In light of the COVID-19 pandemic, more than half a million businesses in Germany have implemented short-time work. The temporary reduction of regular working time allows companies to reduce their personnel costs while maintaining their workforce and avoiding lay-offs. In order to partially compensate the reduction in remuneration for employees, the Federal Employment Agency pays between 60% and 80% (for employees with children between 67% and 87%) of the net loss in remuneration (up to certain salary levels) that results from the reduction of working hours.
Now that short-time work has been implemented, employers are faced with a number of practical issues relating to the day-to-day management of short-time work and the financial impact that certain circumstances might have. This article provides an overview of the practicable issues that employers must handle during short-time work periods.
Can employees engage in alternative employment during short-time work? If so, will this affect the amount of short-time work allowance?
Yes, unless prohibited by an individual's employment contract, employees are generally free to engage in alternative employment during short-time work. According to a new law (so-called 'social package II'), which passed the legislative process on 15 May 2020, income deriving from such a second job for periods ending on or before 31 December 2020 will not be credited against the short-time work allowance. This applies to the extent that the sum of the employee's total income during the grant of short-time work allowance (ie, the amount of the short-time work allowance, reduced salary due to short-time work (if any) and the amount of the salary of the second job) does not exceed the amount of the employee's regular salary from their main job (for which the short-time work was introduced). To the extent that an employee's total earnings exceed the remuneration that they would normally earn in their main job as a consequence of the second income, such earnings above the limit must be credited against the short-time work allowance. Employers should request full and timely information from their employees regarding side jobs that they engage in during short-time work periods and the remuneration received in order to avoid mistakes when calculating the short-time work allowance.
It should be noted that until recently (ie, 30 April 2020), only income derived from a second job in a so-called 'system-relevant profession and sector' was subject to the abovementioned commercial privilege. Income derived from second jobs outside of system-relevant professions and sectors, which employees took up while on short-time work, had to be fully credited against short-time allowance. System-relevant professions and sectors cover services that are indispensable for public life, security and the care of people, including:
- healthcare;
- energy and water supply;
- transport and passenger traffic;
- agriculture;
- the food industry; and
- the supply of food to people.
System-relevant professions are determined by the Ordinance for the Determination of Critical Infrastructures in accordance with the Law on the Federal Office for Information Security.
Apart from the aforementioned commercial privilege due to the new regulation, the employment law aspects should also be taken into account. The permissibility of the commencement of a second job during an ongoing employment relationship is often subject to limitations, which are typically set out in the respective employment contract. The (minimum) requirement in most employment contracts will include employees' obligation to notify their employer about a second job in advance. In some cases, the commencement of a second job may be subject to the employer's prior approval. Such approval could be given even if no business interests are affected.
Do employees continue to accrue holiday entitlements during short-time work periods? Can employees take holiday during short-time work periods and is it possible to take holiday only on 'work days'? Who will pay the compensation and what is the amount?
Before the implementation of short-time work is considered unavoidable and short-time work allowance can be claimed, employers must ensure that any legacy holiday (eg, 2019 holiday) is fully granted and taken. Holiday entitlements of the current calendar year are considered protected and do not have to be used.
Apart from that, unless otherwise agreed, the accrual of holiday entitlements continues during short-time work periods. If the working time is reduced to zero hours (so-called 'short-time work zero'), according to two landmark European Court of Justice (ECJ) decisions, it would generally be permissible to suspend the accrual of additional holiday entitlements for as long as short-time work continues.(1) However, before using this option, employers should assess the legal basis for existing holiday entitlements and how this can be amended in an enforceable manner.
Employees can continue to take holiday during short-time work periods. According to the functional guidelines of the Federal Employment Agency, holiday can even be taken on single days without jeopardising the ability to draw short-time work allowance (eg, to bridge time between the end of a stretch of short-time work and a weekend), provided that this is in line with the employee's wishes. On the other hand, the Federal Vacation Act and various collective bargaining agreements require employers to grant a certain minimum period of uninterrupted vacation (eg, 12 business days in accordance with Section 7 of the Federal Vacation Act). Otherwise, the holiday entitlement is not properly fulfilled. Therefore, during short-time work periods, employers should encourage employees to take longer stretches of holiday and avoid granting holiday on a single-day basis right before or after short-time work days.
