Employment Update, Germany

05 February 2008

Dr Martin Nebeling, Lutz Hoheisel

Legislation

Employment & social law changes

Crucial changes have recently emerged with regard to employment and social law; particularly, lower contributions and taxes, but also due in part to the rise of income thresholds, to higher duties.

The contribution to unemployment insurance has decreased from 4.2% to 3.3% of the gross salary, meaning the economy is relieved of more than €7 million per annum. But, an average wage-earner can retain €400 more of his gross earnings.

An extension of the period for obtaining unemployment benefit for elderly employees was intended for 1 January 2008. The government has submitted proposals but has not yet been decided by the Bundestag (lower house of German Parliament) and therefore, a reactive provision has been taken into consideration. According to the proposals, employees older than 50 are supposed to receive the ALG 1 (unemployment money I) for 15 months, employees older than 55 years for 18 months and employees older than 58 for 24 months. The Retirement Income Act, which has been in force since 2005 has also been changed. In view of pension taxation the taxable pension portion will increase from 54% to 56% in 2008.

Voluntary contributions paid into old age provision schemes or pension schemes are exempt for paying social security contributions and this will be continued indefinitely beyond 2008. The fourth and last grade of support for the Riester-Rente will also come into force. “Riester” private pensions were introduced on 1 January 2002. These are voluntary with contributions increasing gradually from up to 1% of gross salary in 2002 to 4% in 2008. They attract tax exemptions or matching cash contributions from the state, with special incentives for families with children. Benefits have to be taken as an annuity or paid in installments from age 60 and are taxed on receipt. This leads to an increase in the basic allowance for all the Riester savers to €154 and €185 per annum for child allowance.

[It is known that the omission of the monopoly on letters, extensions concerning the Arbeitnehmerentsendegesetz] (an Act in Germany, according to which minimum standards in certain branches for working conditions can be determined) have been pursued and that a minimum-wage for post service providers has come into force. This is valid for companies, predominantly dispatching letters. The minimum-wage for postmen now amounts to €9.80 in the west of Germany and €9 in the east. All other employees within this branch obtain a minimum-wage of €8.40 in the old federal states and €8 in the new federal states.

In view to the income threshold the following values apply for the national insurance branches as of January 2008:



































































































income threshold


2007


former

federal states,
in EUR:


new

federal states,
in EUR:


workers and employees


annually


63,000


54,600



monthly


5,250


4,550


social miners and mine-employees insurance


annually


77,400


66,600



monthly


6,400


5,400


unemployment insurance


annually


63,000


54,600



monthly


5,250


4,550


health insurance


annually


42,750


42,750



monthly


3,562.50


3,562.50






income threshold


2008


former federal states,
in EUR:


new

federal states ,
in EUR:


worker and employees


annually


63,600


54,000



monthly


5,300


4,500


social miners and mine-employees insurance


annually


78,600


66,600



monthly


6,550


5,550


unemployment insurance


annually


63,600


54,000



monthly


5,300


4,500


health insurance


annually


43,200


43,200



monthly


3,600


3,600






















2007


rate of contribution %


retirement insurance


19.9


social miners and mine-employees insurance; retirement insurance


26.4


unemployment insurance


4.2


long-term care insurance


1.95 (with children 1.7)


health insurance (general rate of contribution)


individual


Case law

Separation Agreement - Interpretation of a General Settlement Clause: Regional Labour Court for the State of Hesse (Hessisches Landesarbeitsgericht), Judgment dated 25 April 2007 – 6 Sa 32/07

Background

Many employers enter into separation agreements with employees who have to leave employment. Prior to the signing of such agreements, the parties negotiate on the issues to be covered by the separation agreement. More or less “for good order”, almost all separation agreements contain a so-called “general settlement clause” stating that with fulfilment of the settlement any mutual claims between the parties are fully and finally settled. From time to time, legal disputes arise as to whether such a general clause really waived all mutual claims. A recently published judgment of the Regional Labour Court for the State of Hesse illustrates that one should not rely on a general settlement clause.

The Judgment of the
Regional Labour Court

An employer entered into a separation agreement with one of its employees addressing all issues that had been discussed during the negotiations. One of the last provisions of the agreement was a general settlement clause: "The parties agree that with fulfilment of this [settlement] agreement any mutual claims out of the employment relationship are settled”. During the negotiations the parties obviously “forgot” to terminate and waive a post-contractual non-competition undertaking (“Non-Compete”) which was agreed on in the employment contract. According to Non-Compete, the employee had to refrain from competing with the employer for a two year period commencing on expiration of employment and was (in accordance with mandatory law) entitled to compensation amounting to 50% of the contractual remuneration last received.

Shortly after signing the separation agreement, the employee requested the agreed compensation from the employer. The employer responded that the general settlement clause fully waived the Non-Compete and that no compensation will be paid.

The former employee filed a successful claim for compensation with the local labour court of Marburg. By way of interpretation of the general settlement clause, the local labour court judged that the Non-Compete was not covered by the general settlement clause, as its rights and obligations arise after expiration of the employment relationship. The employer appealed to the Regional Labour Court and prevailed. The court considered the Non-Compete as part of the employment relationship and therefore ruled that the employer is not obliged to pay the compensation.

However, the Regional Labour Court considers the interpretation of the general settlement clause as an issue of general relevance and allowed the employee to appeal at the Federal Labour Court (Bundesarbeitsgericht). It remains to be seen how the Federal Labour Court will interpret the general settlement clause. There are good arguments to consider post-contractual obligations not as part of the employment relationship itself, and that the general settlement clause did not cover the Non-Compete.

Effect on employers

The judgment of the Regional Labour Court is a good example to remind employers to consider any issues that should or must be dealt with in a settlement. Any issues of financial nature like non-competes should be explicitly addressed in the separation agreement to avoid litigation with unclear chances of success.