011, the plaintiff objected to both transfers.

The Federal Labour Court held that the plaintiff could not object to the transfer from the defendant to V since his right to object to the transfer was time-barred. If the employee receives ‘basic information’ on the transfer of business the employee has to object to the transfer of his or her employment within one month, otherwise the employment transfers to the transferee, i.e., V. This decision indicates a deviation from the general principle that the one-month period only starts to run after the employee receives a proper notification letter. In practice, it is very difficult to have a proper notification letter because the Federal Labour Court has interpreted and still interprets the notification obligation very broadly. Therefore, a notification letter must fulfil a lot of different criteria in order to qualify as a ‘proper notification letter’.

ii Statutory minimum wage

The Federal Labour Court also clarified that an employee is entitled to the statutory minimum wage for on-call duty (decision of 29 June 2016, Case No. 5 AZR 716/15).

The plaintiff worked as a paramedic and claimed the statutory minimum wage for hours during which he performed on-call duty.

The Federal Labour Court stated that if an employee performs on-call duty this qualifies as working time under the Minimum Wage Act. However, the remuneration received by the plaintiff for the relevant months fulfilled his entitlement for the statutory minimum wage. The Federal Labour Court multiplied the hours worked by the plaintiff, including on-call duty, by the statutory minimum wage (€8.50). Since the result was lower than the remuneration received by the plaintiff for the relevant months, the Federal Labour Court held that the plaintiff was not entitled to further remuneration.

This decision is one of the first decisions of the Federal Labour Court on the Minimum Wage Act since its introduction in 2015.

Iv BASICS OF ENTERING AN EMPLOYMENT RELATIONSHIP

i Employment relationship

There is no legal obligation to conclude an employment contract in writing. According to the Act on the Recording of Essential Employment Terms, the employer must lay down the essential agreed employment terms in writing, sign and provide the employee with such record one month after commencement of the employment at the latest. This Act does not create an obligation to conclude an employment contract in writing.

In any case, it is recommendable to conclude a written employment contract to avoid disputes about the applicable terms of employment. Employers do not weaken their position by concluding a written employment contract because employees enjoy the same protection if there is only an oral agreement.

If the employer and employee conclude a fixed-term employment contract, the agreement on the fixed term needs to be in writing (i.e., a written agreement executed by both parties on the same copy of the contract) and must be concluded prior to the commencement of the work. Fixed-term employment contracts are permissible if the strict requirements stipulated in the Act on Part-Time and Fixed-Term Work are met. Without any specific reason being required, a fixed-term employment contract can be concluded for a maximum term of two years provided that the employee had not been employed by the same employer in the last three years. In addition, it is permissible to conclude fixed-term employment contracts where the fixed term is justified by objective reasons (e.g., the employee is engaged as a temporary substitute for an employee on parental leave).

Substantial changes to the employment contract or the terms of employment require either the consent of the employee or the employer has to issue a notice of termination with the option of altered conditions of employment. The employer and employee can mutually agree on an amendment or change of the employment contract or terms of employment at any time.

ii Probationary periods

The parties to an employment contract can agree on a maximum probationary period of six months. The statutory notice period during any agreed probationary period is two weeks. The employer and employee can contractually agree on a longer notice period.

iii Establishing a presence

A foreign company does not need to establish a subsidiary to hire employees, but can hire employees by itself. However, such a presence can qualify as a branch and would have to be entered in the commercial register. Also, the competent authority (usually the trade office or similar authority) needs to be informed of the intended start of a business. Please note that there are certain types of businesses that require a permit from the competent authority (e.g., credit institutions, insurance companies, insurance brokers and financial investment brokers).

The foreign company or branch has to apply for a company number with the employment agency. This number is necessary with regard to forwarding social security contributions to the competent authorities.

Employees employed in Germany are generally subject to compulsory statutory social security schemes. These are health insurance, long-term care insurance, pension insurance and unemployment insurance. Generally, the contributions to the statutory social security schemes are evenly split between employer and employee and amount to approximately 40 per cent of the gross monthly salary of the employee up to the social security contribution ceiling. The employer is liable for calculating the social security contributions, deducting the employee’s portion thereof from his or her salary and forwarding it to the competent authority. Further, the employer has to calculate, withhold and pay wage tax for the account of the employee.

Foreign companies can engage independent contractors in Germany.

V RESTRICTIVE COVENANTS

During the ongoing employment relationship, employees are bound by a statutory contractual non-compete obligation.

