The calculation of the minimum wage causes much uncertainty for companies. Now, the first court decisions have been made that provide a certain extent of legal security on this matter.

In its judgment of 13 May 2015 – 10 AZR 191/14, the Federal Labor Court decided that the minimum wage is also to be observed for holidays and in the calculation of the continued payment of wages during sickness. According to a decision of the Labor Court of Düsseldorf (judgement of 20 April 2015 – 5 Ca 1675/15, not yet legally-binding), a performance bonus may also form a component of the statutory minimum wage.

Background

For the first time ever, due to the new Minimum Wage Act (Mindestlohngesetz, MiLoG), as of 1 January 2015, Germany now has a statutory minimum wage in a current gross amount of € 8.50 per hour. Lower wages are possible up until 31 December 2017, inter alia,  by way of collective bargaining agreements, and generally binding collective agreements may stipulate higher hourly wages. The minimum wage must be granted every month and not on an annual average. Thus, a company must calculate how much it is paying its employees by dividing their monthly compensation by the number of hours worked by the employee. This amount must be at least € 8.50 per hour. However, the components of compensation to be used in this calculation are highly controversial.

Specifically, it is disputed whether variable components of compensation, benefits in kind, supplements or one-time payments are components of the minimum wage. Thus, the question arises as to whether these factors could  be considered in the calculation, or if they have to be viewed separately. Breaches of the Minimum Wage Act may result in monetary fines of up to € 500,000.00. Even if such monetary fines are significantly lower for the first breach, companies facing monetary fines starting at €2,500.00 may be temporarily excluded from invitations to tender of public contracting authorities in accordance with Section 19 of the Minimum Wage Act. In order to avoid circumvention of the minimum wage, Section 17 of the Minimum Wage Act introduced the duty to document the commencement, cessation and duration of the work of employees whose regular monthly salary is at or below €2,958.00.

As a reminder: Irrespective of the above, Section 13 of the Minimum Wage Act also stipulates the liability of contracting companies for the observance of the Minimum Wage Act by their subcontractors. It still has not been clarified whether (and to what extent) contracting companies are liable, in particular, for the observance of the Minimum Wage Act by contracted service and work contractors.

Calculation of the Minimum Wage

These two decisions provide an answer to the question of how a company is to calculate minimum wages. Whether supplements, variable compensation and special payments are to be included in the wage and, thus, the monthly base salary may be lower as an exception, seems to depend on whether the wages – other than, for example, contributions to capital formation - have a “direct relation to work performance.” Even if an employee does not actually perform work, such as on holidays, during illnesses or while on vacation, the minimum wage must be observed.

Recommendation

Both decisions only provide clarity on two of the many open questions of the Minimum Wage Act. Thus, companies are at this stage advised as follows:

  • If the minimum wage is first reached when added together with other compensation components, employers must still ensure that the specifications of the Minimum Wage Act are observed. If the (continued payment of) compensation must be granted due to provisions beyond the Minimum Wage Act, the minimum amount is determined in accordance with the minimum wage to be paid otherwise.
  • If subcontractors are commissioned, companies should consider securing themselves as contracting bodies by using warranties and indemnity declarations to ensure that the Minimum Wage Act is observed by such contractors. This effectively limits liability risks for the observance of the Minimum Wage Act by service and work contractors. This is especially the case if the minimum wage is first achieved together with other compensation components. Then such other compensation should not only be directly related to the work performance of the subcontractor but the warranties should also be extended from case to case if necessary.

Summary

The calculation of the minimum wage remains difficult and further case law should be awaited. Companies that modify their compensation systems from case to case, observe documentation duties and obtain warranties and indemnity declarations from their contractors reduce their risks.