By Jessica Jacobi ,Isabell Flöter 

Firm: Kliemt.HR Lawyers

The year-end is approaching again. However, before a quieter, more festive season can begin, most employers are incredibly busy. This is because several tasks have to be completed before the turn of the year. In this article you can find out what they are.

Self-imposed deadlines on 31 December

In many companies, there are projects that need to be completed by 31 December for various reasons. A typical example is that a certain organisational change needs to be implemented by that date because its impact should remain in the ongoing commercial (and calendar) year, or because the end of the year has been agreed upon with the works council as a deadline for the implementation. Another example is that in some cases, particular software is to be replaced by a new version and the licences for the previous software expire on 31 December. In these cases, employers and HR departments find themselves in negotiations with the works council, in some cases even over the vacation period between Christmas and New Year’s Eve. In other cases, the approaching holidays can be used as a tactical means to conclude negotiations before the festive season, since works council members of course prefer not to spend the holidays in negotiations with the employer.

Notices of termination at the end of the year

Year-end organisational changes often lead to notices of termination being declared. Under German law, notice periods typically run to the end of a month and in some cases, an additional quarter ending date must be met. This means that in some cases declaring a notice of termination during the month of December is unavoidable. This means that after the works council has been informed, the serving of notice might take place during the holiday season. This raises the question whether it is illegal or immoral to serve notice during the German Christmas season. In principle, notice of termination can be served anytime, which includes on public holidays, Sundays and even on 24 December which, for many Germans, is the most sacred day of the year. The Federal Labour Court (Bundesarbeitsgericht), the highest German court in labour matters, has decided that a notice of termination on Christmas Eve is neither illegal nor against any moral code, because Christmas Eve is considered to be a regular working day (BAG, judgment of 14 November 1984 - 7 AZR 174/83). Under German statute, only the actual Christmas days, 25 and 26 December, are considered bank holidays. However, the general requirements for a valid termination notice also apply here, i.e. it must be signed by the authorised person and delivered on time. If a works council is formed, it must also be consulted in good time and in sufficient detail prior to notice of termination being issued. We recommend not exhausting the deadlines until the very final day and taking bank holidays and other delivery obstacles into account. At this time of year, delivery of the notice by 21 December at the latest would be ideal. For a timely hearing by the works council 13 December is an appropriate date.

Remaining holiday entitlements

A very popular question regarding the end of the year is about company policies that allow some carry-over of leftover vacation. Many international employers allow their employees to carry over a certain amount of days into the next year. In German labour law, s7 (3) sentence 1 of the Federal Holiday Act (Bundesurlaubsgesetz, ‘BUrlG’) stipulates that holidays that are not granted and taken by the end of the year expire. According to s7 (3) sentence 2 BUrlG, the remaining vacation days do not expire only if they can be carried over to the next calendar year because of urgent operational reasons or reasons personal to the employee. Pursuant to s7 (3) sentence 3 BUrlG, transferred holidays must then be granted and taken in the first three months of the following calendar year. According to statute and case law, therefore, holidays that have not been applied for (and therefore not taken) expire on 31 December of the holiday year or at the latest on 31 March of the following year. If the holiday has expired, the employee is not entitled to holiday compensation in accordance with s7 (4) BUrlG at the end of the employment relationship.

This year, however, the Federal Labour Court reacted to the case law of the European Court of Justice (ruling of 6 November 2018) and expressly changed its previous case law on the expiry of the statutory minimum holiday entitlement. In a recent decision of 19 February 2019 (9 AZR 541/15, 9 AZR 423/16), it imposed strict obligations on employers that need to be met relating to leftover vacation days. From now on, the entitlement to the statutory minimum holiday only expires at the end of the calendar year (s7 (3) sentence 1 BUrlG) or the transfer period (s7 (3) sentence 3 BUrlG) if the employer has previously put the employee in a position to take his holiday entitlement, and the employee does not take it of his own free will.

The employer must therefore:

  • encourage the worker to take his or her holidays; and
  • inform the worker clearly and in good time that the leave will expire if he or she does not take it by the end of the reference period or an authorised transfer period.

The employer bears the burden of proof for the fulfilment of this obligation. Therefore, if employers have not yet sufficiently complied with their duty to take the initiative and if there are employees in the company who still have open holiday entitlements for 2019, they should now be quickly requested to take their holidays completely by the end of the year, with appropriate instruction on the consequences of not doing so.

If this is no longer possible by the end of the year, e.g. because too many remaining days of vacation are left, employees should at least now be informed about the expiration of their vacation entitlement on 31 March 2020 and asked to plan their holiday at the beginning of 2020. In order to be able to prove that these obligations have been met, employers should issue this notification at least in text form (email) to the employees concerned.

31 December: End of the bonus year

In addition to a fixed salary, many employers offer their employees variable compensation in the form of a bonus or commission. The legal basis for such bonus or commission claims can be the employment contract, collective bargaining agreements, works agreements or operational practice. In general, variable remuneration is not paid monthly, but is based on a longer reference period, which usually reflects the relevant financial year (attention: this is not necessarily the same as the calendar year) or is linked to the calendar year. Employees often participate pro rata in the company's success during the reference period. In most bonus systems, variable remuneration is calculated individually for each employee on the basis of the performance targets achieved (in addition to a potential ‘company factor’). The targets must therefore be set in good time at the beginning of the new reference period within the framework of a target agreement. The employer generally has a wide scope of discretion in this respect, which must, however, be in line with the general legal requirement to be fair when exercising discretion), and the general principle of equal treatment and the prohibition on discrimination.