The employer and employee can agree on a post-contractual non-compete covenant with a maximum term of two years following termination of the employment relationship, if justified by the legitimate interests of the employer. The employee must be granted compensation amounting to at least half of the remuneration package last received by the employee for each year of the non-compete obligation.

Vi WAGES

i General principles

Wages and salaries are usually stipulated in the employment contract and collective bargaining agreement.

A statutory minimum wage of €8.50 gross per hour applies. From 1 January 2017, the statutory minimum wage increases to €8.84 gross per hour. According to the case law of the Federal Labour Court, the remuneration of an employee must generally not be lower than two-thirds of the remuneration under collective bargaining agreements commonly applied in the respective industry and region, and in no case less than 50 per cent of the value of the work performed by the employee. Thus, it might be necessary to actually pay a higher wage than €8.84 gross per hour. In addition, minimum wages apply to certain industries (e.g., cleaning services, security service, construction businesses).

ii Working time

Statutory limits regarding maximum working hours are stipulated in the Working Time Act. Generally, the maximum weekly working time is 48 hours on average over a period of six months. The maximum daily working time is 10 hours. The same principles basically apply to night work. Employees need to have an uninterrupted rest of at least 11 hours after finishing a day’s work.

iii Overtime

Employees are basically allowed to work overtime up to the limits of the Working Time Act. The employment contract needs to provide for such obligation. There is no statutory provision requiring overtime to be compensated in the form of higher wages or salary. In many companies, overtime is compensated by time off. Many collective bargaining agreements provide for overtime premiums. Usually, these range from 25 per cent on regular working days to 100 per cent for work on Sundays or public holidays. It is also generally permissible to compensate a certain amount of overtime with the regular salary if the employment contract provides for this. It is uncommon for managerial employees to receive compensation for overtime.

Vii FOREIGN WORKERS

Citizens of all EU member states, EEA member states (i.e., Liechtenstein, Iceland and Norway) and Switzerland are free to take up employment in Germany.

Citizens of third countries need a residence and work permit to be allowed to work in Germany. Persons willing to take up work in Germany are generally required to apply for the residence and work permit before coming to Germany. Citizens of certain countries (e.g., Australia, Canada, New Zealand and the United States) are allowed to apply for a residence and work permit after their entry into Germany.

Whether a foreign worker is subject to German tax depends on whether he or she is a tax resident in Germany (i.e., if he or she has a residence or habitual abode located in Germany). An applicable double taxation treaty concluded between Germany and the country of residence of the foreign worker might restrict the right of Germany to tax remuneration.

Generally, all employees working in Germany, regardless of their nationality, are subject to the German social security system. Exceptions may apply if a foreign worker is only temporarily seconded to Germany or performs work in different states.

With regard to secondments within the EU, the EEA and Switzerland, the provisions of Regulation (EC) No 883/2004 of 29 April 2004 on the coordination of social security systems apply. According to this, employees can remain subject to the social security system of their home state if they are seconded to another member state. An agreement on the applicable social security system may be agreed with the authorities.

Germany concluded bilateral social security treaties with certain states (e.g., with Australia, Canada, Turkey and the United States), which also relate to employee secondments. These social security treaties do not necessarily cover all components of the statutory social security system.

As a general rule (which applies if an employee is seconded from a state with which Germany did not conclude a social security treaty or if any such treaty does not cover a specific component of the German social security system), an employee who is temporarily seconded to Germany under his or her employment contract with a foreign company is not subject to the German social security system (‘inward radiation’).

Whether a foreign worker is protected by German labour and employment law generally depends on the law applicable to the employment relationship. Such law needs to be determined on the basis of conflict of laws rules (in Germany Regulation (EC) No 593/2008 on the law applicable to contractual obligations (Rome I)). Under that Regulation, the parties to an employment contract can generally freely choose the law that shall govern the contract (subject to mandatory statutory provisions under the law that, in the absence of choice, would have been applicable). The Regulation also includes provisions determining by which law the employment contract is governed in the absence of a choice of law.

Viii GLOBAL POLICIES

German law does not require companies to set up any work rules. Often, internationally active groups (in particular, those whose parent company is subject to the Sarbanes-Oxley Act) wish to implement global policies applying to all companies of the group (e.g., global code of business conduct or the like).

