Limitation periods in employment contracts - Minimum wage entitlements must be excluded!

What is a contractual limitation period?

Limitation periods mean that your entitlements under the employment contract expire if you do not raise a claim within a certain period after due date.

There are two types of limitation period in common: “One-level” and “two-level” clauses. Whereas the "one-level" clause states that the claims must be asserted (not in writing, rather text form is sufficient![1]) against the other contracting party up to a certain point in time after the due date, “two-level” limitation periods require that, after assertion of the claim, an action must be brought before the labour court before expiration of a further limitation period.

What is the purpose of limitation periods?

A number of employment contracts provide for limitation periods with the aim to ensure legal certainty and clarity as the standard statutory limitation periods of three years are too long in order to meet the needs and interest of the parties of an employment relationship. During such an extensive period claims and disputes accumulate and problems of evidence which may arise in the course of subsequent assertion, will occur.

What needs to be considered when agreeing on limitation periods?

Limitation periods are subject to the control of General Terms and Conditions (AGB) pursuant to the German Federal Civil Code. Accordingly, contractual provisions shall be deemed as ineffective if they unreasonably disadvantage the employee as the contractual party or if they are not transparent enough. Therefore it is especially not permissible to agree on a limitation period of less than three months or to demand a written assertion, rather text form shall be deemed as sufficient. 

What is new?

In its decision from 18 September 2018 (9 AZR 162/18), the Federal Labour Court clarified that a limitation period in the employment contract shall be deemed as ineffective if entitlements due to the Minimum Wage Act are not explicitly excluded.

Facts of the case

The employment contract of the plaintiff provides for a clause, stating that all mutual claims arising from the employment relationship shall expire if they are not asserted to the other contracting party within three months of their due date. The clause did not explicitly exclude any minimum wage claims.

In the course of a lawsuit due to an employer-side dismissal the parties have agreed that the employment relationship should be duly handled until termination date. However the employee objected to the pay slip and claimed for vacation compensation after expiration of the agreed limitation period.

Decision of the Federal Labour Court

The court has decided that the plaintiff is still entitled to vacation compensation, whereby the compliance with the limitation period is not of relevance at all, as this clause turned out to be ineffective as it was not transparent enough and therefore unreasonably disadvantages the employee as the contracting party. In consequence the whole clause has to be seen as null and void notwithstanding whether entitlements pursuant to the Minimum Wage Act are affected or not.

What practical consequences are to be expected?

The decision shows that it is advisable as an employer to pay attention to precise wording with regard to limitation periods. Taking the decisive arguments of the court into account, indispensable statutory claims shall be explicitly excluded from the limitation periods. Otherwise the whole limitation clause might be assessed as null and void.

The decision affects contracts concluded after 31 December 2014. For older contracts limitation periods should in any case be adapted in the course of contract amendments.