If the reference period is the calendar year, it is now time to set targets for 2020. This should be completed by the first weeks of 2020 at the latest. However, please also remember to observe the participation rights of the works council under s87 (1) No. 10 and 11 of the Works Constitution Act (Betriebsverfassungsgesetz - BetrVG). If no targets are agreed or are set late, the employee may be entitled to compensation for lost bonus payments. In this case,100% achievement of targets will ultimately have to be assumed. It is therefore important for the employer to be able to prove that he has informed employees of the targets on time for evidence purposes; the employee's consent is not required in general. However, if the bonus plan provides that targets are set by mutual agreement, the employer should ensure that the employee accepts his or her targets in writing in order to avoid future litigation about their enforceability.

Once the targets have been set, they can no longer be changed unilaterally by the employer during the course of the year, unless the mandatory circumstances on which the bonus calculation is based change objectively (e.g. transfer of the employee to another business unit). In this case, new targets must then be agreed with or for the employee as quickly as possible.

At the end of the reference period, the employer must be able to prove that the variable salary was calculated in accordance with the specified conditions. This is usually achieved by making the calculation methods available to the employee at the same time as the targets are set.

In practice, so-called ‘year-end consultations’ are usually held, irrespective of variable remuneration structures. These primarily serve to evaluate individual employees and are often used as a negotiating opportunity for salary increases next year. However, feedback consultations are also a common way in which employees can evaluate their employer and express wishes or make suggestions for improvements based on the events of last year. Year-end consultations generally have a positive effect on employees and employers. They promote employee motivation and give managers a valuable insight into the general mood in the company. In this way, employers become aware of things they would otherwise not have noticed.

Payroll Issues

At the turn of the year, the employers have various reporting obligations. For example, each employee who is insured by law in health, nursing, pension or unemployment insurance on 31 December of a year as well as each low-paid employee must be registered with the health insurance funds (s28a (2), and s28h of the Social Security Code IV (Sozialgesetzbuch IV - SGB IV). The notification serves in particular as proof of insurance and remuneration for pension insurance. Furthermore, by 16 February of the following year at the latest, a report of the respective annual remuneration must be submitted to the statutory accident insurance for all employees in accordance with Section 28a (2a) SGB IV. In this annual report, all of an insured person's salaries that are subject to accident insurance contributions must be combined for the calendar year. Breaches of the obligation to report constitute a misdemeanor which can be punished with fines (Section 111 (4) SGB IV). In addition, according to Section 41b of the Income Tax Act (Einkommenssteuergesetz - EStG), the employer must submit the electronic income tax certificate (elektronische Lohnsteuerbescheinigung) for each of his employees to the responsible tax authority at the end of the calendar year. The income tax statement must then also be sent to the employee, usually with the January or February payroll run for the following year.

As every year, the basis for calculation of social security contributions will be raised in January. German law establishes so-called contribution ceilings for the various sectors of social security, pension, health insurance, nursing insurance and unemployment benefits. Up to these limits (roughly between EUR 55,000 Euro and EUR 80,000) employers must use employees’ gross salary in the individual classes of insurance to calculate contributions. Employers should therefore include the new reference values in their payroll in good time; otherwise, inadequate employer and employee contributions could be paid for higher earners and potentially leading to unpleasant extra payments after a tax audit.

The general annual earnings limit (Jahresarbeitsentgeltgrenze - JAEG) in the insurance law of statutory health insurance will also rise from EUR 60,750 to EUR 62,550 in 2020. Accordingly, employees will only (continue to) be exempt from inclusion in the statutory health insurance scheme from 1 January 2020 if their expected annual earnings in 2020 exceed the increased annual earnings limit. If they exceed the amount, they can choose to take out private health insurance rather than the statutory insurance. In order to pay the correct contributions, employees must therefore be registered or deregistered correctly and in good time.

Federal minimum Wage

In 2014, Germany has passed an act regarding a statutory minimum wage. In the past, there were only certain industry sectors in Germany where a minimum wage applied based on union agreements. The federal minimum wage is being raised every other year. As of 1 January 2019, the statutory minimum will rise from the current EUR 9.19 per hour to EUR 9.35 per hour. This will have an impact on all employers who work with lower paid employees such as manual workers or trainees. This is because the hourly minimum wage needs to be met looking at every month. If employees work overtime during a certain period, the federal minimum wage per hour must still be met in any given month. This also sets a limit on the number of hours which can be worked by so called ‘minijobbers’ whose monthly salary of up to 450 Euro has andvantageous status, with a reduced income tax burden and social security deductions. These minijobbers can only be allowed to work for a maximum of 48 hour per month as of 1 January 2020: EUR 9.35 x 48 hours = EUR 448. Employers should also keep an eye on collective wage increases. From 1 January 2020, for example, higher minimum branch wages will apply to the roofing and electrical trades. Even the tabular wages in the public service of the federal states (Tarifvertrag im öffentlichen Dienst der Länder, ‘TV-L’) will rise on 1 January 2020. In the public sector, (TVöD), a wage increase will not take place until 1 March 2020.