If there is a works council, the implementation of a company policy in Germany may trigger co-determination rights of the works council. The co-determination right does not necessarily have to relate to the whole policy but may – from a legal perspective – be restricted to certain provisions contained therein. If such a co-determination right exists, implementation of the respective provisions of the company policy requires the works council’s consent.

If there is no works council, the company may implement the policy under the employer’s right to instruct its employees if the policy specifies or pertains to obligations that are already (an implied) part of the employment relationship. An employer’s instruction does not require a specific form. An email, note or letter would be sufficient. However, additional obligations or prohibitions going beyond implied obligations under the employment relationship would require employees’ consent.

If a company implements a company policy by means of an employer’s instruction, it is recommendable – but not mandatory – to have the employees confirm receipt and acknowledge the company policy.

Alternatively, a company policy may be implemented based on employees’ consent, namely, by agreement with the employee.

There is no legal obligation to have a company policy translated into German. However, breaches of a company policy can only be disciplined if the company can prove that the respective employee has sufficient command of the language in which the company policy is written. It is therefore recommendable to prepare a translation if not all employees have sufficient command of that language.

Ix TRANSLATION

There is no legal obligation under German law to translate employment documents into German or the employee’s native language. However, it is recommendable to prepare at least a German translation if not all employees have sufficient command of the language in which the employment contract or company policy is written.

X EMPLOYEE REPRESENTATION

i Works councils

Works councils can be elected in operations with at least five employees. There is no legal obligation to establish a works council. If employees decide to elect a works council, the employer cannot prevent the employees from doing so.

The number of works council members depends on the number of employees employed in the operation.

In operations with more than 200 employees, a certain number of works council members (depending on the number of employees employed in the operation on a regular basis) are released from their normal work duties to only perform works council work.

Regular works council elections take place every four years in the period between 1 March and 31 May of that calendar year. The next regular works council election will take place in 2018. The works council members are generally elected for a term of four years.

If a company has more than one operation, a joint works council is to be established at the company level. The works councils send delegates to the joint works council. The joint works council is competent for matters relating to the company. Also, the local works councils can delegate matters to the joint works council.

A group works council can be established at the level of the parent company of a group in Germany. It is competent for matters pertaining to the whole group.

An economic committee is to be established in companies employing more than 100 employees on a regular basis. The economic committee is responsible for discussing economic matters with the management of the company and informing the works council.

Managerial employees can elect their own representative body where there are at least 10 managerial employees in an operation.

The rights and powers of the works council are stipulated in the Works Council Constitution Act. They are far-reaching and can extend from information rights, consultation rights and negotiation rights to what are known as co-determination rights. Participation rights of the works council are of particular importance in the event of an operational change (e.g., downsizings).

Works council members, former works council members (whose term of office ended less than one year ago) as well as certain employees who engaged in connection with the election of the works council enjoy special protection against dismissal.

Works council members are entitled to their regular salary when performing works council work. In addition, they are allowed to participate in any necessary (external) training. The employer has to bear the costs in this regard. In addition, it has to bear the costs resulting from the work of the works council (e.g., the costs for hiring a certain specialist as an advisor of the works council) and provide the works council with all necessary equipment to perform its work (e.g., an office, computer, telephone, etc.).

ii Employee representatives on supervisory boards

If, in particular, a German limited liability company or stock corporation employs between 501 and 2,000 employees in Germany on a regular basis, it is subject to the provisions of the One-Third Co-Determination Act. As a result, one-third of the seats of the respective supervisory board have to be filled by employee representatives.

Under the German Co-Determination Act, a co-determined supervisory board must be established, in particular, in all German limited liability companies and stock corporations having more than 2,000 employees on a regular basis. As a result, 50 per cent of the seats of the supervisory board have to be filled by employee representatives. The Co-Determination Act provides for mandatory rights of the supervisory board (e.g., appointing and removing the members of the management board).

Certain companies that are listed or subject to co-determination (generally those employing more than 500 employees on a regular basis) must establish targets for the female quota on certain management levels. Listed companies that are subject to co-determination must also implement a quota of at least 30 per cent men and 30 per cent women on their supervisory boards.

iii Unions

Employees can also get involved with unions. Employers are usually not entitled to ask employees whether they are union members. Also, the employer must not discriminate against employees on account of their union membership.

