The Employment Law Review: Germany
The relationship between employers and employees is extensively regulated in Germany 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 has 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 be regulated by collective bargaining agreements (concluded between an employers' association or a single employer and a union) and works 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).
Year in review
i Trade Secrets Act
The Trade Secrets Act has applied since 26 April 2019. It implements Directive (EU) 2016/943 of the European Parliament and of the Council on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure into national German law with the aim of establishing homogenous protection of trade secrets.
The Act summarises the protection of trade secrets formerly contained in various laws and introduces some new content, notably a legal definition of the term 'trade secret'. It requires that the owner of a trade secret apply 'appropriate' measures to ensure non-disclosure, verifiable, inter alia, through measures such as comprehensive confidentiality agreements with employees and post contractual non-competition clauses. In addition, the Trade Secrets Act implements exemptions to protect whistle-blowers, journalists and employees.
ii Tax Act relating to Brexit
The Tax Act relating to Brexit came into force on 29 March 2019. One legislative purpose of the Act is to make Germany more attractive as a business location for financial institutions in view of the expected withdrawal of the United Kingdom from the European Union. The aim is to minimise employment-related risks of significant institutions in the financial sector in relation to 'risk takers' (i.e., making it easier to terminate employment relationships of risk takers). Employees qualify as risk takers if they may have a material impact on the overall risk profile of the institution.
The Act includes provisions under which highly paid material risk takers (as defined in the Remuneration Ordinance for Institutions) will, for the purposes of protection against dismissal, be treated as equivalent to persons in senior positions who are authorised to hire and dismiss employees independently. As a consequence, these employees can be dismissed unilaterally, without any reasons being required, against the payment of severance (all other employees need to agree to a termination of contract against payment of severance); that is to say, the bargaining power of these risk takers has been limited. However, this will affect only material risk takers in major institutions whose annual fixed remuneration exceeds three times the income threshold in the general pension insurance scheme (i.e., in 2019, €241,200 (former West Germany) and €221,400 (former East Germany)).
For other employees in the financial sector, the rules on protection against dismissal remain unchanged.
i Fixed-term employment and prohibition of previous employment
According to Section 14(2), sentence 2 of the Act on Part-Time and Limited Term Employment, the limitation of fixed-term employment contracts will be null and void if the individual has been employed by the employer previously ('prohibition of previous employment'). This means that the employer may not validly conclude a fixed term contract with an individual if that individual has been in its employ at any time in the past. This practice had been criticised over time and, as a consequence, has become the subject of case law. Following the Federal Constitutional Court's ruling that the case law, which had allowed a fixed-term employment relationship with the same employer after a three-year break, was unconstitutional,2 the Federal Labour Court was required to revise its decisions to comply with this ruling. According to the Federal Constitutional Court, in (rare and) extreme cases, fixed terms are valid despite previous employment to avoid unreasonable results (e.g., in the event that the earlier employment relationship was 'very long ago, very different in nature or has been of a very short duration'). According to the recent) decisions by the Federal Labour Court, neither is a time period of eight years a 'very long' period nor can previous employment of nine or six months qualify as 'very short duration'.3 In its latest decision, the Federal Labour Court ruled that previous employment that was in place 22 years ago may qualify as 'very long ago'.4 In this case, it was possible to conclude a new fixed-term contract despite the prohibition under Section 14(2), sentence 2 of the Act on Part-Time and Limited Term Employment .
In the first four months of 2019, the Federal Labour Court made several decisions regarding vacation entitlement.
In one of these cases, on 19 February 2019, the Court decided that an annual vacation entitlement would normally lapse only if the employer had previously duly informed employees of their specific holiday entitlement and the relevant periods of expiry.5 How the notification of this individual information to each employee shall be implemented in practice is yet to be seen.
Basics of entering into an employment relationship
i Employment relationship
There is no legal obligation to conclude an employment contract in writing. However, according to the Act on the Recording of Essential Employment Terms, an employer must lay down the essential agreed employment terms in writing, sign it and provide its employee with this record no later than one month after commencement of the employment.
In any case, it is recommended 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 an employer and an 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 past. 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 employee to give consent or the employer to issue a notice of termination with the option of altered conditions of employment. The employer and the employee can mutually agree on an amendment or change to 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 the 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. 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 to the employment agency for a company number. This number is necessary with regard to forwarding social security contributions to the competent authorities.