Compensation for holiday days must be calculated based on standard compensation (ie, as if, during the 13-week reference period prior to the holiday day, the employee's remuneration was not reduced due to short-time work).(2)
Who pays compensation on public holidays and what is the amount?
Working hours which are simultaneously lost as a result of short-time work on a public holiday and for which short-time work allowance is paid on days other than public holidays will be deemed to be lost as a result of a public holiday.(3) As a consequence, remuneration for public holidays must be paid and borne by employers; the Federal Employment Agency pays no short-time work allowance for public holidays.
The amount of holiday pay depends on whether, without the public holiday, the respective employee would have worked full-time or reduced hours as per the short-time work schedule. If the employee would normally have worked full-time on the public holiday, they will also receive public holiday remuneration in the amount of the standard remuneration. On the other hand, if the employee had been assigned to reduced hours on this day on the basis of the short-time work schedule, they would receive public holiday remuneration only in the amount of the short-time work allowance (potentially increased by top-up payments that the employer makes in addition to the short-time work allowance). In practice, there is often no difference between the two scenarios as collective bargaining agreements, works agreements or individual agreements on the implementation of short-time work regularly determine that holiday pay must be made in the amount of the standard remuneration.
Are employees entitled to continuation of remuneration in the event of sickness during short-time work periods? Does it make a difference whether the sickness started before or after the short-time work began?
If an employee cannot work due to sickness during short-time work periods, they are entitled to short-time work allowance for the hours lost as a result of the short-time work (except on public holidays). If an employee cannot work due to sickness that began prior to the short-time work period, they are not entitled to short-time work allowance for the hours lost due to short-time work but rather receive sickness benefits from health insurance. In this case, the amount of the sickness benefits equals the short-time work allowance. The decisive point in time is the collective start date of short-time work for the respective business operation or department but not the first day of short-time work for the individual.
Employers owe continued remuneration for any remaining working hours that employees should have worked according to the short-time work schedule. The continued remuneration is calculated in accordance with the general principles. On termination of short-time work, the regular working hours will again be decisive for the calculation.
In any event, employees' entitlement to short-time work allowance (or sickness benefits in the amount of short-time work allowance) when they cannot work due to illness ends when the statutory six-week reference period for continued remuneration is exhausted. Compensation (including short-time work allowance) is then replaced by sickness benefits payable by health insurance.
What impact does short-time work have on occupational pensions?
Company pension commitments are principally not suspended during a short-time work period. Therefore, employers must pay the benefits or contributions that accumulate under an employer-funded company pension scheme. However, as many pension schemes use working hours or salary-based elements in their formulas to define the payable pension or contribution amount, employers that implement short-time work may benefit from an indirect cost-saving effect.
With regard to employee-funded company pension schemes on the basis of a deferred compensation arrangement pursuant to Section 1a of the Company Pension Act, the legal situation depends on the degree of short-time work. If the employee continues to work at reduced hours, they also continue to receive a (reduced) salary eligible for a conversion into a company pension entitlement. The deferred compensation arrangement continues to apply unless the parties amend or suspend it by individual agreement. On the other hand, if an employee's working hours are reduced to zero during the short-time work period, their salary is also cut to zero with the consequence that a deferral of compensation is no longer possible. The short-time work allowance paid by the Federal Employment Agency is considered a mere salary replacement payment and is therefore not eligible for a conversion into a company pension entitlement. However, pursuant to Section 1a(4) of the Company Pension Act, employees can maintain the company pension arrangement with their own contributions during such a period of continued employment without salary.
Notwithstanding the above principles, the legal consequences of short-time work on an employer's company pension obligations with regard to employees or involved pension providers depend on the circumstances in each individual case, including provisions of collective bargaining agreements or works agreements, where applicable. Given the complexity of the underlying legal framework and available case law, employers should seek professional support by competent legal and actuarial specialists to avoid liability risks.
Must employers increase the short-time work allowance by additional payments? What are the tax and social security law consequences if top-up payments are made? Do special rules apply to employees above certain income limits?
