No general prohibition of deterioration for retirement benefits in cases of transfer of businesses
Update Employment Law October 2019
Federal Labor Court, June 12, 2019 - 1 AZR 154/17
There is no general prohibition of deterioration that applies to retirement benefits in the case of one or several transfers of businesses pursuant to Section 613a German Civil Code. This has now been confirmed by the Federal Labor Court in a recent decision. Where the legal requirements for a replacement of provisions by those of another collective agreement or works agreement pursuant to Section 613a(1) sentence 3 are met, the replacement of transformed provisions by a works agreement with more detrimental provisions after an additional transfer of business is also possible.
The plaintiff was initially employed by a legal predecessor of V-GmbH. The employer and the works council agreed on a pension scheme (1992 Works Agreement), which also governed a retirement pension with amounts based on length of service and pensionable income. In 1999, the SEB division, of which the plaintiff was a member, transferred to V SEA GmbH (1st transfer of business). Subsequently, a works council was elected there for the first time ever in 2002. On May 30, 2013, V SEA GmbH was merged into the defendant company by way of absorption and the previous business was fully integrated into the defendant company’s business (2nd transfer of business). The General Company Agreement on Occupational Retirement (2008 General Company Agreement), which governs a defined-contribution promise of benefits, had applied at the defendant company since November 1, 2008. To mitigate the economic disadvantages resulting from the business merger, the defendant concluded a social plan with the works council of V SEA GmbH, which provided in particular for establishing an initial module, a dynamic module, and a top-up amount to secure the vested retirement entitlements. The plaintiff requested a declaratory judgement that his occupational pension scheme would continue to be based on the 1992 Works Agreement and not on the 2008 General Company Agreement.
After losing his case in the lower courts, the plaintiff’s appeal before the Federal Labor Court was also dismissed. The provisions of the 1992 Works Agreement, which were initially transformed pursuant to Section 613a (1) sentence 2 Civil Code after the first transfer of business, were replaced by the 2008 General Company Agreement pursuant to Section 613a(1) sentence 3 Civil Code following the second transfer of business.
After a transfer of business within the meaning of Section 613a Civil Code, the rights and obligations of the employment relationship either continue directly and mandatorily pursuant to Section 77(4) sentence 1 Works Constitution Act (normative after-effect) or become part of the employment relationship (transformed effect). Normative after-effects are only given where the business maintains its identity. Otherwise, the provisions of Section 613a(1) sentence 2 Civil Code are transformed into the employment relationship with the transformed provisions retaining their collective character. If another transfer of business follows, the transformed provisions are again transformed into the employment relationship with the acquiring business while retaining their collective character. Replacement of the transformed provisions is possible if these rights and obligations are then governed by a collective bargaining agreement or a works agreement at the acquiring business, in accordance with Section 613a(1) sentence 3 Civil Code.
In the case at issue, the provisions of the 1992 Works Agreement had initially been transformed after the first transfer of business and had become part of the employment relationship with V SEA GmbH. At the second transfer of business, these transformed provisions were then superseded by the 2008 General Company Agreement applicable at the defendant, in accordance with the requirements of Section 613a(1) sentence 3 Civil Code. The 2008 General Company Agreement concerned the same subject matter as the 1992 Works Agreement and the plaintiff fell within the scope of the 2008 General Company Agreement.
The Federal Labor Court also held that there were no objections to the replacement in terms of occupational pension law. The social plan stipulated that the vested rights were maintained as of the replacement reference date. According to the three-stage review scheme developed by the courts for the replacement of pension benefits, the replacement was lawful as well. Reductions of vested partial amounts require compelling grounds, reductions of earned dynamics require valid reasons, and reductions of benefits dependent on length of service, i.e., benefits that are not yet vested, only require objective proportional grounds. Since the social plan secured the vested partial amounts and the dynamics, only objective proportional grounds were needed to replace the future pension increases. The Federal Labor Court considered such grounds given in the acquiring business’s interest in standardizing its pension schemes. In conclusion, the Federal Labor Court clarified with a view to the case law of the Court of Justice of the European Union that there was no general prohibition of deterioration in pension benefits.
Tips for use in practice
The replacement of initially transformed provisions is possible within the limits of Section 613a(1) sentence 3 Civil Code. This also applies where it is associated with deteriorating positions of individuals. This decision is welcome for business practice and in particular for evaluating existing pension commitments in the scope of corporate acquisitions. The Federal Labor Court thus once again expressly recognizes the interest of acquiring businesses in creating uniform terms in their companies after a transfer of businesses. The Federal Labor Court does not limit the legal possibilities of replacement by a general prohibition of deterioration, which is not even provided for by statutory provisions.