People 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 employee's gross monthly salary 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.
During the course of an employment relationship, employees are bound by a statutory contractual non-compete obligation.
The employer and the 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.
i General principles
Wages and salaries are usually stipulated in the employment contract and collective bargaining agreement.
As of 1 January 2020, the statutory minimum wage is €9.35 gross per hour.6 The increase is based on a decision by the Minimum Wage Commission, which proposed an adjustment every two years. 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 €9.35 gross per hour. In addition, minimum wages apply to certain industries (e.g., cleaning services, security services, 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 apply to night work. Employees need to have an uninterrupted rest of at least 11 hours after finishing a day's work.
Employees are allowed to work overtime up to the limits stipulated by the Working Time Act. The employment contract needs to include provision for working additional hours. 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, which usually range from 25 per cent on regular working days to 100 per cent for work carried out 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.
Citizens of Switzerland and all Member States of the European Union and the European Economic Area (i.e., Liechtenstein, Iceland and Norway) 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 a residence and work permit before travelling 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 arrival in 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 European Union, the European Economic Area 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 has concluded bilateral social security treaties with certain states (e.g., 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 has not concluded 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. This 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.
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).
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 recommended – 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 employees.
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 advisable to prepare a translation if not all employees have sufficient command of that language.
An employee is entitled to be granted parental leave (Elternzeit) by his or her employer until the child reaches the age of three. Of these three years, up to 24 months may be taken between the child's third birthday and the age of eight.
Parental leave enables an employee to take a break from work or to reduce working hours (part-time) to look after a child. An employee who takes parental leave is (partly) released from his or her work duties. The employee does not receive any pay from the employer. However, the employee can receive a parental allowance (Elterngeld) for 14 months (the full amount of monthly parental allowance) or for up to 28 months (half the amount of monthly parental allowance). Parental allowances are paid by the German state.
The parental allowance is a form of financial support for a family after the birth of a child. It amounts to 67 per cent of the net income in the last 12 months before the birth, but not less than €300 per month. The allowance is capped at €1,800 per month (for 14 months) or €900 (for 28 months).
There is no legal obligation under German law to translate employment documents into German or an employee's native language. However, a German translation should be prepared at the very least if not all employees have sufficient command of the language in which the employment contract or company policy is written.
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. An employer cannot prevent employees from electing a works council.
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 who are regularly employed in the operation) are released from their normal work duties to perform work for the council only.
Works council elections take place every four years between 1 March and 31 May and council members are generally elected for the full term of four years. The next regular works council election is due to take place in 2022.
If a company has more than one operation, a joint works council must be established at the company level. The works councils each send delegates to the joint works council. The joint works council is competent for matters relating to the company. Further, 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 must be established in companies employing more than 100 people 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 if 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., downsizing).
Works council members, former works council members (whose term of office ended less than one year ago) and certain employees who participated in the election of the works council enjoy special protection against dismissal.
Works council members are entitled to their regular salary when performing work for the council. 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 adviser of the works council) and provide the works council with all necessary equipment to perform its work (e.g., office, computer, telephone).
ii Employee representatives on supervisory boards
If, in particular, a German limited liability company or stock corporation employs between 501 and 2,000 people in Germany on a regular basis, it is subject to the provisions of the One-Third Participation Act. As a result, one-third of the seats of the respective supervisory board have to be filled by employee representatives.
Under the Co-Determination Act, a co-determined supervisory board must be established, in particular, in all German limited liability companies and stock corporations that employs more than 2,000 people 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 people 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.
Employees can also get involved with unions. Employers are usually not entitled to ask employees whether they are union members. In addition, employers must not discriminate against employees on account of their union membership.
Employee representation (protected concerted activity)
i Requirements for registration
Under the Federal Data Protection Act, the employer is permitted to collect and process an employee's personal data if he or she has given 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 that 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 European Union (EU) and the European Economic Area (EEA) 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 (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 Court of Justice of the European Union declared the Safe Harbour Decision of the European Commission invalid on 6 October 2015,7 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 about 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 towards the statutory healthcare fund, accident insurance and pension insurance).
iv Background checks
Background checks by an 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 that relate to the work of the employee or applicant may be requested. When performing background checks, the employer may not access information from social networks such as Facebook. On the other hand, it may evaluate information about the employee or applicant from professional networks such as Xing or LinkedIn.