Employers may need to top up the short-time work allowance to a certain level. Such obligation may arise from a collective bargaining agreement, a works agreement or an individual agreement. While making top-up payments seems counterproductive in light of the savings that companies want to generate by reducing the number of regular working hours and compensation, in some cases, offering top-up payments is necessary to get consent from works councils or individuals to implement a short-time work scheme. In other cases, employers want to ease the financial impact on employees and offer top-up payments voluntarily. Top-up payments typically close the gap between the state short-time work allowance (which is 60% or 67%) and anything between 75% and 100% of the remuneration difference that the employee is suffering due to the short-time work. While there are companies at both ends of the spectrum, a common level is 80% of the income difference.
Top-up payments are exempt from social security contributions if together with the short-time work allowance they are less than 80% of the gross remuneration difference (up to a certain remuneration level). While so far, top-up payments have been considered taxable compensation, a new law is expected to come into force shortly, according to which top-up payments paid for periods between 1 March 2020 and 31 December 2020 will be tax-exempt up to the same level that they are exempt from social security contributions. In any event, unless otherwise agreed, any tax must be borne by the employee and will be withheld from their monthly compensation by their employer and paid to the tax office. It should be noted that provisions requiring the employer to top up the short-time work allowance to a certain percentage of the net pay difference can potentially be misinterpreted by works councils and employees. Therefore, employers should clarify in the respective provision of the works agreement or individual short-time work agreement that any tax incurred by payment of the top-up amount is to be borne by employees.
Short-time work allowance is generally provided with respect to only remuneration lost up to a certain remuneration level – the so-called 'social security contribution assessment ceiling' (BBG) in German state pension and unemployment insurance. The BBG equals a monthly gross compensation of €6,900 for West Germany and €6,450 for East Germany. Any remuneration lost above the BBG does not qualify for short-time work allowance. That also means that employers may need to offer even higher top-up payments to employees with higher salaries in order to get their consent to short-time work.
To what extent are working time accounts protected? Can they still be used during short-time work periods?
As a general rule, the implementation of short-time work is considered avoidable (and short-time allowance cannot be claimed) if and to the extent that working time credits can be used by employers to bridge downtime. Pursuant to the new rules on short-time work that were put in place by the legislature in March 2020 in response to the COVID-19 crisis, there is no longer a need to build up negative working time balances. However, in principle, any positive working time balances that are at the employer's disposal must be reduced first before short-time work allowance can be claimed. There are a number of exceptions to this rule. Protected from the requirement to be used with priority are:
- working time credits already earmarked for a certain purpose (eg, bridge days) based on binding agreements that are unrelated to the short-time work;
- flexitime accounts up to the maximum limit that employees may accrue based on the underlying flexitime agreement;
- absent any flexitime framework, working time credits equalling one working day that result from, for instance, shift handover activities of half an hour to one hour per day;
- certain working time credits for employees in the construction sector;
- time credits in long-term flexitime accounts;
- time credits in excess of 10% of the annual working time;
- time credits that have existed unchanged for more than one year (eg, the lowest number of accumulated hours in a working time account of the past 12 months); and
- working time frameworks existing specifically to react to volatile workloads or production fluctuation.
During short-time work periods, flexitime accounts can still be used to balance daily deviations in working time provided that the above limitations are taken into account.
Are there certain time recording requirements that employers must meet in order to be able to claim reimbursement of short-time work allowance from the Federal Employment Agency?
During short-time work periods, employers must ensure proper time recording. This also applies to business operations with otherwise flexible working time models or even trust-based working time. As part of the request for payment of the short-time work allowance and short-time-related social security contributions, employers must clearly and comprehensively demonstrate the following details to the Federal Employment Agency(4) for each employee affected by short-time work:
- regular working days per week;
- hours worked per day;
- hours per day not worked due to short-time work;
- hours per day not worked due to sickness (broken up into hours with continuation of regular remuneration and continuation of short-time work allowance);
- hours not worked due to holiday or other approved absence (eg, social hours); and
- hours of unapproved absence or unpaid leave.
Endnotes
(1) See ECJ decisions dated 8 November 2012, cases C-229/11 and C-230/11.
(2) See Section 11(1) of the Federal Vacation Act.
(3) See Section 2(2) of the Continuation of Pay Act.
(4) The Federal Employment Agency offers sample time sheets which can be downloaded online.
