Issue: November 2018

GERMANY - Time to Review Standard Employment Contracts in Germany

By: André Zimmermann

A recent ruling of the Federal Labor Court will invalidate thousands of forfeiture clauses in employment contracts in Germany. Companies need to review and revise their standard employment contracts now and explore options to amend existing contracts to exclude potential liabilities. Otherwise there may be significant exposure for the employer. The time to act is now!

What Happened?

On September 18, 2018 the Federal Labor Court held that forfeiture clauses (i.e., language providing that any claims arising under the employment contract are forfeited if not exercised within a specific period) that do not explicitly exclude claims for the minimum wage under the Minimum Wage Act (Mindestlohngesetz) are invalid. This results in the ineffectiveness of thousands of forfeiture clauses in employment contracts in Germany.

What Does That Mean for Employers?

  • If the forfeiture clause does not meet these requirements, any claims of the employees are subject to the general statutory limitation period only. Depending on the nature of the claim, this period regularly is at least three years (commencing at the end of the year in which the claim becomes due).
  • Consequently, the lack of a valid forfeiture clause in the employment contract can lead to quite some uncertainty and financial exposure for the employer. For example, a terminated employee may bring substantial claims for overtime payments even a long time after having left the company.

What to do Now to Comply and Limit Liabilities?

  • Standard employment contracts used in Germany must now be adjusted to the new legal situation. Entitlements to the minimum wage under the Minimum Wage Act must be explicitly excluded from the scope of forfeiture clauses.
  • In addition, as for existing employment contracts, forfeiture clauses should be reviewed and adjusted in order to comply with these new requirements.

What is the Full Background?

In Germany, it is market standard to have forfeiture clauses in employment contracts, i.e., language providing that any claims arising under the contract are forfeited if not exercised within three months after their due date. This creates legal certainty, especially for the employer, since there is a clear cut-off date for any potential liabilities.

However, such clauses are subject to a specific terms and conditions control since they are considered to be standard business terms (Allgemeine Geschäftsbedingungen). Inter alia, such clause needs to be clear and understandable and may not unreasonably put the employee at a disadvantage. If a forfeiture clause does not comply with these requirements, it is deemed to be invalid.

Against this background, the Federal Labor Court held that forfeiture clauses that do not explicitly exclude entitlements under the Minimum Wage Act are null and void. The court is of the opinion that the forfeiture clause in the case at hand constitutes an unreasonable disadvantage to the employee, as it is not sufficiently clear and understandable to the employee that the minimum wage is not covered.

The Minimum Wage Act explicitly provides that any agreements limiting entitlements under the Minimum Wage Act are in effective. Until now, it was not clear how to handle this provision in standard employment contracts, particularly whether due to the terms and conditions control, particularly whether the forfeiture clauses need to specifically address that any entitlements to the statutory minimum wage are excluded.

While prevailing case law of local and regional labor courts tends to not consider this to be required, the Federal Labor Court now has come to believe the opposite is true. According to the ruling, this at least applies to employment contracts concluded after December 31, 2014, as the Minimum Wage Act entered into force on January 1, 2015.

To-Do’s for Employers

Companies with employees in Germany should now review their standard employment contracts and modify the wording of forfeiture clauses in their standard employment contracts and existing contracts. Otherwise, the forfeiture clauses may be ineffective and claims of employees would not lapse after expiry of the period laid down in the employment contract, but will generally continue to exist for three years after the due date.

André Zimmermann

Orrick, Herrington & Sutcliffe LLP