Xi DATA PROTECTION

i Requirements for registration

Under the German Federal Data Protection Act, the employer is permitted to collect and process its employees’ personal data if the employee has granted his or her consent or if a statutory provision or other legal provision (in particular, a works agreement) allows for such data processing. It is generally permissible to process data to the extent this is necessary for the purposes of the employment relationship. Beyond that, data processing is only permissible to a very limited extent, accompanied by a careful weighing of the legitimate interests of the employer and the employee.

ii Cross-border data transfers

Transfers of personal data to countries inside the EU and EEA area are allowed under the same conditions as data transfers within Germany. They are not subject to the approval of the supervisory authorities.

Data transfers to countries outside the EU and EEA area (third countries) are permitted only if the recipient of the data can ensure an ‘adequate level of protection’ of the data.

The European Commission has determined with regard to a number of countries that they have an adequate level of protection. In other countries, an adequate level of protection can be ensured by individual agreements with the data recipient or permits issued by supervisory authorities. Data transfers to the United States have been particularly problematic. After the ECJ declared the Safe Harbor Decision of the European Commission invalid on 6 October 2015 (Case No. C-362/14, Schrems), data transfers to the United States were only permissible on the basis of standard contractual clauses or individual permits. On 12 July 2016, the European Commission adopted the EU–US Privacy Shield, which now governs data transfers to the United States.

iii Sensitive data

Information on a person’s racial or ethnic origin, political opinions, religious or philosophical convictions, union membership, health or sex life is considered to be sensitive data. Sensitive data may only be processed by the employer in rare cases where this is explicitly permitted or required by statutory provisions (e.g., notification duties toward the statutory healthcare fund, accident insurance and pension insurance).

iv Background checks

Background checks by the employer are allowed but must be limited to issues that are significant for the specific position. With regard to checks of criminal records, only prior convictions may be requested which relate to the work of the employee or applicant. When performing background checks, the employer may not access information from social networks such as Facebook. On the other hand, it may evaluate information on the employee or applicant from professional networks such as Xing or LinkedIn.

Xii DISCONTINUING EMPLOYMENT

i Dismissal

The possibilities for dismissing an employee are limited by the Dismissal Protection Act. This Act applies to employees who:

  • a have completed at least six months service with the employer; and
  • b are employed in an operation with more than 10 employees.

Under the Dismissal Protection Act, the termination of an employment relationship needs to be justified on objective grounds, these being:

  • a operational reasons (i.e., redundancies);
  • b conduct-related reasons (i.e., misconduct); or
  • c reasons related to the person of the employee (e.g., inability to perform the work due to long-term illness).

In particular, with regard to terminations for operational reasons, there must not be any vacancies within the company on the same or lower hierarchy levels that could be filled by the affected employee.

A dismissal for good cause with immediate effect is possible under circumstances that make it unacceptable for the employer to employ the employee until the expiration of the notice period (e.g., fraud against the employer).

Any works council must be heard prior to the issuance of each notice of termination. The works council cannot veto the termination.

The applicable notice period must be observed. It can be stipulated in the individual employment contract, collective bargaining agreement or statutory law. Statutory law provides for notice periods depending on the employee’s years of service (ranging from four weeks during the first two years of service, to up to seven months after 20 years of service).

Employees continue to be employees of the company during the notice period, namely, a unilateral payment in lieu of notice is not permissible. Employees may generally be released from the duty to work (i.e., gardening leave).

Any notice of termination must be in writing and it must be signed by a person authorised to legally represent the company.

Employees can challenge the validity of the termination by filing a dismissal protection suit with the competent labour court. There is no discovery or jury trial under German law.

If the labour court finds a dismissal to be unlawful, it can, from a legal perspective, only award reinstatement; in other words, generally, it cannot grant a severance payment. In addition, the employee would be entitled to back pay.

Although the legal consequence of an invalid dismissal is reinstatement, approximately 90 per cent of the dismissal protection suits are settled in court. The employer pays a severance and the employee accepts the termination. The severance is usually paid in addition to the notice period.

The employer can always offer the employee to conclude a mutual termination agreement. A mutual termination agreement usually provides for the termination of the employment and the payment of a severance.

There is no statutory formula for calculating severance payments. The following formula is often applied: severance payment = factor × gross monthly salary × years of service.

The factor usually ranges between 0.5 and 1.5.

ii Redundancies

The dismissal of employees for operational reasons (i.e., redundancy) is generally permissible if a position (job) is eliminated. A redundancy does not automatically result in the termination of the individual whose job ceases to exist. Instead, the employee to actually be dismissed must be determined by means of a social selection procedure. Social selection procedure means that from a group of comparable employees, the individual with the least need for social protection in terms of age, years of service, maintenance obligations and disability is to be terminated.

