Federal Labour Court strengthens employers’ commitment to collective agreements

In December 2005, the Federal Labour Court ruled that employers are obliged to pay wage increases even if they left the employers’ association before the collective agreement in question was finalised. This rule applies to all individual employment contracts that, for their working conditions and wage rates, rely on those in the most recently agreed collective standards provided that the individual employment contract was concluded after 1 January 2002.

On 15 December 2005, the Federal Labour Court (Bundesarbeitsgericht, BAG) ruled that employers have to pay recent, collectively agreed wage increases even if they left the employers’ association before the collective agreement was finalised . This rule applies to all individual employment contracts that, for their working conditions and wage rates, rely on those in the 'most recently agreed collective standards' provided that the individual employment contract was concluded after 1 January 2002. Whereas the unions welcomed the BAG’s judgment, employers’ associations heavily criticised the ruling.

Companies that are members of an employers’ association usually make use of a 'dynamic reference clause' in individual employment contracts. Such a clause stipulates that pay and working time etc are the same as those that are agreed upon in collective bargains. Employers make use of such a clause in order to avoid discrimation against non-union employees. Firstly, firms cannot distinguish between union members and non-union members when they conclude the contract. Secondly, discrimination might result in lower cooperation and decreased working morale among employees. In addition, companies can reduce their transaction costs by making use of such reference clauses, because they do not have to change existing individual employment contracts for non-union employees whenever a new collective agreement is concluded.

The BAG’s judgment implies a revision of its former precedents. Employers only used to be committed to paying the wage increases that were stipulated by a new collective agreement if they belonged to the corresponding employers’ association. In the past, if an employer had already left this association before the new agreement was settled, the company was exempt from applying the new collective standards. This held true for employment contracts for both union and non-union employees. It did not matter whether or not a dynamic reference clause existed. According to the Collective Bargaining Act (Tarifvertragsgesetz), only the old collective standards remained legally binding ('Nachwirkungspflicht'). The Confederation of German Employers’ Associations (Bundesvereinigung der Deutschen Arbeitgeberverbände, BDA) heavily criticised the BAG’s turnaround because the court even confirmed the former precedents of 2003. On the other hand, the Confederation of German Trade Unions (Deutscher Gewerkschaftsbund, DGB), according to a statement in the Handelsblatt on 16 December, praised the ruling as a significant and progressive step.

The BAG’s judgment compels employers to revise their practice of including dynamic reference clauses in individual employment contracts. In the view of labour law experts, employers will have to make sure that reference clauses are clearly formulated. They should clarify in the contract that any reference to a collective agreement is only binding as long as the company belongs to the corresponding employers’ association.

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