German Labour Court Decision Forcing Employers to Reexamine Their Employment Contracts

It is rare for the highest German labour court to issue a decision that will require employers to take immediate action with respect to their employment contracts. On September 18, 2018, however, the Federal Labour Court issued such a ruling. The Court held that forfeiture clauses that do not explicitly exclude claims for the minimum wage under the Minimum Wage Act (Mindestlohngesetz) are void. This ruling impacts forfeiture clauses in employment contracts in Germany.

What is a forfeiture clause?

Forfeiture clauses provide that an employee's claims against the employer must be asserted within a certain period of time, or are forfeited. This period is normally three months. Such expiration clauses allow employers to limit liability arising from the employment relationship (e.g., compensation for overtime or for vacation entitlements).

Ruling of the Federal Labour Court

The decision was based on a typical situation in practice: An employee had sued for compensation for vacation entitlements after the termination of the employment relationship. His employment contract stipulated, among other things, that all mutual claims arising from the employment relationship would lapse if they were not asserted in writing against the other contracting party within three months of the cause of action giving rise to the lawsuit.  The Federal Labour Court sided with the employee, however, because the contractual clause was not clear and comprehensible, and did not exclude claims for the minimum wage under the Minimum Wage Act. The Court declared the entire contract clause invalid. The employee could therefore proceed with his claim for holiday pay.

It should be noted that this decision applies only to employment contracts. It does not affect the validity of any forfeiture clauses contained in tariff agreements.

What are the consequences for employers in Germany?

If a forfeiture clause is void according to this decision of the Federal Labour Court, claims of employees from the employment relationship cannot be forfeited. Such claims lapse according to the statutory limitation period (typically three years). Employers in Germany should review and revise their standard employment contracts. In addition, employers should consider whether other contractual provisions may have been based on the assumed effectiveness of contractual forfeiture clauses.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.