Introduction

It is common practice to use the customary industry wage level determined by collective bargaining agreements as a guideline when deciding on employee remuneration. This often applies even if the employer is not or no longer a member of an employers' association or party to a collective bargaining agreement.

But what happens if a (non-unionised) employer repeatedly passes on salary increases in accordance with collective bargaining developments in a certain collective bargaining territory and then later stops this practice? Are employees still entitled to a pay rise if the parties to a collective bargaining agreement decide on remuneration increases under such a collective agreement?

Company practice

This question arises because entitlements to benefits under employment law can be established by company practice. Even in the absence of a statutory basis for a claim, or an explicit individual or collective agreement, regular repetition of particular employer conduct which could suggest to employees that a payment or benefit is to be permanently granted to them may establish employee entitlement in terms of individual employment law. This often results in significant uncertainty in practice.

Clear indications required

However, according to case law, it cannot be assumed that merely granting a wage increase under a collective agreement means that the employer intends to pass on such increases in the future. Company practice can arise only if clear indications in employer conduct suggest that the employer intends to assume the increase on a permanent basis, even without being obliged to do so by a collective bargaining agreement. This was confirmed by the Federal Employment Court in a February 24 2016 decision (4 AZR 990/13).

No commitment to collective bargaining agreements

The determining factor for accrual of a claim based on company practice is how the recipient of the declaration understands both the declaration and the employer's conduct, taking into account all circumstances. On this basis, the Federal Employment Court assumed that the fact that the employer was not tied to a collective bargaining agreement illustrated the employer's intention not to increase salaries automatically in the future according to collective bargaining developments because, as a rule, an employer not bound to a collective bargaining agreement need not submit to the regulatory power of an employers' association. The result is that employees cannot recognisably assume an employer's permanent commitment.

Unforeseeable dynamics of wage development

According to the Federal Employment Court, the unforeseeable dynamics of wage developments and the personnel costs generated as a result argue against the employer's identifiable contractual willingness to regularly increase remuneration according to developments under collective bargaining agreements in a certain collective bargaining territory.

Continued payment of increased remuneration

If an employer which is not tied to a collective bargaining agreement repeatedly passes on to its employees an increase in salary according to developments under collective bargaining agreements in a certain territory, it will generally establish only the employees' entitlement to continued remuneration payments to the amount most recently granted. There is no entitlement for future wage increases under collective agreements to be passed on. This decision contains an important clarification and contributes to removing existing uncertainties in business practice with regard to company practice – at least concerning wage increases under collective agreements. Employers not tied to a collective bargaining agreement may thus continue to have employees participate in any wage developments under collective bargaining agreements or to base remuneration on the wages under collective agreements without thus automatically committing to future terms. It is important to consider this in corporate communications and to avoid relevant statements suggesting willingness to follow collective salary increases in the future.

No entitlement

Even in the case of an employer tied to a collective bargaining agreement, a relevant intention to make a legal commitment in terms of the future cannot generally be assumed without any contrary points to go on. If an employer tied to a collective bargaining agreement passes on an increase in wages under the agreement to all employees, regardless of whether the individual employee is covered by the agreement, the employer does not usually intend – according to the Federal Employment Court – to make a permanent (contractual) commitment beyond the period for which it is bound to the agreement without being able to terminate the collective bargaining agreement or leave the association. The court made this explicitly clear.

Consequently, an entitlement to have increases in wages under collective agreements passed on does not result from reference clauses in the employment contract if such clauses are to be construed as 'equal treatment clauses', meaning that they were agreed before January 1 2002. If the employer leaves the employers' association that concluded the collective bargaining agreement, such clause has only a static effect on the most recently applicable collective bargaining agreement.

Tips for drafting contracts

In view of the Federal Employment Court rulings on the interpretation of reference clauses, particular attention should be paid to precise wording when drafting contracts. Reference clauses agreed as of January 1 2002 must clearly result from the clause's wording that employees who are not trade union members will be treated in the same way as employees who are members, with regard to the applicability of the relevant collective bargaining agreement. The rebuttable presumption that union members are the only concern of an employer tied to a collective bargaining agreement no longer applies. With regard to employment contract clauses agreed as of January 1 2002 that provide for the applicability of collective bargaining agreements, it must thus still be determined on the basis of the wording whether a contractual entitlement to having future increases in wages under collective agreements passed on is established.

For further information on this topic please contact Björn Otto or Patricia Jares at CMS Hasche Sigle by telephone (+49 221 7716 195) or email (bjoern.otto@cms-hs.com or patricia.jares@cms-hs.com). The CMS Hasche Sigle website can be accessed at www.cms-hs.com.

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