Interim review of 1996/7 bargaining on continued payment of remuneration in case of illness

On 1 October 1996 the new version of the Act on Continued Payment of Wages and Salaries and the resulting reduction of the statutory level of continued payment of remuneration in case of illness from 100% to 80% of the previous income came into force. Subsequently, this issue became subject to collective bargaining all over Germany. A recent analysis of private sector collective agreements concluded so far in the 1996-7 bargaining round shows that in all but a negligible number of case, the trade unions were able to enforce 100% continued payment, though in the majority of cases the unions made concessions to the employers' side.

Continued payment of remuneration in case of illness

The employment contract is a reciprocal contract: the employer pays the wage for the employee to render job performance - and vice versa. In principle, this means that no wage has to be paid if the work is not done. However, the employment contract is not a simple reciprocal exchange contract but a contract with personal and social references. Owing to the dependence of the employee on remuneration, in certain cases a legal obligation is imposed on the employer by statute, collective agreement, works agreement or the individual employment contract to continue payments although the work performance due from the employee has not been rendered. The most important case is the continued payment of wages in the event of incapacity for work because of illness of the employee. In German labour law, this subject is regulated by the Act on Continued Payment of Wages and Salaries (Engeltfortzahlungsgesetz). In the event of incapacity for work due to illness, wage earners, salaried employees and vocational trainees have a legal entitlement to continued payment of wages or salaries for a period of up to six weeks. In principle, this entitlement is not to be dispensed with to the disadvantage of the employee, either by of collective agreement or by individual contract. However, the entitlement may be changed in the employee's favour at any time.

In the discussion on continued payment of remuneration (Entgeltfortzahlung) in case of illness, there are three perspectives that ought to be considered:

  • the management perspective. Continued payment of remuneration leads to non-wage labour costs of sick leave, without any work having been done. Furthermore, high rates of absence due to illness affect the work-load and motivation of the other employees;
  • the social policy perspective. Continued payment of remuneration is a function of the social security system which ensures that the employees who depend on their income from work are able to maintain their living standards in case of illness; and
  • the economic perspective. Continued payment of remuneration is an insurance of the employee by the employer against the risk of loss of income due to illness. However, continued payment of 100% of previous pay in case of illness provides an incentive for the employer to neglect health prevention and even for the employee to pretend to be ill and get 100% pay without work.

Before and after the 1996 legislation

The 1994 version of the Act on Continued Payment of Wages and Salaries provided for a legal entitlement to continued payment in case of illness at a level of 100% of previous pay for a maximum period of six weeks. Due to relatively high - by international standards - rates of absence connected to illness and high costs of continued payment of remuneration in Germany, the German legislature decided to change the Act in 1996. The intention was to reduce the costs of absence borne by the employers and to reduce the incentives to misuse the legal entitlements. The changes were heavily opposed by the German trade unions.

The most important features of the 1996 legislation are that:

  • the employee has an entitlement to continued payment only after four weeks of employment with the employer;
  • the level of the legal entitlement to continued payment is reduced from 100% to 80% of previous regular gross income;
  • the base for calculation of the continued payment comprises the monthly remuneration of the employee when working regular working hours; and
  • an employee can receive 100% of previous income if, in return, the entitlement to paid leave is reduced.

In this context, a 1996 representative survey by the Mannheimer Zentrum für Europäische Sozialforschung ("Die Einkommenssicherung im Krankheitsfall: Auf der Suche nach dem Wählerwillen und der ökonomischen Vernunft", Thomas Schuster, Working paper ABIII/Nr. 16, Mannheimer Zentrum für Europäische Sozialforschung, Mannheim (1996)) is especially interesting. The survey reveals that, although trade union officials heavily opposed the reductions, the median trade union member, the median voter and the median party members of the Christian Democratic Party (CDU), the Social Democratic Party (SPD) and the Green Party (Bündnis 90/Die Grünen) preferred a level of continued payment of 80%.

