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29 September 2010
A collective bargaining agreement applies to an employment relationship where the employer is either (i) a member of an employers' association which has entered into such an agreement, or (ii) the employer itself is party to such an agreement. Further, for a collective bargaining agreement to apply, the employee must be a member of the respective trade union which has entered into the collective bargaining agreement. Furthermore, the rights and obligations established in a collective bargaining agreement apply if the agreement is declared to be generally binding. In such cases the legal norms set forth in the respective collective bargaining agreement apply directly and with mandatory effect.
In addition, in order to ensure that the benefits of a collective bargaining agreement apply to employees who are not automatically bound by it (so-called 'outsiders'), individual employment agreements often include dynamic or static referral clauses. Usually, employers include such clauses in all employment agreements so as to avoid having to administer two separate salary schemes, and to avoid the situation whereby all employees immediately join the trade union in order to enjoy the benefits set forth in the collective bargaining agreement.
If a collective bargaining agreement applies directly and includes mandatory effect arrangements which depart from the legal norms set forth therein, such departures are permissible only if (i) they are authorised by the collective bargaining agreement, or (ii) they are to the employees' advantage.
Therefore, at all times but in particular in times of economic depression or financial crisis, the question arises as to whether employers can alter the terms of their employment relationships, even where this may be to the detriment of their employees. As such, employers often seek ways in which to escape from collective bargaining agreements in order to avoid the application of the legal norms set forth in the collective bargaining agreements. This update considers various methods through which this might be achieved and considers the various legal risks that each method entails.
Termination of contract with employers' association
Pursuant to Section 3(3) of the Collective Bargaining Agreements Act, a collective bargaining agreement continues to be binding until it expires or is terminated. Thus, a termination of membership of the employer's association will not end the responsibilities imposed by the collective bargaining agreement. It will only ensure that the employer is not bound by future collective bargaining agreements.
In addition, pursuant to Section 4(5) of the act, upon the expiration of a collective bargaining agreement the legal norms set forth in an agreement continue to apply. Thus, the employer is still bound to such legal norms until they are superseded by a subsequent arrangement. Such arrangements include collective bargaining agreements, works agreements and individual agreements.
A further problem arises from referral clauses. Dynamic referral clauses in employment contracts signed after January 1 2002 are not interpreted as equal treatment clauses. Therefore, future modifications of the collective bargaining agreement will be binding on the employees regardless of the employer's membership of the employers' association.
Under German labour law, an employer can close down its business or a section of its business and dismiss those employees who are affected by the closure for operational reasons. After that, the employer may enter into service agreements with such employees who are then deemed to be freelancers or else enter into agreements with other companies. Pursuant to such agreements former employees (working as freelancers) or companies are often taken on to render the same services as those rendered by the dismissed employees prior to their dismissal. The respective applicable collective bargaining agreement does not apply to workers employed on either of these bases.
However, such outsourcing leads to further legal risks. In order to be valid, a dismissal for operational reasons requires that the specific roles undertaken by the dismissed employees must have been eliminated due to external or internal causes. Where an employer enters into service agreements with freelancers or a separate company to render the same services as were previously carried out by dismissed employees, is highly disputable as to whether the specific roles in question have truly been eliminated. Therefore, such a dismissal may be deemed to be void. Works councils are unlikely to consent to such dismissals.
Moreover, employer that enter into service agreements with separate companies risk such process being deemed legally to be a transfer of business. Under German labour law a dismissal for operational reasons caused by the closure of a business or section of a business is void if a court holds that the outsourcing is legally a transfer of business.
In addition, outsourcing is usually deemed to be an operational change, which entails other statutory rights and obligations, such as the obligation to negotiate a reconciliation of interest with the works council or enter into a social plan, whereupon the affected employees are usually entitled to benefits such as severance payments.
Even after the process of outsourcing has been completed, further legal risks arise if the freelancers are self-employed in name only and therefore deemed to be employees. In such cases freelancers are still employees of the employer and the legal norms set forth in the collective bargaining agreement still apply. Freelancers who are self-employed in name only can also lead to serious financial burdens for the employer retroactively, as the employer will be obliged to pay social insurance contributions not only for the current year, but also for previous years. Moreover, the Tax Office may compel the employer to make up for unpaid withholding taxes. In order to avoid such legal risks, the scope of transfer of business plays a major role.
