The German labour courts regularly have to decide on the enforceability of clauses in employment contracts that declare overtime hours to be deemed compensated by payment of regular remuneration. When the Federal Labour Court decided on such contractual provisions almost 10 years ago in light of the then modernised law on general terms and conditions, it provided guidance as to when such lump sum compensation clauses may be admissible and what constraints otherwise have to be observed. A significant number of legal disputes in this area remain.
The fact that lump sum compensation clauses still appear in mostly inadmissible forms in more recent employment contracts potentially results from employers' aim to save not only the cost of the remuneration, but also considerable organisational effort. Offering overtime compensation in addition to regular remuneration requires diligent time recording. This is especially cumbersome in a world in which employers and employees alike want working models to be agile and allow for considerable flexibility. If it were not for a potential general obligation under the EU Working Time Directive (2003/88/EC) to record all working time from beginning to end,1 the common nine-to-five clock-in-and-clock-out working model would be unfashionable.
Essentially, an employer can try to implement lump sum compensation for overtime work in two different ways. Besides contractual clauses in employment agreements, it is also possible to negotiate a provision for (lump sum) overtime compensation in works agreements. In both cases, the following important aspects must be considered.
General terms and conditions
As a general rule, clauses in employment contracts are considered general terms and conditions. Exceptions apply where clauses are individually negotiated between employer and employee. However, this is rarely the case. It may apply to specific clauses on, for instance, reimbursement of relocation expenses or the approval of certain side activities. Clauses on remuneration and working hours are typically prepared and proposed by employers without employee input, so that such clauses are typically viewed as general terms and conditions.
As a consequence of this classification, the respective clauses in employment agreements must comply with the law on general terms and conditions as set out in the Civil Code. Such law applies to all contracts between consumers and entrepreneurs, including employment contracts. With regard to compensation clauses for overtime, Section 307(1), Sentences 1 and 2 of the Civil Code is particularly relevant. According to this provision, general terms and conditions may be ineffective if they are too vague or inadequately disadvantage consumers. The Federal Labour Court applies these abstract legal requirements in the case of compensation clauses as follows:
- The contractual clause must be clearly understandable. It is permissible only if it indicates which services it will cover and to what extent. At the time that the contract is concluded, the employee must be able to determine what they have to expect and what services – in this case how many (additional) working hours – they must provide at the maximum for the agreed remuneration. The central requirement is a sufficiently determinable amount of overtime hours.
- Care must also be taken to ensure that general terms and conditions do not inadequately take advantage of consumers (ie, employees). If consumers are overburdened – in particular, in relation to compensation – this can lead to the invalidity of a clause. With regard to a lump sum compensation clause, employers must not be able to unilaterally and substantially change the ratio between working time and remuneration in their favour. An example of such inadequate disadvantage would be a compensation clause according to which all overtime is deemed compensated by payment of the regular compensation. In this case, there would be a considerable imbalance between the work owed and the pay, which would render the clause invalid and unenforceable from the outset.
Compensation clause agreed by works agreement
In contrast to the one-sided clause in employment contracts, works agreements do not constitute general terms and conditions as they are negotiated at eye level between employers and the works council. The law on general terms and conditions does not apply to works agreements. Nevertheless, strict principles must also be observed in this case.
Recently, a corresponding clause was the subject of legal proceedings before the Federal Labour Court.2 This case is a good illustration of what must be considered and what can lead to the invalidity of overtime compensation clauses in works agreements. One of the provisions of the works agreement at issue was that for certain employees, including the plaintiff, compensation must be paid only in the event of regular overtime. Nevertheless, the plaintiff demanded compensation in court for the overtime that he had worked. The Federal Labour Court ruled in the plaintiff's favour. The court justified its decision as follows:
- Clauses in works agreements must satisfy the requirement of certainty and clarity of standards. The contested works agreement, and in particular the term 'regular overtime', did not meet such requirements. For employees falling within the scope of the works agreement, it was unclear what 'regular overtime' actually meant. An interpretation of the clause in the context of further regulations of the works agreement offered no additional clarity.