The collective bargaining results

On 1 October 1996, the new version of the Act on Continued Payment of Wages and Salaries came into force. Since most industry-wide collective agreements provided for 100% continued payment of remuneration, many employers tried to introduce 80% when the collective agreements were to be renegotiated in autumn 1996. This was rejected by the trade unions, which intended to keep the level at 100%. All over Germany, the issue of continued payment of wages and salaries became subject to collective bargaining (). By August 1997, not all sectors had reached an agreement on this issue.

The Institut der deutschen Wirtschaft (IW) has conducted an analysis of all 140 private sector collective bargaining agreements on continued payment on remuneration that were concluded by trade unions affiliated to the German Trade Union Confederation (Deutscher Gewerkschaftsbund, DGB) in the period between the passing of the new legislation and June 1997 ("Zwischenbilanz der Tarifverhandlungen zur Entgeltfortzahlung 1996/97", Stefan Zagelmeyer, in iw-gewerkschaftsreport 2/97). The analysis shows the following:

  • the 140 agreements cover 9.6 million employees in around 80 industries/bargaining districts;
  • the median duration of the agreements is 31 months and varies from nine months in Bavaria n bookshops to 84 months in the western German rubber industries;
  • all but three agreements (two in the wood processing industries of Hessia and Lower Saxony and one in the bakery trade of Rhineland- Westphalia) provide for 100% continued remuneration; and
  • in the construction industries, the collective agreement provides for a graduated solution: for the first three days of illness, the employee receives 80%, from the fourth day the employer pays 100%.

At first glance, the trade unions seem to have been able to enforce their demands. At second glance, however, a detailed analysis of the contents of the agreements reveals that 81 out of the 140 agreements included compensation measures to reduce the costs of the sick leave regulations for the employers. Two forms of compensation can be distinguished:

  1. collective compensation borne by all employees under the agreement concerned, including changes in the calculation base for sick pay, reductions in the annual pay bonuses, or concessions regarding other substantive issues - such as the postponement of working time reduction; and
  2. individual compensation borne by sick employees.

As regards collective compensation, 63 agreements provide for a reduction of the base of calculation for the continued payments. Instead of including excess hours worked before becoming incapacitated for work, the calculation base comprises only the wages for regular monthly working time. A reduction in the annual pay bonus, usually by five percentage points, is specified in 22 agreements. Individual compensation measures are contained in 24 agreements. For example, the agreements for the rubber and cement industries allow for cuts in the entitlements of employees for holiday bonuses for up to 10 days of sick leave. In the metalworking sector, the level of the annual Christmas bonus can be connected by works agreements to individual or collective absence.

In 13 of the 140 collective agreements, certain groups of employees - such as new employees, employees with fixed-term contracts and seasonal employees - are excluded from the provisions of the collective agreements. New employees are entitled only after a fixed period of one to six months of employment with the same employer. Seasonal employees in the fruit and vegetable processing industries are eligible for the entitlements of the collective agreement from their second season onward. Five agreements allow for works agreements or "hardship clauses" (permitting exemptions for companies in certain circumstances).

Commentary

Since an entitlement for employees to continued payment of remuneration in case of illness at a level of 100% of previous pay provides unintended incentives to go sick, the reductions of the statutory entitlements from 100% to 80% were economically reasonable. From the perspective of social policy, this level still ensures that employees are able to maintain their living standards in case of illness. Furthermore, the new legislation could have reduced non-wage labour costs.

However, the results of the collective bargaining round runs counter to the intentions of the legislation. All but a negligible number of collective agreements provide for 100% continued payment, though trade unions had to make concessions to the employers' side. Still, all things considered, the new statutory and collective regulation of continued payment of remuneration in case of illness paid off for the employers.

In the future, continued payment of remuneration in case of illness will remain an issue in German collective bargaining. In the public sector collective bargaining round due to begin in October 1997, municipal employers have already signalled that they will be balancing union demands for 100% continued payment of remuneration with concessions in other areas. It seems very likely that the private sector employers will also demand further concessions when many of the current agreements will have to be renegotiated next year.

In general, the aim of the collective bargaining rounds to come should be to develop arrangements that are economically sensible, effective from the perspective of social policy, that reduce non-wage labour costs and that conform with the preferences of the affected social partners and the population. (Stefan Zagelmeyer, IW)

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