German companies are now faced with exposure to an increasing number of costly lawsuits seeking payment for overtime work. In particular, substantial financial risk results due to the unclear legal situation in the area of blanket contract clauses regulating compensation for overtime. For decades, companies have agreed to employment contract clauses with employees by which all possible overtime work was deemed to be compensated with the monthly salary payment. Employees are now suing for retroactive payment of this overtime worked. The German Federal Labor Court (Bundesarbeitsgericht, BAG) has ruled with recent fundamental decisions on the question of the legal validity of these clauses which have significance in particular for consultancy firms, the bank sector and other fields with employees earning an above-average salary.

In 2010, the BAG decided for the first time that the widely used blanket compensation clauses were legally invalid (BAG, 1.9.2010, 5 AZR 517/09). Now, in two judgments which have been followed with especially keen interest, the BAG further clarified in which cases an employee can demand payment for overtime worked. Particularly one judgment (BAG, 17.8.2011, 5 AZR 406/10) caused quite a sensation. The BAG held that the plaintiff, a highly paid employed attorney, had no claim for payment for overtime work even though his employment contract contained an invalid blanket compensation clause. This decision was rather surprising, especially in view of the background that the BAG rejected the legal validity of a blanket compensation clause in 2010. In its judgment, the Court based its view essentially on the fact that a young attorney having a salary of EUR 80,000.00 knows that he is to work respective overtime hours without additional payment. As a result, his lawsuit failed. In the case of a storehouse manager of a forwarding company (BAG, 1.9.2011, 5 AZR 517/09), however, the Court came to the exact opposite result. In this case, due to his low salary, the employee had a reasonable expectation that overtime work would be compensated. The company lost the lawsuit.

Legal Basis

Blanket compensation clauses for overtime work have been standard in employment contracts for a long time. However, lower courts have expressed doubts already in the past with regard to the legal validity of these clauses because the employee does not know how many hours he must work for his monthly salary. This was confirmed by the BAG in 2010. Consequently, in practice, employers have to some extent already switched to including blanket compensation clauses in employment contracts which have a limited scope. Clauses which foresee compensation in the amount of up to 20 percent of the work hours by the base salary are deemed to be permissible.

The Current Case Law

The above-mentioned young attorney was working as an attorney in a major law firm. He earned EUR 80,000.00 gross per year and his employment contract contained the following clause:

“Any necessary overtime or additional work is compensated by the gross salary to be paid.”

After working for approximately two years, the law firm terminated the employment contract with the attorney. Within the framework of a lawsuit for protection against unfair dismissal, the attorney claimed compensation for overtime worked in the amount of approximately EUR 40,000.00 for the time period as from the commencement of his employment contract. In the above-named judgment, the BAG rejected the attorney’s claim of payment for overtime worked however. Although the blanket compensation clause was deemed to be intransparent and therewith legally invalid, the Court examined nevertheless whether the employee could expect compensation for his overtime work at all. In this respect, the Court found that he did not have this expectation. A highly paidyoung attorney cannot expect that his overtime will be compensated. Rather, the plaintiff hoped that his working such overtime hours would be a factor in his being made partner. He did this, however, at his own risk because being made partner was neither represented to be a certainty nor a probability. In the case of the young attorney, therefore, the BAG rejected compensation for overtime worked.

The Court decided differently, however, in the case of the storehouse worker who had a similar clause in his employment contract and who earned an annual gross salary of EUR 36,000.00. In this case as well, the Court found the blanket compensation clause to be invalid. However, the Court decided that the employee could expect, due to this relatively low salary, that his overtime hours worked would be compensated.

Practical Significance

The BAG has now given first indications as to the cases for which compensation for overtime can be prevented. In cases of “highly specialized services” with above-average compensation, the employee cannot expect that his overtime work hours shall be compensated. A problem exists, however, in that the Court has left open up to now what work activities in the future shall be categorized as being “highly specialized services.” The question therefore arises regarding the extent that the judgment is transferable to other cases. These should include, in addition to the legal advisor sector, for example, the consultancy branch or highly paid employee positions in banks. In practice, therefore, for the question of the legal validity of blanket overtime compensation in the future, essentially such shall be dependent upon the circumstances of the employment contract and the question whether an objective compensation expectation can be answered affirmatively. Of significance would be, e.g. the handling in the past or the existence of a collective bargaining agreement with respective compensation regulations for overtime.

Due to the still-existing uncertainties, blanket compensation clauses continue to be a problem. This applies in particular to the case that an employee does not earn an above-average salary. On the basis of the BAG judgment, with management employees, in many cases however a payment of overtime can be prevented in the future. With the remaining employees, there is however the risk that employees may now and again be able to claim a substantial overtime compensation amount. Therefore, with contract drafting, employers should increasingly use the above-mentioned limited compensation clauses. Also to be considered in this connection is always also that claims for overtime are often difficult for the employee to prove. In addition, the claims can be limited or precluded. A possibility to be taken into consideration, on the one hand, is the preclusion of certain claims due to the expiration of the statute of limitations period. On the other hand, forfeiture clauses can be included in employment contracts which can preclude a payment claim of the employee after the expiration of three months.