- The overtime clause in the works agreement in question had another deficiency that ultimately contributed to its invalidity: it violated the principle of equal treatment under the Works Constitution Act. The Federal Labour Court classified it as inadmissible that overtime hours of employees who regularly worked overtime should be compensated on a lump sum basis, whereas overtime hours of colleagues who worked overtime only irregularly should be compensated according to their actual number of overtime hours. One of the concerns with this approach has been that, if there was no upper limit for overtime hours in each category, more overtime can be worked even in the case of irregular overtime than in the case of regular overtime.
The Federal Labour Court's decision reiterates that similar standards apply to works agreements and employment contracts in terms of certainty and transparency. A person affected by an overtime clause must be able to determine whether and to what extent they are entitled to overtime pay. In addition, clauses in works agreements must comply with the statutory principle of equal treatment pursuant to the Works Constitution Act. Therefore, lump sum compensation for overtime work determined by a works agreement does not automatically provide greater legal certainty than overtime clauses in employment agreements.
Legal consequence of invalidity
The invalidity of clauses on lump sum compensation for overtime work does not always result in additional payment obligations for employers. The Federal Labour Court has decided that certain groups of employee are not entitled to additional compensation for overtime. The decisive differentiation criteria are primarily the amount of pay and the type of employment. For employees who are not considered higher earners or who do not owe services of a higher kind there is a general assumption that, unless otherwise agreed, remuneration is to be calculated and paid by the actual number of hours worked. Without a proper clause on lump sum overtime compensation, these employees may also demand remuneration for every additional hour of work performed. Although the Federal Labour Court emphasises that the differentiation between high earners and normal earners must always be determined based on the circumstances of an individual case, the social contribution assessment ceiling in the German state pension insurance is viewed as a good limit. Employees who earn more than the assessment ceiling are viewed as higher earners, whereas employees who earn less are viewed as normal earners. The assessment ceiling is adjusted regularly. In 2020 it will be €82,800 (for West Germany) and €77,400 (for East Germany). If an employee's pay is above that limit, they can no longer objectively expect their additional working time to be remunerated.
Inevitably, the question arises as to what an effective lump sum compensation clause might look like. In the interests of certainty and transparency, it is advisable to quantify the exact number of overtime hours that will be deemed compensated by payment of regular remuneration. In employment agreements, the number of uncompensated overtime hours must not be too high to avoid inadequately disadvantaging employees. As a rule of thumb, overtime hours equalling 10% to 25% of an employee's regular weekly or monthly working time are acceptable. For employees at the lower end of the pay scale, the recommendation is to lean more towards 10%, whereas employees with a remuneration at the higher end (but still below the social contribution assessment ceiling) can be expected to work up to 25% in addition to their regular weekly or monthly working time without extra overtime compensation. Such an amount does not inadequately disadvantage the employee and can be clearly defined. If overtime compensation is governed by works agreements, it may be recommended to agree on the same percentage of working hours that are deemed compensated by payment of regular remuneration. Otherwise, in light of the Federal Labour Court's recent decision, the courts could potentially view and differentiate as a violation of the principle of equal treatment under the Works Constitution Act.
Even if employers' desire to simplify the handling of overtime compensation is understandable, lump sum compensation clauses are suitable only to a limited extent and involve a high risk of unenforceability. In this respect, the implementation of the latest European Court of Justice case law on the measurement of working time also promises to give new impetus to the issue. The general prognosis is that soon each employer will be obligated to fully record each employee's working time (ie, not only overtime) in an appropriate way. Even if exceptions remain permissible depending on the type and size of the company and the work that is being performed, it is nevertheless expected that a larger number of employees will become aware of how many hours they actually work. This may fuel expectations for additional compensation. It is likely that many existing clauses on compensation of overtime work will be put to the test.
An earlier version of this article was first published in Labor Law Magazine.
1 ECJ decision of 14 May 2019, case C-55/18.
(2) Decision of 26 June 2019, case 5 AZR 452/18.
This article was first published by the International Law Office
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