Transfer of business
A transfer of business is a change of ownership of an economic entity which maintains its identity after the transfer. Such transfers have particular implications with regard to outsourcing. Where an employer transfers its business or a section of its business to an acquirer by means of a legal transaction (ie, an acquisition), the employees affected by the acquisition become employees of the acquirer unless they object to the transfer of the employment relationship.
Pursuant to Section 613a of the Civil Code, rights and obligations set in a collective bargaining agreement will become part of the individual employment contract in the event of a transfer of business. No provisions set out in the collective bargaining agreement can be changed to the detriment of the employees until at least one year after the transfer of business. However, such one-year period is irrelevant if the collective bargaining agreement expires or the acquirer's business falls under a different collective bargaining agreement. If the acquirer is part of another collective bargaining agreement which governs the same matter, those terms displace the previous contract and the previous collective bargaining agreement is no longer binding.
In the event of a transfer of business, dynamic referral clauses are highly important. Dynamic referral clauses set in employment agreements entered into before 2002 are interpreted as equal treatment clauses. Therefore, the specific collective bargaining agreement that was binding on the seller at the time of the transfer of business will apply. However, if a new collective bargaining agreement in the acquirer's business is binding on those employees who are members of a trade union, the same agreement will be binding on 'outsiders' due to the interpretation of the clause as an equal treatment clause.
Dynamic referral clauses in employment contracts signed after January 1 2002 are not interpreted as equal treatment clauses. Therefore, future modifications of the previous collective bargaining agreement will be binding.
Entry into collective bargaining agreement with different trade union
Where collective bargaining agreements have been agreed with more than one trade union, different collective bargaining agreements apply to the employment relationships. If an employment relationship is covered by multiple collective bargaining agreements, those agreements apply alongside one another insofar as they differ in their content. If a matter is covered by more than one collective bargaining agreement, however, questions regarding the concurrency of the agreements and which agreement is to be applied arise. As a result of overlapping agreements, the legal rules applying to an employment contract often conflict. The Federal Labour Court only recently overruled the principle of uniformity whereupon only the most specific collective bargaining agreement will apply to the relevant employment agreement.(1) Thus, entry into more than one collective bargaining agreement can lead to a situation wherein numerous collective bargaining agreements apply to the employment relationships in the same business. Further, according to the latest ruling of the Federal Labour Court, it is possible that several collective bargaining agreements apply to each of the employment relationships. In such situations it is likely that whichever collective bargaining agreement is most to the employees' advantage will apply.
Leasing of employees
Employees are leased within a triangle of contractual relationships involving the agency (ie, the employer), the agency workers and the client. Thus, two contracts need to be entered into (i) a service contract between the agency and the client and, (ii) an employment contract, which regulates employment relationships between agency workers and the agency. The client is not the employer of the agency workers and so cannot be bound by a collective bargaining agreement. The employment relationship between the agency and the agency workers forms the legal basis for the employee's obligation to render his or her services.
Agencies that wish to contract employees commercially to clients for work are required to obtain a permit from the state authority; otherwise agency workers are deemed to be employees of the client. The law on agency work is based on the equal pay and equal treatment principles, pursuant to which agency workers are entitled to the same remuneration and benefits as comparable permanent employees of the client. Lower remuneration of agency workers is permissible only on a collective wage scale basis.
The employer can also transfer its business and lease the transferred employees back from the acquirer (ie, through a sale-and-lease-back). Sale-and-lease-back represents a particular category of outsourcing to which all the legal risks and problems associated with outsourcing, transfer of business and leasing of employees apply.
There are several possible methods for escaping from collective bargaining agreements. However, all such methods entail various legal and economic problems and risks. First, employers should consider their position carefully with regard to whether they should terminate their membership of the employers' association. The employer must also consider different legal possibilities and their legal and economic impact on the respective employment relationships and the company in order to ascertain the best way to solve the company's economic problems, to avoid the application of unfavourable modifications to a collective bargaining agreement and, most importantly, to protect the company from the negative legal consequences which can arise from transfers of business, outsourcing, entering into more than one collective bargaining agreement and the leasing of employees.
For further information on this topic please contact Marion Bernhardt, Bjoern Gaul, Reiner Kurschat or Bernd Roock at CMS Hasche Sigle by telephone (+49 30 20360 1406), fax (+49 30 20360 2000) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
(1) Decision 4 AZR 549/08, July 7 2010.
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