The possibilities for dismissing an employee are limited by the Dismissal Protection Act. This Act applies to employees who have completed at least six months' service with an employer and are employed in an operation that has more than 10 employees.
Under the Dismissal Protection Act, the termination of an employment relationship needs to be justified on objective grounds, which are:
- operational reasons (i.e., redundancy);
- conduct-related reasons (i.e., misconduct); or
- reasons relating to the person of the employee (e.g., an inability to perform the work required owing 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 termination for good cause with immediate effect is possible under circumstances that make it unacceptable for the employer to employ the person until the expiry 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. However, the works council cannot veto the termination.
The applicable notice period must be observed. It can be stipulated in an individual employment contract, collective bargaining agreement or statutory law. Statutory law provides for notice periods depending on an 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 employed by the company during the notice period, which means 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 termination protection suit with the competent labour court. There is no discovery or jury trial under German law.
If the labour court finds a termination 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 termination is reinstatement, approximately 90 per cent of the termination protection suits are settled in court. The employer pays 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 the chance to conclude a mutual termination agreement. This type of agreement usually provides for the termination of the employment and the payment of severance.
There is no statutory formula for calculating severance payments, though the following is often applied: severance payment = factor × gross monthly salary × years of service. The factor usually ranges between 0.5 and 1.5.
The termination of employee contracts for operational reasons (i.e., redundancy) is generally permissible if a position (job) is eliminated. A redundancy does not automatically result in termination of the contract of the individual whose job ceases to exist. Instead, a social selection procedure is used to determine which employees must be dismissed. This 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 will be dismissed.
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 in Section XII.i are commonly used in social plans.
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 individual employees by issuing notices of termination or concluding mutual termination agreements.
Under German law, if a substantial reduction in personnel constitutes a mass redundancy, the employer has to notify the employment agency. A mass redundancy occurs if an employer dismisses a certain number or proportion of employees who are employed in an operation within 30 calendar days. The employment agency does not review whether the mass redundancy is justified. The procedure is more of a formal requirement, which is, however, a precondition for validity of the termination.
Transfer of business
The Acquired Rights Directive (Directive 2001/23/EC) has the primary intention of protecting the rights of workers during a transfer of business. In Germany, the Acquired Rights Directive has been implemented in Section 613a of the Civil Code.
A transfer of business occurs if an economic entity is transferred by way of legal transaction to a third party (transferee) that 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.
To determine whether an economic entity has been transferred in the specific case, the following seven criteria need to be considered:
- type of business involved;
- transfer of tangible assets;
- transfer of intangible assets;
- assumption of personnel or part of the personnel by the transferee;
- transfer of customers;
- similarity between activities before and after the transfer; and
- 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, an employee 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 employee has 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 employee must declare his or her objection – essentially, there is no time limit on when he or she can object to the transfer. If the employee objects to the transfer, he or she remains an employee of the transferor (i.e., he or she does not automatically have to resign).
Termination of the employment relationship of an employee because of the transfer of business is ineffective. Termination for other reasons is permissible, subject to the general rules.
As a result of the decision of the European Court of Justice of 14 May 2019 (Case No. C-55/18), employers are required to keep records of their employees' working hours. This decision may have a significant effect on German labour law as, until now, it had only laid down minor requirements for the recording of working time, breaks and rest periods. At present, in Section 16(2), sentence 1 of the Working Time Act, German law provides that employers are obliged to record employees' working hours that exceed those of the working day. This only affects working hours exceeding eight hours per working day as well as Sundays and public holidays. An additional obligation to record working time currently exists under Section 17 of the Minimum Wage Act solely for specific minor occupations. It is open as to whether and how the German legislature will shape the duty to record working time for all employees in the future and how this is likely to affect the businesses of employers.
1 Thomas Winzer is a partner at Gleiss Lutz.
2 Decisions of 6 June 2018, Case Nos. 1 BvL 7/14, 1 BvL 7/14, 1 BvR 1375/14.
3 Decisions of 23 January 2019, Case Nos. 7 AZR 733/16, 7 AZR 13/17.
4 Decision of 21 August 2019, Case No. 7 AZR 452/17.
5 Decision of 19 February 2019, Case No. 9 AZR 541/15.
6 When introduced on 1 January 2015, the standard minimum wage was €8.50.
7 Case No. C-362/14, Schrems.