The works council has many more rights in the case of an operational change (e.g., mass redundancy). If a planned restructuring constitutes an operational change, the employer must negotiate a reconciliation of interests regarding the scope of the restructuring and its implementation (in particular, steps and timing), and a social plan with the works council (usually providing for severance payments). Again, there is no statutory formula for calculating the severance payments. In practice, formulas similar to the one described above (see Section XII.i, supra) are commonly used in social plans.

It should be noted that the conclusion of the proceedings on a reconciliation of interests and a social plan does not implement the redundancies. The employer still has to implement the redundancies concerning the individual employees by issuing notices of termination or concluding mutual termination agreements.

If a substantial reduction in personnel constitutes a mass redundancy under German law, the employer has to notify the mass redundancy to the employment agency. A mass redundancy occurs if the employer dismisses a certain number or portion of its employees employed in an operation within 30 calendar days. The employment agency does not review whether the redundancies are justified. The procedure is more of a formal requirement, which is, however, a precondition for validity of the dismissal.

Xiii TRANSFER OF BUSINESS

The Acquired Rights Directive (Directive 2001/23/EC) is a European directive whose primary intention is to protect the rights of workers on account of a transfer of business. In Germany, the Acquired Rights Directive has been implemented in Section 613a of the German Civil Code.

A transfer of business occurs if an economic entity is transferred by way of legal transaction to a third party (transferee) who continues to operate the economic entity. As a consequence, all employment relationships that are allocated to the economic entity transfer with all rights and obligations to the transferee by operation of law.

In order to determine whether an economic entity has been transferred in the specific case, the following seven criteria need to be considered:

  • a type of business involved;
  • b transfer of tangible assets;
  • c transfer of intangible assets;
  • d assumption of personnel or part of the personnel by the transferee;
  • e transfer of customers;
  • f similarity between activities before and after the transfer; and
  • g duration of any suspension of activities.

It should be established whether an entity is an asset-intensive business (e.g., a production plant) or a labour-intensive business (e.g., a consulting firm). In the case of an asset-intensive business, a transfer of business can occur simply by taking over the relevant assets and continuing the business. With regard to labour-intensive businesses, a transfer of business occurs if the transferee assumes an essential part of the workforce in terms of numbers and knowledge or skills.

If a transfer of business occurs, all rights and obligations under the employment relationship transfer to the new employer by operation of law. Only the employment relationships of active employees transfer. The employment conditions remain unchanged.

The transferor and the transferee are obliged to notify the employees who are subject to a transfer of their employment relationship. The Federal Labour Court has interpreted this obligation very broadly.

Under German law, the employees affected by a transfer of business may generally object to the transfer of his or her employment relationship within a period of one month after receiving a proper notification letter. If the employees have not been properly informed (i.e., if the notification letter does not meet the standards set by statutory law and case law), there is no statutory period during which the employees must declare their objection – basically they can object to the transfer without time limitation. If the employee objects to the transfer, he or she remains an employee of the transferor, in other words he or she does not automatically resign.

Termination of the employment relationship of an employee due to the transfer of business is ineffective. Terminations for other reasons are permissible subject to the general rules.

Xiv OUTLOOK

i Proposed new statute on equal payment of women and men

Currently, a new statute on equal payment of women and men is under discussion. Companies employing more than 200 employees on a regular basis shall, at the employee’s request, reveal the remuneration of comparable employees. Moreover, companies employing more than 500 employees on a regular basis shall be obliged to establish equal payment of women and men and report progress.

At the moment it cannot be assessed whether this proposed legislation will be finalised prior to the general election in 2017.

ii EU General Data Protection Regulation

From 25 May 2018, the EU General Data Protection Regulation will be applicable. It stipulates that the Member States may provide for more specific rules to ensure the protection of employees’ personal data, in particular with regard to recruitment, the performance of the employment contract, management, planning and organisation of work, equality and diversity, health and safety, protection of employer’s or customer’s property, rights and benefits on an individual or collective basis and the termination of the employment contract. The German government’s coalition agreement contains the commitment to establish a national data protection standard that exceeds the European data protection standard. In August 2016, a draft bill was published, which suggests only minor adjustments to the current provision on protection of employees’ personal data.

Footnotes

1 Thomas Winzer is a partner at Gleiss Lutz.